At this time, I would like to welcome everyone to the Barings BDC Inc. conference call for the quarter ended June 30, 2020. All participants are in a listen-only mode. A question-and-answer session will follow the Company’s formal remarks. [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 are – including 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, 2019, and quarterly report on Form 10-Q for the quarter ended June 30, 2020. 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 will turn the call over to Eric Lloyd, Chief Executive Officer of Barings BDC. Please go ahead.

Thank you, operator, and good morning, everyone. We appreciate everyone joining us for today's call. And I just want to start off by saying that I hope you and your families are doing well and staying healthy as we continue to navigate these uncertain times that we're all living in right now. Note that throughout today's call, we're going to be referring to our second quarter 2020 earnings presentation that's posted on the Investor Relations section of our website. Similar to all the calls we've been on in the past, I'm joined by Barings BDC's President and Barings Co-Head of Global Private Finance, Ian Fowler; Tom McDonnell, Managing Director and Portfolio Manager of Global High Yield; and BDC's Chief Financial Officer, Jon Bock. As we typically do, Ian and Jon will review details of our portfolio and second quarter results in a moment, but I'll start off with some high-level comments about the quarter. Before turning to the presentation, I'd first like to mention a recent development that we did not include in our earnings release, but it was included in a release by Moody's Investors Service last night. We are excited to relay that Barings BDC has received an investment-grade rating of Baa3 with a stable outlook from Moody's. And subsequent to the quarter end, Barings BDC has also entered into a commitment for a $100 million private placement of unsecured debt. We expect to draw on this $100 million commitment over the next 12 months. The first $50 million will be priced at a 4.66% coupon with the remaining $50 million to be priced at the time of borrowing. Post this issuance, we believe that Baring's strong capital profile as an investment-grade issuer will provide a distinct advantage to Barings BDC throughout this period of market volatility. Turn…

Thanks, Eric. On Slide 10, we show a summary of our investment activity for the second quarter. Overall, it was a slow quarter across the market, and we continued to be selective in terms of both of our deployments and BSL sales. Net new middle market investments totaled $21 million, including two new platform investments, while the BSL and structured products portfolio saw a net decrease of $67 million based on selective dispositions. As you can see on Slide 11, at June 30, we were invested in roughly $668 million of private middle-market loans and equity, which included $71 million of unfunded commitments and $351 million of liquid broadly syndicated loans. Portfolio leverage was up slightly compared to the first quarter, which you would expect as we are beginning to see the first impact of the uncertain economic environment come through reported portfolio company financials. I will cover portfolio performance and the resulting valuation impact shortly. The $597 million funded middle market portfolio was spread across 64 portfolio companies and 18 industries and sponsor-backed transactions, while the $351 million BSL portfolio was spread across 81 portfolio companies and 26 industries. We expect to continue to rotate out of the broadly syndicated loans in the third quarter with a net BSL portfolio decline likely to be even higher than what we saw in the second quarter. Our top 10 investments are shown on Slide 12 with no investment exceeding 2.4% of the total portfolio and the top 10 representing only 21% of the total portfolio. Our portfolio remains diverse and with limited exposure to any single investment or industry. Slide 13 shows a bridge of our total investment portfolio from March 31 to June 30. We've touched on the key origination and repayment components, but this slide also shows the impact…

Thanks, Ian. And if you could turn to Slide 19. You can see the bridge of the company's net asset value per share since last quarter, and the dollar per share increase was due primarily to net unrealized appreciation on our investment portfolio of $1.36 per share, which was partially offset by roughly $0.34 per share from realized losses on sales of certain assets in our BSL portfolio. You saw the breakdown of unrealized appreciation on a NAV per share basis when Ian discussed Slide 14, which included value improvements across all of our asset categories. Now Slides 20 and 21 show our income statement and balance sheet for the last five quarters. I will not spend too much time here given that we've already hit the highlights, but I'll point out that while we had lower investment income due primarily to a decrease in our weighted average yield on performing debt investment from 5.8% at March 31 to 5.5% at June 30 due to lower LIBOR, we also saw a decrease in operating expenses to help mitigate this impact from a net investment income perspective. From a balance sheet perspective on Slide 21, you can see that our investment portfolio, excluding short-term investments, was up slightly in the second quarter, reflecting the net impact of our unrealized appreciation being offset by the rotation out of BSL investments. This rotation enabled us to repay debt during the quarter as our CLO debt balance decreased to $225 million at June 30. We were also able to use cash to further repay these notes in the quarter with a $48 million repayment on July 15 made with cash and short-term investments on hand at June 30. Details on each of our borrowings are shown on Slide 22. While it was subsequent to…

Thank you. The floor is now open for questions. [Operator Instructions] Our first question today is coming from Finian O'Shea of Wells Fargo. Please go ahead.

Hi, good morning. Thanks for having me on. First question for Ian, on your commentary on portfolio improvement from previous more conservative assessment, is this related to liquidity or your forward earnings outlook? And in the case of if it's the latter, does that mean that companies are deleveraging or that earnings are actually holding up or are going to hold up versus what you initially had underwritten? Any more context on the – qualitative context on the change from last quarter would be helpful.

Yes. Sure, Fin. Thanks. Yes. Look, let me throw out a couple of things. When we looked at the first quarter, we really started working with management teams before quarter end knowing that the COVID situation was fluid and it was going to have an impact and we were sort of expecting it to be somewhat similar to what other countries around the world were going through. So what we really did was a prospective forecast with those management teams and those sponsors of what they thought the next couple of months were going to look like knowing that, with all the uncertainty, it was going to be really difficult to underwrite anything beyond that. And I would say a couple of observations. One, I think some management teams were overly pessimistic in terms of what they thought their market was going to be like with COVID. We also saw some sponsors – or I would say, generally most sponsors and management teams take aggressive actions in terms of cost reductions and adjusting their cost structure. So I think that was helpful. And then I would say that sort of the third set of companies that had pessimistic outlooks, some of them actually have been able to pivot in terms of their business model and pick up business where they didn't think they were going to be able to pick up business. So it's hard to say that there was a general trend other than when we had those discussions and we are working with those management teams looking at their forecasts and their liquidity needs, it was kind of at the darkest days of this situation, which obviously remains fluid. What I will say on a broader basis is that, as a portfolio, we are really well positioned because we just don't have companies that are, what I would look – I would call, COVID red industries, which is retail, restaurant and travel and leisure in the middle market portfolio. And I would just say, by nature, we typically avoid or minimize consumer-facing businesses anyway because it's just really hard to underwrite consumer trends. And so because of that, we had no payment defaults in the middle market portfolio. We had no material modifications in the middle market portfolio. That does not mean to suggest that we're not going to have some challenges, it's really going to depend on what the next six, 12, 18 months look like.

That's very helpful. And then two part, I'll start with one at a time. Jonathan, the Moody's rating, did you or the BDC commit to any change in leverage ratios, leverage composition, anything of that sort that would have constrained your previous strategic outlook or approach? And as sort of a second part to that, a roundabout way to ask that again, does that change the BDC's investing approach to more aggressive strategies?

Just the first part of your question as it relates to change, no. And so what I think is indicative of a high-quality platform is that in the midst of a global pandemic, received an investment-grade credit rating, which we believe is a show of both the strength of balance sheet, the strength of portfolio. And our forward outlook was the same for many of others that are investment-grade rated, right. So I think you can see our leverage target of roughly 1.25x such that it fits inside of the scope of what's been outlined in the IG community. In terms of opportunity, there's two points to that, right. First, as you go through a period of uncertainty, when you have the flexibility of a capital structure to allow you to be both defensive, that's important because we've seen several situations where to the extent there were material loan modifications or fear of them, there's been dilutive capital raise, it's harmed investors either on the debt or equity side. So there's a defensive purpose that your having an IG credit rating certainly helps a bit. And then from an offensive point of view, clearly, as Ian and Eric have outlined, boring is beautiful. Boring remains beautiful. However, you can also see that if you have a wide frame of reference and ability to invest in different asset classes as the vast majority of markets go through a period of unprecedented volatility, it's best to have the capital structure to then invest in those opportunities when they come out. So the answer is right on track with where we've been before, but also having that ability and that optionality is valuable to us and also valuable to our shareholders.

Okay. Thank you. And just a final small question for anybody there. And forgive me if you provided this, any guidance on your post-quarter BSL sales?

Yes. So this is Jon. You could probably imagine that our current quarter run rate for BSL reductions, and again, remember, we're very focused on making sure that BSL reductions are done so very close to our original purchase prices, would be very similar to that of last quarter, right, on a go-forward basis clearly depending on the market environment, right. Right now, we've seen some relative strength, particularly in our high-quality BSLs that sits on balance sheet, and we continue to take advantage of that, realizing that additional dry powder and opportunity coming into the face of wider spreads is going to be beneficial for us all, but we're still very focused, Fin, on making sure we do so on a NAV-neutral basis.

That’s all for me. Thank you.

Thank you. Our next question is coming from Bryce Rowe of National Securities. Please go ahead.

Thanks, everyone. Good morning. Appreciate you taking the questions here. Ian, you mentioned the no material modifications with respect to the middle market book. I'm curious, if you were maybe getting some requests for waivers or modifications and maybe pushed back on those a bit? Or you simply weren't getting many requests at all?

Thanks. So yes, I mean, we had a couple of companies that needed some modifications in that platform. So I don't think anyone could have constructed a portfolio that would be totally COVID-proof. But in the BDC portfolio, if you look at the industries that were most impacted by the shelter-in-place, it was like dental management practices and so a lot of those businesses were completely shutdown. And so a lot of it really depended on how quickly those areas of geography – of markets reverted back to normal, and fortunately, they were able to do that. And the liquidity for those companies not to need the material modification. So I'm not going to say that there weren't any, but it wasn't a large number of businesses that were thinking about or looking for modifications.

Okay. That's helpful. And then wanted to maybe talk about the pipeline relative to the level of the BSL portfolio and that transition. So clearly, good to see the pipeline having built back up over the past two months. And you all have talked in the past about the transition from BSL to middle market with middle market originations at a certain pace over any given quarter. So I'm curious, are we kind of back at that preconceived pace that was originally laid out? And then when we think about some of these BSL sales you mentioned that some of the heavier hit names were exited and you took the loss here in the second quarter. It sounds more like you're seeing opportunities to sell BSLs closer to your cost basis now with the tightening of spreads. And so I'm wondering if the pace of middle market is really going to be the driver of the transition away from BSL? Or if you'll simply be opportunistic with the BSL sales to exit close to cost at this point.

So this is Eric. I'll take a first crack at it and then the team can jump in. What I'd say is, we never want to be in a position nor would we have our middle market pipeline drive selling BSLs at a price that we don't believe is appropriate from an exit perspective. And that's one of the reasons why we continued to deleverage. We were 1.2 last quarter, deleveraging through this quarter. And to Fin's question that Jon referenced, it's fair to say we've continued to sell into this market rally here post the second quarter from a BSL perspective, really to give us flexibility around two things. To the extent that the middle market pipeline, which I'll address in a second, turns into investment opportunities and/or there's more market volatility that creates other investment opportunities. Jon referenced the deals that we did here in the quarter, DM was over 10%. And so those are really attractive from a risk-return perspective. I'd say on the pipeline, it's great to see the pipeline having basically gotten back to our – call it, more normalized level from a pipeline perspective. What I would characterize though is prior to the COVID thing, we were averaging right around $100 million a quarter, plus or minus from middle market originations into the BDC which were, as you said offset by sales of BSLs or increasing leverage depending on the opportunity at the time. Still keeping that leverage really prudent and that's what we're going to continue to do. I think it'd be hard to say right now that we could predict that kind of the pace that we saw M&A the last six, eight, 10 quarters is kind of back. What I'd tell you is, the pipeline is beginning to build, deal discussions are occurring. How many of those actually turn into transactions? I'd say, is still the jury's out a little bit on that. So wouldn't want to say we're back to where we were, but I'd say we certainly have a much better pipeline than what it looked like four, six, eight, 12 weeks ago. So I'm not trying to dodge your question. I just don't want somebody to model that out as like we're kind of back to that run rate. But I mean there's a chance at it, but we just haven't seen the behaviors and the consistency of closure of M&A deals that would give you a high degree of confidence that that's what's going to happen, but it could.

That's helpful, Eric. I appreciate it. I have one last question around – with the pipeline having built up here a little bit, obviously, I would assume the origination teams are more and more active here. Just curious how difficult it is to conduct any level of due diligence at this point with social distancing or maybe Zoom-type due diligence happening. Maybe you could just talk to the process and what you've had to change to get comfortable with that process.

Yes. I'll turn that one. You could imagine, it's kind of unprecedented ways we've done due diligence even for us. We've done this for 30 years. So I'll let Ian talk about kind of how we're approaching it.

Yes. Yes. And I still think about the days of closing deals where you're all together in one room working throughout the night, looking at docs and negotiating deals. But look, in terms of the technology, I'd say that people are figuring it out. There's a process around it. We've been involved with sponsors doing diligence with management teams that is being done remote with us. I've seen some private equity firms in a boardroom with the management team, social distance. But we're not in there, but we're there virtually. I think if you just kind of look at what's happening, obviously, add-on acquisitions have been fairly consistent at that kind of activity and I think we'll continue to see most of that. And one of the advantages of add-ons is that a lot of – because it's consolidating within an industry, there's a lot of knowledge and relationships in that industry, so that the buyer probably knows the management team of the target. I think we're seeing sponsors buy companies that they had previously looked at in the past and so they're familiar with those businesses and the management teams of those businesses. I really think and look the whole market over the last nine years. There's been a lot of sponsor-to-sponsor transactions, right, as opposed to strategic coming in or IPOs. And I wouldn't be surprised if you see some horsetrading where sponsors are looking to put money to work, there's less risk putting the money to work with a property that they've owned in the past and that sponsor is looking for an exit. And so I think you'll see some of those appear as well. Kind of adding on to what Eric said, we're still at the early stages. I mean if you think about it, the life cycle of our deals, it's around eight to 12 weeks generally from beginning to close funding. And so anything that we're looking at right now really was originated back in May. And so it's still early days. It's difficult to say for sure because there's not a lot of data points out there. And we're still in this price and risk discovery of like really where the market is and how sustainable it is. I think it feels pretty good. But we just don't have visibility until – visibility into what the rest of the year looks like. There might be some focus on trying to get some transactions done because there might be a – administration change and tax laws could change. I've heard that being mentioned. But these are only companies that are COVID light or COVID green businesses with no issues. I'd say companies that don't fit that profile are really on the sidelines here. And for us, in terms of our strategy, we're not chasing risks. We're not backing up the truck. But if we see good attractive businesses, we're going to chase them pretty hard.

Great. Thank you all for the time. Appreciate it.

Thank you. Our next question is coming from Robert Dodd of Raymond James. Please go ahead.

Hi, guys. First one for I think, Jonathan, I think – and then one for – around the pipeline. So on the liability stat, obviously I mean, the BSL – you terminated the BSL dedicated kind of revolver. You still have a number of things you can use for that, obviously. But with the BSL portfolio like continuing to shrink, what should we expect for the overall kind of evolution of the capital structure? Because right now, you have the general revolver and have that $100 million from private placement. But those are kind of the structures that exist right now plus cash and some of the BSL assets, obviously, that exists to service growth the middle market portfolio. As the BSL declines, if it declines, your percentage, if you will of secured financing on middle market go up, so what's the management process you're going to do to keep unsecured mix lower – or higher?

Yes. It makes complete sense. So if you think about the mix of the liability stack, you can imagine that, one, it will be financed with both senior secured debt as well as an increase in unsecured outstandings as well over time. Our view is unsecured debt can be a very attractive form of financing. It's just the timing in which you kind of acquit and issue it is extremely important because if you fast-forward – or sorry, rewind perhaps maybe six quarters ago, to the extent that you were issuing investment-grade credit and forcing – based on incentives and fee math, which Robert, we know very well, it would force yield seek into improper asset classes that might have introduced more NAV volatility over time. Today, if you layer in unsecured debt, right, as a part of the capital stack, the investment opportunity overall, senior secured loans, and then as also Eric mentioned, Barings has a very wide frame of a lot of other asset classes, not only are you able to diversify your liability structure, but you can grow earnings accretively as a result. So forward outlook would be – you'll see utilization of both secured and unsecured sources with the view that in today's environment, the flexibility offered by unsecured debt and the strong returns that are available in a wide array of asset classes means that you can see that composition increase. Does that help, Robert?

That does. And then if I can, on the portfolio and the – more the pipeline. I mean from your comments, it sounded like your confidence in any given pipeline deal closing is maybe lower than it had been right, because a lot of these things are early stage. And it's a probability weighted pipeline. So how would you – if I put you on the spot a little bit, how would you characterize kind of the growth pipeline? I mean is that – are you seeing a lot more early-stage opportunities, but with lower confidence that each one will actually close? Or how is that checking out?

Yes. It's also...

Go ahead, Ian.

No, go ahead.

Okay. I was going to say...

You start, Eric. I'll jump in.

All right. I would say it this way, Robert. I would say that in the past, probably three to five weeks, we've seen a material increase in prospective deal flow. So I would say it's a lot more early stage now than things that are – Ian said kind of – our typical process is eight to 12 weeks, plus or minus. So I'd say its more stuff in the early to mid-stage than it is the latter stage. I'd say the latter stage stuff is primarily add-on acquisitions for existing portfolio companies that Ian referred to in what we call COVID green industries. So we've seen the underlying performance of that particular company, how they've weathered this challenging time that everybody is living in. We've seen the same on the target. So those opportunities, I'd say, are more progressed, but I'd say, for a new platform transaction, it'd be more in the early stage. And that – which is why I was characterizing saying it's a little harder to have a certain degree of confidence that all the things will align for an actual M&A execution to occur around that portfolio company. Ian, please jump in and add on anything.

Yes. No, I think you hit it. The only thing I would add is that both in terms of new deals, I think – and especially if it's horsetrading activity sponsor to sponsor, it's not a wide auction. And so when you're in this environment, if you're well positioned from a competitive standpoint, I think the likelihood of that deal closing is a higher hit rate than we would normally see because in a normal market, right, when you take a look at our portfolio or our pipeline, the hit rate is somewhere between 4% and 6%. In this environment where its low volume, but you've got two sponsors that are kind of negotiating a deal and we're plugged in, our hit rate on that deal is going to be much higher than 4% to 6%. So that's a positive. But like Eric said, if you factor in that kind of eight to 12 weeks, we're still pretty early. So how some of those deals progress really depends on the transaction itself, how it's going to market, who's involved in our position with those sponsors. So one thing I will point out, which is good, if you have an attractive portfolio is from an AUM perspective, in this environment, there's not a lot of runoff.

Got it, got it. And if I can, a follow-up to that, I mean so would you characterize the kind of businesses, the early stage ones in the platform that are coming in as more characterized by sponsored portfolio management rather than liquidity seeking from borrowers? And would that tend to indicate that, you might not to take this one, but you might not be replicating the 10.7% DM-3 that we saw in Q2 with those new deals that come in?

Yes. So it's interesting, right, because I mean this whole cycle is interesting. And having been through cycles before, they're always different other than there's a beginning, middle and end. And what's unusual about this one is, in a normal cycle, we would have seen a period of distressed sellers, right, platforms that are looking for liquidity coming to market, selling performing assets to get liquidity. I'm just talking about the middle market here. We would have seen companies with broken balance sheet that need some gap capital. We would have seen some little R and some big R restructuring. We really haven't seen that yet because I think a couple of things. One, we had that quick rebound, I wouldn't say recovery, but we had a rebound. And because of our assets, by nature, being illiquid and the platforms of today's market versus markets of 15, 20 years ago where there's probably more flexibility to kind of kick the can down the road, I mean we know there are companies out there that are impaired. We know there are companies out there that need liquidity, but we're just not seeing it in the market yet. And so really, as long as this involvement and support by the Fed and fiscal policy continues, it's going to push out that and I don't know whether you'll be able to outgrow it or not. I expect that at some point, we'll probably see some of those opportunities. But the deals that we're looking at right now, it's – they're attractive companies and their sponsors are selling because – probably because they're looking for – they know they're in the money. And even – and I would say, for companies that are COVID green, we've even seen some purchase price multiple expansions. So why wouldn't you take some chips off the table as you look at your portfolio. And so as you said, it's really looking at portfolio management from a sponsor perspective.

Got it. I appreciate the color, and that's it for me. Thank you, guys.

Thank you.

Thank you. Our next question is coming from Casey Alexander of Compass Point.

I have two quick questions. One, in your subsequent events, you discussed the two investments that you made, which were first lien senior secured debt investments with a weighted average yield of 14%. That sounds like a weighted average yield that is unusual for first lien in any environment. So I'm just kind of wondering what the nature of those investments were that allowed for such an elevated return on them, especially given the fact that you guys try to target very senior first lien with lower leverage attachment points.

Sure. So you want to take that, Jon, and I can provide some color.

Yes. Sure. So we'll just remember – so Casey, one of the benefits of the wide frame of reference at Barings is that we can focus in on different pockets of opportunity that exist. And so for example, we have our core boring is beautiful direct lending mandate, which Ian and our teams and Eric always execute with the types of spreads and returns, and more importantly, the risk profile that you'd expect. But additionally, Barings operates a number of verticals, whether it's either structured credit, or in this case, special situations wherein certain instances where companies are finding themselves strapped for liquidity, you are able to provide perhaps a larger company a liquidity solution at a very attractive rate of return and credit profile. And that benefit that affords us by the fact that Barings' platform in credit is so wide and global, you can identify some of these larger companies that are going to be looking for those liquidity solutions. And we can execute them with a team that has done this as their primary job for the last 20 years. So it's a mix. And these types of opportunities come, they're episodic, but certainly attractive and great complements to the direct lending portfolio. But Ian can also expound as well.

No, no. You've got it.

Well, my recollection is that those special situations were ideally likely to ultimately find their way to the JV. Is that possible that these are being brought on balance sheet and then ultimately going to be sold down into the JV?

No. So Casey, the broader point for JV, the answer is we always execute in tandem with our partners – with our JV partners. But when you think of the joint venture, there is a heavy focus as it relates to diversification. So clearly, the BDC as well as the JV can own. Both own a credit such as this one. This is not going to be considered a bad asset. However, for example, a European loan, right, you would not see the same level of ownership, largely because if a European loan comes on the BDC balance sheet, there is also diversification tests that we have to be aware of. So at the end of the day, clearly, everybody moves in the same direction, but for something that sits as a good asset for BBDC, you can expect BBDC and the JV to participate at the end of the day, still providing good risk-adjusted return at appropriate levels of diversification. So it's not as if the JV drives this type of investment. It's that BBDC is open to this type of investment as is the JV. And clearly, when these pockets open up, which only Barings can execute on, we all participate and keep it diversified as well.

Let me just make sure we're clear. So don't think of those investments as kind of what I'll call the core of our portfolio, right? We're not changing our strategy in any way, shape or form. When we do see a special situation, it may happen to be first lien, may happen to be technically first lien, when we see a situation like that, that we believe the risk-adjusted return is really attractive, we're going to selectively, in a modest size relative to the other investments, make investments in those areas. So although it's first lien, don't think of it as, all of a sudden, we're changing our core first lien strategy to having these type of yields. It's not that at all.

All right, understood. Thank you. Secondly, since the last conference call, there hasn't been any actual share change in the share repurchase program, and the stock had been trading sort of in the 15 percent-ish discount to NAV range. But with this increase in NAV, that's jumped to over 20%. Are we now at a level where since you changed the share repurchase program to something more discretionary, that this looks like a better shot on goal to do some accretive share repurchases?

Casey, this is Bock. I'll kind of answer that. Really, when we think about share repurchase overall, I know this was kind of our commitment on our February call of 2019. And that this is always a part of our capital allocation philosophy. And so you can expect to see additional share repurchases and you can expect them to be accretive. The timing of which can be – certainly fluctuate, but philosophically, we sit exactly in alignment because we do recognize that there's opportunities in the broader market as well as our own share base. If you look back to last quarter, I think you kind of see kind of a general trend where there's some in the middle – or some at the beginning of the year, in the middle and then the end. And sometimes it just depends on the weightings. But at the end of the day, we remain philosophically aligned, and more importantly, committed. We believe that's an important part of capital allocation philosophy subject to, and this is always important, just the broader liquidity constraints and/or the regulatory environment.

Okay. Thank you for that.

Thank you. Our next question is coming from Ryan Lynch of KBW. Please go ahead.

I just have one today. As we look through credit cycles, if you could time them perfectly at kind of the height of cycles, it would make sense to reduce risk as much as you could with more into first lien secular growth businesses. And then at the bottom of the cycles or coming out of cycles, it would make sense to add on more risk or lean into more of a risk asset as you move down the capital structure, take on more cyclical businesses. Obviously, you have to time the cycle, right to do that. It doesn't sound like that's your guys' approach as we're in this cycle and potentially coming out. Can you just talk about why no – it doesn't seem like desire to lean into more risk potentially coming out of the cycle.

I'll start with that and then maybe turn it over to Ian. So you're right. We do not macroeconomic try and time our investments. We underwrite every – our typical deal is somewhere between five and seven years in length from a loan maturity perspective. We underwrite every single deal assuming there's going to be some form of credit cycle or economic cycle during the life of that asset. So that would have been true two years ago, five years ago and it will be true tomorrow. And so now, listen, on the margin, do you understand the economic environment meaning when you've been in a very strong bull market, you have to be potentially a little more cautious because you know at some point you'll just go through that cycle. As you come out of the cycle, you can feel that, too. So on the margin, you can think about margin enhancement for a company or margin expansion for a company being potentially more logical than that environment. But we don't industry time or market time or economic cycle time our investments. Our view is it's very difficult to predict what those cycles will be, how long they'll last. And so we just assume there's going to be a cycle during the life of every single investment we make. Ian, if you want to add anything to that?

Yes. I guess the only thing I would add is just from a capital stack perspective. And that is – I mean, look, we are a capital solution provider. We've got a long history investing in junior capital and senior and we've been managing third-party junior capital for decades and experience through cycles. And so like Eric said, we don't change our credit view based on where we are in the cycle. But every time we look at an opportunity, if it's an attractive company, we do look at it from a relative value lens. We focus on probability of default, loss given default and we can be agnostic in terms of where we play in that capital structure. And that is a competitive advantage that we have when we're talking to private equity firms. And obviously, what we want to do is being the dumb money in the transaction if there is dumb money in the transaction. But I'd say what we did do over the last few years is just given how frothy the market was, we spent more – we focused more on the top of the cap structure in a defensive play. And obviously, building a portfolio in the last two years of a cycle is it's a really challenging situation. But we – as we come out of this cycle to the extent that we see good junior opportunities, we'll definitely look at those. I think right now, the issue is we still have COVID flare-ups. We still have the Fed propping up the economy and so I don't know if you can really say that we've – we moved through the trough and we're headed up at this point. I don't know if that helps at all.

That's a good color, and definitely fair points. Those are my questions. I appreciate the time today.

Thank you. This brings us to the end of the question-and-answer session. I would like to turn the floor back over to Eric Lloyd for closing comments.

I just want to say thanks to everybody for joining us today. I know it's a busy time for particularly the analysts on there. Thanks for joining us. And everybody at Barings, we just hope everybody out there stays healthy, stays positive. And if we can do anything, answer any questions for any of our shareholders, analysts going forward, you know how to get ahold of us. So thank you again for your time.

Ladies and gentlemen, thank you for your participation. You may disconnect your lines or log off the webcast at this time, and have a wonderful day.