Barings BDC, Inc. (BBDC) Q1 2019 Earnings Report, Transcript and Summary

Greetings. At this time, I would like to welcome everyone to the Barings BDC, Inc. Conference Call for the Quarter Ended March 31, 2019. [Operator Instructions] 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. 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 annual report on Form 10-K for the fiscal year ended December 31, 2018, and quarterly report on Form 10-Q for the quarter ended March 31, 2019, each is filed with the Securities and Exchange Commission. Barings BDC undertakes no obligation to update or revise any forward-looking statements unless required by law. At this time, I would turn the call over to Eric Lloyd, Chief Executive Officer of Barings BDC.

Thank you, Donna and good morning everyone. We appreciate you joining us for today's call and please note that throughout this call, we'll be referring to our first quarter 2019 earnings presentation that is posted on the Investor Relations Section of our website. On the call today, I am joined by Barings BDC's President and Barings Co-Head of North America Private Finance, Ian Fowler; Tom McDonnell, Managing Director and Portfolio Manager in Global High Yield; and BDC's Chief Financial Officer, Jonathan Bock. Ian and Jon will review our first quarter result and market trends in a few moments but I’d like to begin our call today with a few high level comments about the quarter. Please turn to Slide 5 of the presentation. This is an update to a slide we shared last quarter highlighting the volatility of liquid credit spreads and their correlation to BDC stock prices. In the fourth quarter, the liquid credit market experienced a worst quarter since the financial crisis with prices falling roughly 4.5%. Loans spreads were covered by approximately 100 basis points in January and February of 2019. Although the market weakened modestly in March, the first quarter saw corresponding increase in BDC stock prices that reflected the increase in spreads with BEG total returns outpacing the broader market. This spread recovery drove improved March for our broadly syndicated loan portfolio as underlying performance at our portfolio companies has remained strong. Now turning to Slide 6 here you’ll see our first quarter highlights. You can see our NAV increase 4.9% to $11.52 per share. This was primarily driven by the spread movements I just discussed resulting in a higher fair value for our broadly syndicated loan portfolio. Once again this movement in portfolio values is not the result of changes in underlying company fundamentals but rather was driven by a partial reversal of the technically driven sell-off and global credit spreads in the fourth quarter of 2018. Moreover, we’ll continue tightening in liquid credit spreads in second quarter of 2019 approximately half of the remaining unrealized loss is already been recovered so far in this quarter. From an operating standpoint our middle market portfolio ramp continues. Though it was seasonally down given deal activities often slowed at the beginning of the year. During the quarter we made investments totaling $65 million and the total value of our middle market portfolio increased to $289 million at quarter end. Net investment income of $0.16 a share was consistent with the fourth quarter and in excess of our first quarter dividend of $0.12 per share. While quarter-over-quarter investment income increased due to the larger investment portfolio, net investment income was flat due in part to late investment fundings and higher financing costs associated with our new $800 million corporate credit facility that closed in mid February. I would also note that we will experience the full quarter effect of unused fees in the second quarter of 2019. However, we expect an earnings pressure to be temporary as we continue to leverage our credit line and we believe the additional liquidity provided by our facility is well worth the cost. On Slide 7 we summarize some further financial highlights for the first quarter compared to the previous two quarters. In the middle of the slide you can see the $25.4 million of net unrealized depreciation that drove the net income and NAV increases in Q1. Recovering a large portion of the $52.3 million of unrealized depreciation recorded in the fourth quarter. Leverage results slightly from last quarter and our $1.2 billion investment portfolio was partially supported by $580 million of borrowings under our broadly syndicated loan facility and $40 million of borrowings under our new $800 million corporate revolver. Subsequent to quarter end, we issued an on balance sheet CLO structure for a portion of our broadly syndicated loan holdings. This allows for very attractive match funded financing and all in cost that was lower than our broadly syndicated loan facility. I’ll let Jonathan further outline these benefits in his remarks. Before I turn the call over to Ian, I’d like to provide a quick update on our share repurchase program. As our Chairman Mike Freno outlined on earnings call last quarter, we believe share purchases are an important part of any long-term capital allocation philosophy. The share repurchase plan we announced for 2019 aims to repurchase up to 2.5% of the outstanding shares of Barings BDC stock with traded prices below NAV. And purchase up to 5% of the outstanding shares in the invested stock trade at price below 0.9 of NAV subject to liquidity and regulatory constraints. Through a combination of purchases under rule 10b51 and rule 10b18 plans, the company has already purchased approximately 1.5% of its outstanding shares. Overall the share repurchase program, our underlying capital allocation velocity and substantial ownership of parent further differentiate our commitment to market leading alignment with our shareholders. With that, Ian will now provide an update on our investment portfolio and trends we’re seeing in the middle market.

Thank you, Eric and good morning everyone. Jumping to Slide 10 you can see a summary of our new investments in repayments for the last three quarters. Following a very active fourth quarter, the first quarter was slower for both of Barings BDC and the market as a whole as we had $59 million of net middle market loan funding. While quarters will fluctuate, you can see that our average level of middle market fundings for the last three quarters is roughly a $100 million consistent with the expected average level we have previously discussed. Additionally we had net sales of the BSL portfolio investment of $33 million continuing our strategy to opportunistically exit certain BSL investments in order to fund middle market portfolio growth. Turning to Slide 11, you can see that as of March 31, the BDC was invested roughly $838 million of liquid broadly syndicated loans and $317 million in private middle market loans including delay to our term loans. Overall our portfolio consists of 99% senior secured first lien assets. The BSL continue to be a diversified portfolio of 111 investments across multiple industries with a weighted average spread of 329 basis points and a yield at fair value of 6%. Senior leverage for this portfolio remain consistent with last quarter with a weighted average of 4.9 times senior debt to EBITDA. Now shifting to the middle market portfolio stats on Slide 11. As of March 31, our $317 million middle market portfolio was spread across 25 portfolio companies as compared to $249 million across 19 portfolio companies at the end of 2018. Underlying portfolio company fundamentals remained strong with weighted average senior leverage of 4.5 times and a median EBITDA size of our first lien middle market exposure of approximately $34 million. Out of the 25 middle market investments, 22 are first lien investments and three are second lien term loans selectively made after considering their leverage levels, structure, credit profiles and absolute returns. Average spreads and yields are also consistent with last quarter at 501 basis points and 7.8% respectively. We will always evaluate yield structures for the fast risk adjusted returns. But I also want to be clear that we will continue to focus on a predominantly first lien senior secured strategy. Our middle market portfolio remains well diversified as the 25 investments are spread across 13 industries and no investment exceeds 2.1% of the total portfolio. Our top 10 investments are shown on Slide 12. Now turning to Slide 14. Here you will see the start of the three slides that outlined lower market spread and leverage trends with third-party data from affinitive. I think its valuable to use these same slides each quarter in order to consistently highlight trends in the market. As you can see on Slide 14, which illustrates middle market spreads from first lien to mezzanine, there is modest spread widening across much of the middle market in the first quarter. The exception was second lien spreads which decreased slightly after the increase in the fourth quarter, continuing the trend attracting more closely with the liquid market. Overall, spreads in the middle market have remained relatively stable and are generally slightly above 2018 averages. Slide 15 shows the slighted uptick in leverage during the first quarter for the all senior and traditional first lien, second lien categories continuing the increasing leverage trends of recent years. A great ton of leverage trends by industry is shown on Slide 16. While we have the capability and focus to search for the most attractive relative value in the capital structure, our general preference is to structure very deep first lien senior debt into a bifurcated traditional first lien, second lien structure with the risk return profile is more clear. Importantly, it allows us to consider where true value really sits. In this competitive environment, we believe the focus, discipline and capabilities of the various platform will lead to high quality investment portfolio opportunities. With that I’ll turn the call now over to Jon to provide more color on our first quarter financial results.

Thanks Ian. On Slide 18 you’ll see a bridge of the company’s net asset value per share from December 31 and March 31. But then finally components of NAV increase to $11.52 or unrealized depreciation on investment portfolio of $0.50 per share do a meaningful swing in market yields. Our net investment income for the first quarter exceeding our quarterly dividend by $0.04 of share and a $0.02 increase through accretion for the share repurchase fan. Slide 19 and 20 show our income statement and balance sheet for the last three quarters. A couple of key items to remember for the first quarter; first, pursuant to our advisor agreement, the base management prepaid their rates increased from one point last year to 1.125% this quarter. What will remain for the rest of the calendar year. Second, as Eric mentioned, we incurred higher interest in other financing fees due impact to commitment fees associated with our new $800 million cooperate credit facility. Our $1.2 billion investment portfolio was reported by borrowings of $580 million under the BSL facility and 40 million under the new corporate revolver and that was leading core in leverage of 1.06 times or 1.94 times debt to equity after adjusting for cash, short-term investments in net unsettled transactions. As we just called from the call last quarter our BSL funding facility was reduced to a commitment size of 600 million following the closing of the new $800 million senior secured middle market credit facility in February. Details regarding both credit facilities are shown on Slide 21. Now subsequent to quarter end, the BSL funding facility was reduced further to a total commitment size of $300 million in conjunction with an on-balance sheet Static CLO issuance. This transaction have technically allowed us to shift the financing to more than half of our BSL portfolio from the short-term revolver to a long term securitized debt offering. The orange spread on the CLO is approximately 121 basis point, which is actually lower than the orange spread of our BSL facility while simultaneously it came into duration by roughly seven years. The effect of the advance rate of the CLO structure also matches the BSL facility but reduces the borrowing base risk inhering new types of facilities due to the daily valuation fluctuations. Now, it's important to know a few high level concepts regarding the financing. First, it creates additional diversity in our capital structure and as we now has a mix of permanent equity, long term securitization and to revolvers. Second point is it matches the duration of our liabilities with assets for significant portion of our BSL portfolio more also lower financing costs. And finally, just another example of the structure in management expertise and the bearings platform brings the advisor to the BDC. On Slide 22 shows are paid and announced dividends since we are in to corporate advisors to the BDC. We announced yesterday that our second quarter dividend of $0.13 will be paid on June 19, and that’s another increase to also aligned our dividend with the earnings part of our portfolio. Now look ahead, Slide 24 summarizes our investment activities since March 31.In the second quarter we made 66 million of new middle market investment commitments at an average three year discount margin of 5.8%, of which 55 million of already funded. Now that’s relatively saw our first quarter, this is a good start to the second quarter and in line with the general historic trend. Now as I mentioned on our last quarter call, our intention is to drive shareholder returns not just through middle market investments but also through the affective use of our non-qualified asset bucket, via a joint venture with a very respected institutional partner. As announced last night, Barings BDC entered into a joint venture with State of South Carolina retiring system. This joint venture will have approximately 550 million in underlying equity and it will be leveraged commensurate with its underlying asset mix. That asset mix will be highly diversified across multiple asset classes including U.S. and European liquid, U.S. and European illiquid credit, structured products and real estate debt. Now few benefits to point out here; first, is diversification. This wide investment mainly the program allows their BDC to gain exposure to the diversified pool investments, asset classes, yield profiles and geographies. The second benefit height of scale. This JV provides meaningful events and capacity in a wide range of asset classes for repairing generate private financed platform overall and finally there’s an element of affirmation of Barings BDC strong platform and share of focus. As many of the investment community are aware, South Carolina retired to remain their leading investor in the private credit alternative category then number of respective managers and we greatly appreciate their partnership with Barings BDC and look forward to driving attractive risk-adjusted returns to shareholders in the future. Now turning to our probability weighted pipeline on Slide 25. Investor could see that our North American private finance pipeline or factory closings is approximately 440 million and remains heavily first lien and senior secured focus across the wide variety of diversified industries. And remember this pipeline is an estimate just based on expected closing rates for our deals and our investment pipeline and should just be looked at it as such. And with that operator, we’d like to open the line for questions.

[Operator Instructions] Our first question today is coming from Mickey Schleien of Ladenburg Thalmann. Please go ahead.

Jonathan I just want to follow-up on your comments on the JV.As we all know in the past these JVs were used to form senior loan funds, which would allow BDCs to tap into you know synthetically higher leverage, that's obviously no longer an issue with the new regulatory regime, someone make sure I understand your rationale, are you saying that you are primarily going to invest in non-qualified assets and therefore, you can gain more scale into those assets by only counting the equity in the JV as non-qualified as opposed to whole of those assets?

I would kind of characterize it differently. So Mickey, I think you had a chance regarded has an opportunity to see the entirety of the Barings platform and the capability of across a number of different asset classes. Say, Barings totality manages over 300 million across liquid credit deal, liquid credit structure products, real estate et cetera and so what this joint venture program allows one to do is not only invest in specific asset classes that are non-qualified which you could in a sense see in the non-qualified bucket. It also allows you to do qualified investments but due to the different yield profiles to drive return. So really the focus is looking at from a relative down view perspective, one thing you’ll always find is in the middle in some cases, it’s all you focus on is one specific slaver of market you lose a wide frame of reference that could help you price those assets better. And so having an opportunity to benefit from Barings platform and management all these asset classes, allow the BDC to take a diversified point of JV equity to drive return as well as provide some diversification benefits to some assets that makes it on the BBC balance sheet and be shared between the two. Is that makes sense, Mickey.

Yes, that's helpful and just one follow up question if I may. With the forward LIBOR curve now negatively sloped, I'd like to ask how you're managing the downside risk to the portfolio, the portfolios yield in terms of the trends you are getting in LIBOR floors and whether you're starting to think about doing more fixed rate deals if you can or potentially hedging this risk instead?

So this is Eric, maybe bring up a great point on LIBOR right. It's the uncontrollable in some ways that from the yield from our portfolio. I’d say, we look at it in a couple ways. One, we continue to put 1% LIBOR floors in our deals. And so that floor can’t leave it that way exists but obviously that's 100ish basis points lower than where we are today. Two, we do not - we have not focused on fixed rate deals within this portfolio. And really in general, we still think the floating rate approach is the better approach to go over the long-term. Second point I’ll make on that is we haven't done any real hedging over the portfolio to try and play out the interest rate risk. We don't think that ultimately that core competency that we think applies to the BDC. And then the third thing I’d say is what we do focus on average is the credit spread within our assets. And so when we look at transactions, we do believe there is an absolute forward to credit spread, which then ties into yield, but that credit spread is ultimately what we believe people really pay us for. And therefore we make sure that we keep our attractive credit spread in that not just kind of chasing yield another way of saying it. If LIBOR will go to 4% that doesn't mean we’re going to start doing LIBOR plus 300 deals just because it makes a 7% return. So we don’t want to kind of chase LIBOR up or down.

Our next question is coming from Kyle Joseph of Jeffries. Please go ahead.

From a modeling perspective, it sounds like you guys have a have a pretty attractive pipeline in middle market deals to deploy capital into. Just thinking about that, how do you plan on funding that, is it more BSL sales, is it obviously you guys have plenty of debt capacity given what you've done on the right side of your balance sheet recently or is it going to be more of a balance between those two?

So this is Eric, I'd say we really monitor it is kind of what's the best available option at a given time, right. One of the things we want to do is make sure we're protecting NAV in that scenario. So I give you the example, you think back November or December of last quarter when the broadly syndicated loans were selling off and if we had a pipeline then that we needed to fund and leverage were to a certain level. We may take leverage up a little bit versus selling the loans at a price that we think is unattractive and realize it’s a loss that we think is not justified. So we may take leverage up a little bit there. As we sit today, as Jon referenced from the $50 m or so unrealized markdown in the fourth quarter about 25 million of that was recovered in the first quarter. It’s continued to improve from there, so if we sit today, we feel like there is opportunities to sell liquid broadly syndicated loan collateral in order to fund middle market assets and not do so with a loss that would impact NAV.

And just one follow-up from me. Given industry leverage changes you've seen some of your competitor start to increase leverage as well. And I'm just wondering what sort of competitive impact you're seeing in the market, are there pockets where you're seeing more in competition, are there pockets to the market where you're seeing less competition?

Yes this is Eric again, and Ian you can jump in here to. I think in general I'd say it's pretty consistent. I wouldn't say there's one place where there is more or less competition. The practical reality of where we are today and this stays in the market and within direct lending it is really competitive and I’d say it competitive in all places in the market. I wouldn’t say the leverage changes we haven’t seen that really impact any further market but I’ll let Ian answer.

And if you look at the market data the synergies that is playing out I mean essentially you're seeing leverage fairly stable or you’re seeing yields fairly stable. And I would point out in a quarter where volume was low, you see that stability is actually a pretty good sign. And so I think as you look at market today and you look at the players that are out there, we really don't see any changes in the market. The key is really having the ability I think to write the big checks if you can and also be there capital solution provider that can move up and down the capital stack looking for the best relative value in every single transaction.

Our next question is coming from Casey Alexander of Compass Point. Please go ahead.

Forgive me my questions won’t as sophisticated like other guy. Eric you may have mentioned and I'm just not quite sure how you characterize it but half of the realized loss has been recovered thus far this quarter. And I'm not sure exactly what you meant because you had $25 million unrealized gain in this quarter and a $55 million unrealized loss the previous quarter. Are you saying that you’ve regained half of the difference between those two in the second quarter or you're up to 50% of the original 55 million?

Yes, let me try to clarify this and if I don’t keep asking because I want to make sure this is clear. So we obviously believe in marking our assets true to the absolute price as every quarter like everybody does. The liquid collateral is frankly, obviously the easiest on that, right. So if we went to the fourth quarter when the broadly syndicated loan market sold off we had a $50 million or so unrealized loss on that collateral i.e., we have marked it down from where it was purchased because of the sell-off in the market. We recovered in the first quarter about $25 million of that $50 million, so now the unrealized loss was about $25 million. Since the end of the first quarter that $25 million has been recovered about half of that here in the second quarter call approximately $10 million to $12 million of that $25 million of unrealized loss has been recovered. So as we sit here today that means we have about $10 million to $12 million unrealized loss in our broadly syndicated loan portfolio primarily relative to where the purchase price was. Did that clear Casey?

Yes it does its perfect and we understand that could always change between now and the end of the quarter. But we certainly appreciate the update on that. So that's very, very helpful. Thank you.

Absolutely.

Secondly, the definition of the CLO securitization is that of a static pool and you use probably syndicated loans to collateralized debt. So essentially I guess, does that mean that there's like – there's no reinvestment period, so as soon as you either get repaid on a broadly syndicated loan or sell it to fund a traditional middle market loan that that will then pay down the balance on the CLO as opposed to some other type of mechanism?

So I'm going to start with this Casey and I’ll turn it over to Tom who really runs that product for us. So importantly, we didn't take all of the broadly syndicated collateral and put it into the static CLO. We just took a portion of it and put it in the static CLO. We kept a portion of it outside of that for exactly the reasons you're picking up on which is the flexibility to sell that collateral that's not the static CLO whenever we wanted to fund the middle market originations. I think it’s to the static CLO then I’ll let Tom address that part.

Right, yes, so we have over one year in the call period we can't sell assets for a year with a small bucket to do so and for credit purposes but yes static for a year and then all paydowns come in and repay the notes on the CLO, that's correct.

One of the trade Casey, this is Bock that you get between a reinvestment period versus static one is that when you bring that to the market you have the ability to drive your cost of interest or spread of interest quite low. And really the reason you do that if you look that the BDC has a significant amount of available liquidity on its other credit line, particularly middle market revolver. You can always make sure that even though you can protect yourself by lowering your interest costs but always have the ability to make investments at the right time to the extent spread widened.

And lastly on the JV I realize its 50 million you guys 500 million by South Carolina – but we're obviously not putting that into models. We do have to kind of model something here, do you have that sort of a thought process on potential ramp up over JV?

Yes, you’d likely see that ramp over a general 10 quarter process, depending or 10 quarter period, depending on where investments set whether liquid or illiquid spreads depending on the market environment was giving you more attracted rent than one versus the other. But really look, slow and steady and methodical will win the race. So expect that just a gradual growth over time.

And when you say 10 quarter process that would include using leverage versus your equity capital right off the bat, right because you are going to use the blend of leverage plus your equity capital as you do that ramp through 10 quarters?

I think that will be a fair assumption. Yes.

Our next question is coming from Robert Todd of Raymond James. Please go ahead.

Just two questions. One, out of these one first, Jonathan on the base management fees, as you’ve noted I mean it goes up to 108 or it went up to 108 at the beginning of the year. I mean when I look at it maybe I am doing my math wrong but it’s down sequentially versus Q4 before the waivers, obviously the fleet just gone up, average assets moved around a little bit but can you reconcile that for me. It looks like its slower than it should have been this quarter?

Sure. So Robert, the way you want to think about from a modeling perspective, the reason we have those waivers in the first two quarters is those were inclusive of TCAPs prior results and so the way the management, fee based management, if you look at the two prior quarters it makes those averages and it backs out unsettled trade. So we’re still looking back to those two quarters because it’s a two quarter look back but now you’ll restrict the Barings overall Barings reported quarters and you just have to look at the unsettled trades because you are not going to charge management fee on something that wasn’t earning its full economic - full economics. And so if you back out those unsettled trades from that average you get exactly the fleet of this calculation.

On the JV, question I guess, what’s the goal, the target if you will ROE for that vehicle either ROE to you or kind of returns within the vehicle because obviously you know, in the past a lot of BDCs have used JVs to goose up their ROE by applying double average et cetera. Is the goal of this JV to kind of augment ROE for the BDC or divisive - I mean you mentioned diversity of earnings streams has a lot of value even if it doesn’t increase the ROE per se. So can you give us a little bit of color on there about what the - is it primary purpose diversification of income flows or would you expect it to depending on the assets to go in obviously to be accretive to the numbers of ROE or accretive to the value of ROE for diversification.

Let’s just get to a philosophical focus for us where we look at risk adjusted return and we want to generate risk adjusted return really what sets and if you try back into a number in effect that we saw for actually you can see managers really end up creating mistakes trying to find high yield product that might not exist. So think of it is a great return diversifier, right first. And if you think of the investment opportunity that exists you got investment opportunity that are commensurate with the BDC kind of ROE and hurdles target rates over time but it always going to carry to focus on underlying risk management. And really when you think of Barings platform overall and the ability to generate similar returns to do it across a number of uncorrelated asset classes that was what was very attractive to us in order to enter into joint venture with the trusted partner.

Our next question is coming from Christopher Testa of National Securities Corporation. Please go ahead.

On the BSL compositional portfolio, obviously it didn’t moved down that much even though the prices rebounded significantly. Was this purely a function of meeting to do the securitization?

Yes, I think that’s right. So it didn’t move down I think the pipeline there wasn’t a significant pipeline I think on the middle market side. So let’s - why didn’t move down or else think obviously price recovered on the underlying assets so I think that’s where you see there and we did move obviously a portion of those over into the CLO. We did retain some of them larger positions.

And going forward I know you guys have said that you have the one year non caller on the static pool and you can’t sell any of the BSL in that. So should we expect the pace of sales of BSL to slow because you’re basically only able to sell what’s outside of that for number of things middle market, is that a fair way to look at that?

I wouldn’t look at it that way. I think of it now number one, there’s still the ability to sell some of the collateral within the BSL CLO but remember we have another 400 million that sits outside in BSL you can also utilize. The second point is that’s not affected by prepayments and what’s you’ll find is that the natural turnover that’s occurring in that BSL book heavily matches our ability to fund middle market investment. So you term out, you match fund, you have no mark to market issues that relates to the CLO but you are still able to get the repayment, you are still able to sell some and you have additional bucket that’s just across to the right of 400 million of BSL that can also be use as a part to fund little market assets along with our additional leverage liquidity.

And I know you guys touched on this a little bit of Casey’s question but why the choice of static overwhelm that’s not where you could take advantage of dislocation and not have that mark to market risk and reinvest?

Sure. Its purely gets to just the math when you think of the availability liquidity, the underlying entity has. So if you think of a difference between a static versus a reinvestment deal you might find that that could be anywhere between 30 to 40 basis points more. So if you end up locking in that financing cost at a higher spread, you may end up finding yourself were soft if you had available liquidity to make investments overtime on an attractive revolver. So our view as with the significant amount of liquidity available through the middle market line, right. And portion of the bumble line still outstanding, you really actually able to drive ROE with the static choice and at the same time preserve your ability to make investments in the even spread wide.

Chris this is Eric. Let me try and jump in to make sure we are tying this altogether I think we are. So the reason we are getting put all the liquid collateral into the static is absolutely we don’t to tier into that way, right. The reason we did it however is the cheaper cost of financing and importantly the match funding of that financing determining out that financing. So big picture numbers as John said $400ish million of broadly syndicated loans are not in the static CLO. That allow us basically using a 100 million per quarter of roughly resonated deals about a year’s worth of pipeline that we could sell broadly syndicated loans to fund middle market collateral. In addition, within this static CLO we do have the ability to sell some of the collateral within that one year period of time that could benefit if our originations were higher than 100 million per quarter and repayments that would come in for buying cash that comes out of the static CLO into the BDC that also expire incremental liquidity. Then ultimately, you could have - your other pools of leverage if you wanted to - if you had a really robust year you’ll move it up. But we believe that the liquid collateral outside of the static gives us the financing that we need in order to sell those assets in order to rank the pool consistent with what we represented to you and others

And touching on the JV a bit more. Obviously, you guys are able to use a bunch of different sort of investments are you going to have multiple different credit lines within that structure for the different investments or is there any just one single line fund everything.

I think you’ll find that will be a diverse liability structure inside the joint venture just the same way as we look at diverse sourcing of funding inside BDC.

And given that, this is obviously off balance sheet and be able to higher leverage and you guys have the reduced asset coverage just philosophically, how do you kind of look at the total economic leverage of the JV combined with your total balance sheet leverage? What I am getting at is if the mix of the assets and the JVs say fix you to 1.5 times and becomes a larger part of the book, does that make you maybe one or not take a balance sheet leverage as much because you are looking at the total economic leverage or is that something that you are not really concerned with?

So, I’m going to start then I’ll turn it over to Jon. I want to be really clear about the JV which I think Jon was but this is - no part of this was about sort of reducing leverage or double leverage that was not and is not in any way shape or form. The reason why we did it or the intention of it, it is, it really was around the diversification of the asset pool. And access to what we believe could be non-correlated assets consistent versus what's in the BDC. So that’s kind of where it starts and that was the reason we went in to it. Obviously we want to be ROE accretive which means we're going to put leverage on it and some diversified pool which we’re working through right now. Where that leverage comes out and how finance that we do not believe would impact our philosophy on how we'll do the BDC because the whole purpose of going into the JV was not about leveraging, getting double leverage or anything like that. But Jon what do you think?

I’d also say sometimes when you think about the BDC space and JVs, there can be the situation where the tail lags the dog. And so when you think about our deliberate design for this in collaboration with a trusted partner, our view was a $50 million investment of equity for the BDC really want - this is the point where you're able to offer a good diversified return. But also prevent some of the issues that you see in certain circumstances where the returns end up kind of forcing the BDC either to payout an uneconomic dividends or look at something - how shareholders look at something that's less than sustainable over time.

And I fully appreciate you guys aren't trying to just lever this up. I was just kind of asking in the context of, if for example liquid credit present itself a best opportunity relative to more diverse things and that made the JV leverage go up how do you look at in that way. But I fully appreciate what you guys are trying to do with the JV. But those are all my questions and really appreciate your time today.

Absolutely.

Our next question is coming from Paul Johnson of KBW. Please go ahead.

I just had a question on basically the earning you guys have had a pretty good progress with your middle market deployment. So I am sort of wondering how should we view the progress that you guys have made commensurate with your earnings growth. I know you mentioned on the call earlier just some late fundings, the higher financing costs, with reasons that earnings were sort of flat quarter over quarter. But I was wondering if you could just talk a little bit more about the factors that you would expect to increase your sort of run rate earnings?

This is Eric I’ll start and then I’ll turn it over to Jon to provide more detail. The unused fee that we closed in mid-February through this quarter and as I highlighted in my comments will impact the second quarter from a full quarter perspective. On $800 million that decision that we made - and I made around really locking in liquidity at a time where we are in the marketplace. So that $800 million given the unused fee does have a drag. I believe it's in the best interest of shareholders to have that size facility and have that liquidity over the next five years as we continue to build our liability structure because we believe strongly that your term financing and liquidity are foundational part of a strong BDC. How that ties into the earnings with assets I’ll turn over to Jon to walk through any specifics.

If you’re looking at the per share impact I mean to the extent that you have an unused fee of 37.5 basis points on kind of the outstanding that can range between a penny or two potential earnings struck until one is in effect through looking at utilization for the facility that's once no that it's temporary. And so if you think about the general 100 million a quarter pace and that pace is not just - it’s not installed its tied to relative value it just had what history would tell us. That kind of puts the earnings growth profile just on track and slow and steady growth. Here its point where we always want to make sure that slow and steady wins the race. And that's kind of what you could expect for how we're building the portfolio and more importantly how we're deploying capital.

My last question was just sort of modeling question on your G&A was a little bit higher than we had expected this quarter. I think it was about like 66 basis points or so annually. We're just wondering is that sort of a good run rate from here or was there any sort of one-time items in there and you’d expect that to be a little bit lower going forward?

No real kind of expectations you put on kind of that number you just kind of look at overall the expenses that come in the quarter as it relates to financing, or using legal references as a portion of setting up those financings. So I’ll just say, you could kind of expect over time some level of consistency but really its not something we can easily forecast because it is the tight what we are doing as it relates to although we are just trying to drive value.

Thank you. Our next question is coming from Finian O'Shea of Wells Fargo. Please go ahead. Fin your line is live please make sure your line is not muted. Once again, Fin your line is live. Can you please go ahead with your question. We'll move on to our next question from [James Dart of Dart Capital]. Please go ahead.

Just had a question on relating to the share buyback you brought them in February and I am also really pleased to see you are standing by that. Announced in the some in the first quarter and continue buying in the second quarter. Is there any way of seeing those buybacks, if you have to announce them at all or is it just that you will mention them in the quarter is going forward?

We don’t have an obligation to announce those but we’ve communicated to shareholders and the research analysts and everybody out there is one of our foundational principles in Barings is transparency and so we’ve communicated that we’re going to get you a quarterly update every single quarter on where we stand versus that share buyback we are not going to be making an announcement and then not sure that for year or two we’ll continue to give you a quarterly update on that both through our Q earnings release obviously and then through these kind of presentations. So you should expect to get an update at the end of the second quarter earnings call.

And Jim I know this is operated sort of arms-length buyback by you’ve given specific instructions to the broker and they’ve just transact as per those instructions?

So there’s really two components to it and so remember this is the buyback from within the BDC so the shareholders benefit from these purchases. There’s an automated process, you are thinking about that way that this gives us answer now as given NAVs, then there is the supplemental part that’s in there too that can supplement that automatic programmatic plan.

And that supplement, is that’s like seen by the Board is that….

Really management is overseeing that. The share buyback was approved by the Board that was announced in February.

Our next question is coming from Finian O'Shea of Wells Fargo. Please go ahead.

A lot was ask and answered today. So I’ll try and continue a little bit on the joint venture side. You kind of outlined these strategies here and talked about think about 10 quarters of ramp which I think will be 100 million or so origination of quarter. So can you talk about the hold sizes you may have will this be a chunk year portfolio and otherwise, what’s the sort of origination versus financial capital supply and demand from these lines and your do you receive sort of programmatic allocation as you wish that would enable you to ramp this seemingly more quickly than your core BDC portfolio in the direct lending line and I’ve asked a lot there, if you - sure, go ahead.

Fin, it’s Eric. I’ll start and then I’ll turn it over to Ian and Jon to highlight. Couple of things I want to make sure we are really clear on. One, we do not see the JV cannibalizing the ramp of the BDC as we laid out. So we don’t see that happening. We expect the BDC to ramp consistent with what we’ve indicated to shareholders. So this is not anyway we’ll take away from that. Second one is, the diversification of the assets and the JV as Jon referenced for U.S. and European liquid collateral. Think of it as the type of stuff that you’re seeing in our broadly syndicated loan portfolio that’s in here right now. That type of collateral. It allows for directly originated U.S. and European assets. It allows for structured credit. It allows for real estate debt. It will allow some other asset classes. Therefore, although we may see that 550 million of equity with leverage use whatever AUM assumption you want and may seem like a portfolio of similar size to the BDC, the breadth of collateral that can go in there combined with the liquidity of the collateral that can go in there we feel that portfolio can ramp on a very timely basis that achieves the need for the BDC shareholders and for our JV partner within that process. Does that answer your question?

Thank you. At this time, I would like to turn the floor back over to Mr. Lloyd for closing comments.

Lastly, I just want to make sure we say thank you trusting your capital with us. We hope we’d stay consistent to the representations we made. We close this transaction in the summer of last year and each quarter going forward. So thank you for your time today and look forward to having conversations with you in a quarter from now.

Ladies and gentlemen, thank you for your participation. This concludes today’s conference. You may disconnect your lines at this time and have a wonderful day