Barings BDC, Inc. (BBDC) Q4 2020 Earnings Report, Transcript and Summary

Greetings, and welcome to the Barings Fourth Quarter and Full Year 2020 Earnings Conference Call. At this time, all participants are in listen-only mode. [Operator Instructions] It's now my pleasure to turn the call over to CEO Eric Lloyd. Please, go ahead.

Thank you, Kevin, and good morning, everyone. We appreciate you joining us for today's call and I hope that you and your families are doing well and staying healthy during this unprecedented time. Please note that throughout today's call, we'll be referring to our fourth quarter 2020 earnings presentation that is posted on the Investor Relations section of our website. On the call today, I'm joined by Barings BDC's President and Co-head of Global Private Finance, Ian Fowler; Tom McDonnell, Managing Director and Portfolio Manager; Brian High Barings' Head of U.S. Special Situations and Co-portfolio Manager; and the BDC's Chief Financial Officer, Jonathan Bach. As we typically do, me and John will review details of our portfolio and fourth quarter results in a moment, but I'll start off some high-level comments about the quarter. The way our earnings calendar fell this year, it's been almost four and-a-half months since our last earnings call and as you saw on our preliminary earnings release in February and yesterday's filings, we finished 2020 with an extremely after-quarter. Between a record quarter for originations completing the MVC Capital acquisition, issuing new unsecured debt and announcing a dividend increase, we have a lot to cover today. The timing of this call also affords us the opportunity to provide greater visibility into the first quarter of 2021 and you will see the strong finish to 2020 has continued into the New Year. Let's start with the high-level on Slide 5 of the presentation. The macro trends we saw in the third quarter continued into the fourth quarter as broadly syndicated loan prices continued to increase in end of the year back at pre-COVID levels. And while BDC at pre-prices were also up in the fourth quarter, increases have lagged the BSL market, and BDC equities ended 2020 with a 21% decline for the year. Now turning to Barings BDC, flip to Slide 6 for our fourth quarter financial highlights. Our net asset value per share improves $0.02 in the quarter to $10.99. As you might expect based on the market trends I outlined, NET unrealized appreciation in our investment portfolio drove NAV per share higher, but this impact was partially offset by net dilution from the MVC Capital acquisition. When we announced the transaction last August, we outlined that the fixed share exchange rate was based on Barings BDC's NAV per share as of June 30, 2020 of $10.23. Given the increase in our NAV per share since that time, we did experience some NAV per share dilution when the transaction closed in December. This solution, however, is expected to be a near term impact as we continue to believe both the drivers behind the transaction will result in long term NAV per share accretion. Importantly, our actual net asset value increased from approximately $526 million at September 30 to almost $718 million at December 31. This expanded equity base will provide for increased leverage and investment capacity and the opportunity to reposition certain assets into directly originated investments could help drive NAV per share and earnings accretion in the future. Our net investment income increased from $0.17 per share in the third quarter to $0.19 per share in the fourth quarter. Given that the MVC Capital acquisition closed on December 23, this increase was not driven by the acquired assets, but rather the impact of net new Barings originated investments totaling $332 million as we effectively completed the rotation out of our initial broadly syndicated loan portfolio. This increase in core earnings drove the increase in our first quarter 2021 to $0.19 per share, up from $0.17 cents per share in the fourth quarter. Ian will discuss originations in more detail, but the fourth quarter total deployments were record for both Barings BDC and the overall Barings Global middle market lending footprint. Our existing investment portfolio continued to perform well in the fourth quarter. As of December 31, our total investment portfolio was carried slightly above original cost and no Barings originated assets were on non-accrual [ph]. One asset acquired through the MVC Capital transaction with a value of $3 million was on non-accrual status, but overall, debt portfolios performance continues to be in-line with our original expectations. Slide 7 outlines some additional financial highlights for the quarter. Here you can see our investment portfolio at fair value grew to almost $1.5 billion at year-end. The $380 million increase, however, included a $140 million decrease in our short-term cash investments. Thus, our true investment portfolio actually increased $525 million during the quarter as a result of the MVC Capital acquisition and the net deployments I referenced earlier. Even with this increase in size, our net debt to equity ratio is 1.04. Well within our target range for leverage, our quality of our capitalization also improved with the issuance of $175 million of unsecured notes in the fourth quarter and this focus on our capital structure continued in the first quarter of 2021, with an additional $150 million unsecured note issuance in February. Let me wrap up my comments with a few high-level observations about 2020 as a whole. It was an unprecedented year on many levels and the global pandemic created business and personal challenges too numerous to name. If you have told me in late March of 2020, or April of 2020 that Barings BDC would end the year having completed its portfolio rotation out of broadly syndicated loans into directly originated assets, having no Barings originated assets on non-accrual, receiving an investment grade credit rating, and completely the acquisition of a low levered BDC at a discount to NAV, I certainly would have taken that outcome in a heartbeat. This result was driven by a number of factors, including the hard work and dedication of people across the entire bank platform, various investment themes and our internal partners, partnership with our private equity firms and our portfolio companies and other partners. Two other elements that we frequently discuss we're also critical to this outcome. First, Barings' wide investment frame of reference allowed us to participate in a differentiated deal flow across public and private markets, finding the most attractive risk adjusted returns at different times during the year that certainly saw a high level of volatility. Each quarter of 2020 presented different investment dynamics and Barings BDC was able to remain active throughout the year. Second, we continue to believe the alignment between a BDC and its managers are critical. Our alignment was further evidenced by the credit support agreement that was put in place as part of the MVC Capital acquisition, as well as the lower base management fee that became effective on January 1, 2021, as a result of last year's shareholder vote. During challenging times, we believe this type of alignment is critical to achieving optimized results for shareholders. I'll now turn the call over to Ian to provide an update on the market and our investment portfolio.

Thanks, Eric, and good morning, everyone. Let me begin on Slide 9 with some additional details on the record-level of investment activity that Eric mentioned. Net new middle market investments totaled $393 million, with gross fundings of $528 million partially offset by sales repayments of $135 million. New investments included 24 new platform investments, totaling $418 million and $110 million of follow on investments and delayed drive term loan fundings. We also had $13 million of net new cross-platform investments. As a reminder, these are investments that take advantage of the breadth of the Barings investment platform, including items such as opportunistic liquid loan and bond investments, special situation investments, and structured products that would include collateralized loan obligations and asset backed securities. Our initial BSL portfolio decreased by $74 million and given that only $15 million of that portfolio remained at year-end, and it has been further reduced to approximately $2 million today, we will no longer be reporting it separately going forward. We've included the assets acquired in the MVC Capital acquisition under cross-platform investments on this slide, with a total of $185 million acquired at the closing of the transaction and $5 million of subsequent repayments before year-end. You may have expected to see a higher number based on our initial discussion of the transaction, but MVC had over $30 million of assets repayments following our August announcement, consistent with our expectations. Two logical questions when you have a quarter with deployments of this level are one, why was volume so high? And two, how can you be confident with the quality of the originations? Direct lending to middle market companies effectively stopped in the second quarter as the focus shifted to simply navigating the crisis. As government policies took shape and companies began to fully understand the implications of the pandemic, the third quarter started to see a pick-up in transactions involving quality companies that demonstrated an ability to navigate the challenging environment. This dynamic came into full effect in the fourth quarter, as pent-up demand for transactions, both LBOs [ph] and add-ons involving quality companies with a proven 2020 track record, drove what was almost a full-years’ worth of activity in a single quarter. You can see on Slide 10 that direct lending spreads continue to tighten across the different lending sub sectors as volumes pushed higher. In terms of quality of the originations, I believe 2020 created a unique dynamic whereby the high fourth quarter volume could effectively be viewed as the result of an elongated due diligence process as companies needed to demonstrate their ability to manage through the crisis before entering into a transaction. Over 70% of our middle market fundings in 2020 occurred during the fourth quarter and I take comfort in the fact that these new investments were underwritten under a COVID-focused lens. Slide 11 provides a bridge of our portfolio from September 30 to December 31. In addition to the net deployments I just outlined, unrealized appreciation of $25.4 million was a key driver of a portion of the increase in portfolio fair value. We did have $1.5 million of net realized losses, primarily as a result of BSL sales. You can see a breakdown of the key components of our investment portfolio at December 31, if you turn to Slide 12. With the rotation out of our initial BSL portfolio and the closing of our MVC acquisition, this slide now breaks down our portfolio into middle market, MVC and cross-platform components. We were invested in approximately $1.2 billion of private middle market assets at year-end, which included $129 million of unfunded commitments and $223 million of cross-platform investments, which included the remaining $30 million of unfunded commitments to our joint venture investments. The MVC portfolio was valued at $180 million at year-end, consistent with the original transaction value booked at closing. The $1.4 billion funded total portfolio was spread across 146 portfolio companies and 29 industries. One investment acquired from MVC was on non-accrual status and we had no material modifications to the cash payment terms of our debt investments. In terms of cash conversion, 3.8% of our revenue consisted of peak [ph] interest, with no restructured peak [ph] investments for portfolio companies facing liquidity challenges and unable to pay their cash interest. For our middle market portfolio, weighted average first lien leverage was 5.2x, consistent with what we reported last quarter. Our total investment portfolio excluding short-term investments is now made up of 82% first lien investments, which is down from 92% at the end of the third quarter. Slide 13 provides a breakdown of the driver of this change, which is attributed entirely as expected to the MVC Capital acquisition. Excluding the investments acquired from MVC and short-term investments, we ended the year with a portfolio comprised of 93% first lien assets, an increase from the third quarter given the high level of first lien deployments in the fourth quarter. The MVC portfolio on the other hand was comprised primarily of equity, second lien and mezzanine debt investments. We believe this portfolio can initially serve as an attractive complement to the Barings' originated portfolio and the acquisition was the unique opportunity to buy a large portfolio at a discount to NAV. As I mentioned before, we have been sizable payoffs of approximately $30 million since the deal was announced and we will continue to drive toward the exit of non-core lower yielding equity investments and increasing core earnings by redeploying this capital into higher yielding assets. Thus far, the portfolio has performed in-line with our original expectations. Our top 10 investments are shown on Slide 14, with no investment exceeding 2.5% 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. You can see that our two largest investments were acquired as part of the MVC Capital transaction, keep in mind that while these are large exposures, they are also supported by the credit support agreement in place with Barings LLC, thus reducing potential downside risk for these investments. Portfolio diversification is critical for many reasons, but we believe its importance will continue to be highlighted in the current environment. I'll now turn the call over to John to provide additional color on our financial results.

Thanks, Ian. And jumping to Slide 16, here you can see the bridge the company's net asset value per share since last quarter, showing an increase in $0.02 per share to $10.99. Our net investment income outpaced our dividend by $0.02 per share while net unrealized appreciation on our investment portfolio and foreign currency transactions drove an increase of $0.34 per share. The appreciation included a cent a $0.10 per share reclassification adjustment to more than offset the $0.02 per share of net realized loss on investments in foreign currency. Offsetting the unrealized appreciation was a $0.05 loss on extinguishment of debt and a net $0.28% per share reduction due to MVC Capital transaction. Now, as Eric mentioned earlier on the call, BBDC's NAV appreciated since June 30 and that drove this per share dilution. But the increase in NAV on an absolute dollar basis should result in long-term accretion from the transaction. What items you do not see on this NAV waterfall is the impact of share repurchases as we did not make any in the fourth quarter given the MVC merger. As we announced in connection with the merger, however, our board affirmed the company's commitment to repurchase up to 15 million of common stock at then current market prices at any time shares trade below 90% of Barings BDC's, then most recently disclosed net asset value. This program will begin after the filing of our form 10-Q for the first quarter of 2021 and is subject to compliance with covenant and regulatory requirements. Slide 17 shows a further breakdown of our net unrealized appreciation for the quarter on both $1 and per share basis. The $0.34 per share of net unrealized appreciation, which equates to approximately $17 million, included appreciation of approximately $9 million on our current middle market investment portfolio. Of this $9 million of appreciation, $5 million was attributable to lower spreads in the broader market for middle market debt investments, and $6 million was attributable to foreign currency appreciation, which was partially offset by $2 million attributable to underlying credit or fundamental performance. While we did have $2 million of unrealized appreciation due to the underlying credit of investments, it was isolated to a few specific names. We continue to be pleased with the resiliency and performance of the companies across the portfolio. Both the Barings originated assets and those acquired in the MVC Capital transaction. Our cross-platform investments saw appreciation of approximately $11 million dollars and we had $5 million of reclassification adjustments that I mentioned that more than offset the $2 million of net realized losses that we incurred during the quarter. Slide 18 shows our income statement for the last five quarters. As we've discussed, our net investment income per share increased to $0.19 for the quarter driven by a $3.5 million increase in total investment income. Deployments into higher yielding middle market and cross-platform investments helped drive this increase in total investment income, as well as a $0.9 million increase in fee income, of which $0.5 million was due to an increase in non-recurring fees. This increase in total investment income was partially offset by higher interest in financing fees, which rose as a result of hiring borrowing levels and higher interest costs associated with our unsecured debt issuances. From a balance sheet perspective on Slide 19, I'd really point to key takeaways out. The first is the overall increase in the size of Barings BDC in terms of both assets and equity. We ended the year with $1.68 billion of total assets driven by net deployments in the quarter and the MVC Capital acquisition. Net asset value increased to $718 million in large part due to the equity issuance for the MVC Capital acquisition. If you compare this to where things stood at December 31, 2019 with $1.25 billion of total assets and $571 million in net asset value, it shows significant growth during the year. Second, even with this significant growth, the company remains well-positioned from a debt capitalization perspective, ending the year with a debt-to-equity ratio of 1.32x or 1.04x after adjusting for cash, short-term investments and net unsettled transactions. The high aggregate amount of short-term investments in cash resulted really from the timing of certain sales late in the year as well as the need to fund new deployments in early 2021. More importantly, you can also see in the liability section the shift in our mix of debt to a higher reliance and unsecured debt issuance. If you turn to Slide 20, you can see how this funding mix relates to our assets, both in terms of seniority and asset class. Our goal has been to match a diverse portfolio of assets with a diverse capital structure of secured debt, unsecured debt and equity. The recent increase in our equity and unsecured debt levels correspond to the increase in equity and junior debt positions acquired through the MVC merger. This diversified liability structure better positions Barings BDC to take advantage of the wide investment frame of reference across the Barings' platform and provides more flexibility during periods of market volatility. Details on each of our borrowings are shown on Slide 21, which shows our debt profile for each of the last two quarters as well as pro forma for the new $150 million unsecured debt private placement we completed in February. This new issuance included $80 million of five year notes with a coupon of 3.41% and $70 million of seven year notes with a coupon of 4.06% or a blended coupon of 3.71%. Following this issuance, we now have total unsecured debt outstanding of $375 million, maturing between 2025 and 2028 with an additional commitment to raise up to $25 million of unsecured debt. Jump to Slide 22. Barings BDC has available borrowing capacity under our $800 million senior secured corporate credit facility, which was further enhanced by the $150 million unsecured note offering in February, as well as our remaining $25 million unsecured debt commitments. The chart on Slide 22 outlines the impact of using this available liquidity on our net leverage, including the impact of funding our unused capital commitments. Barings BDC currently has $129 million of delayed drug term loan commitments to our portfolio companies, as well as $30 million of remaining commitments to our joint venture investments. This table shows how we have the available capacity to meet the entirety of these commitments if called upon while maintaining cushion against our regulatory leverage limits. Slide 23 depicts our paid and announced dividends since Barings took over as the advisor to the BDC. As Eric mentioned, last month that we outlined our first quarter 2021 dividend was $0.19 per share, an increase of $0.02 per share compared to the fourth quarter. Now, that wraps up our comments on 2020 results, but I'd like to conclude our call with a brief discussion on our expectations for 2021 and I'll say this in the context of what we are expecting to see in the market and in how we believe we will be prepared to react to those expectations. So jump with me to Slide 25. These charts from Refinitiv and Cliffwater show recent trends in institutional loan issuance, as well as loan repayments and sales, and the data points to a high likelihood of increased prepayment velocity and 2021 relative to past cycles. As with most things, there are both positive and negative elements to a highlighted repayment trend. On the positive side, there can be a near-term earnings lift from the recognition of unamortized OID and fees which are taken in to net investment income when an investment repays. So looking at Barings BDC's middle market investment portfolio, the balance of unamortized and fees is approximately $28 million. So there's certainly the potential for increased fee income relative to the levels recognized in 2019 and 2020. Of course, the downside of repayments is the need to redeploy that capital. But Barings has two critical advantages that help us mitigate this risk. First, the hurdle rate for our incentives is set at the target dividend yield, which means potential spread compression for redeployed capital will be borne by the investment manager, not investors. And second, our wide investment frame of reference should help us redeploy that capital on a timely basis and maximize both our liquidity and complexity premiums. And if you look on Slide 26, you'll see the key strength of the Barings platform that could help facilitate redeployment of this capital. Barings BDC is uniquely positioned within the broader Barings Global fixed income franchise to focus primarily on middle market direct lending, but also take advantage of Barings wide investment frame of reference and different market cycles and periods of volatility. Just as it helps Barings BDC grow its initial portfolio, this multi-channel origination strategy should enable Barings BDC to redeploy capital if the repayments materialize. Slide 27 provides a quick updated view of our graphical depiction of relative value across the BBB, BB and B asset classes and it continues to show the relative value opportunities that can exist for investors at different levels of credit risk and how the value of choice across markets provides a meaningful benefit to BDC investors. This translates into the actual results on Slide 28, which showed the premium spread on our new investments in the fourth quarter relative to liquid credit benchmarks as we saw attractive illiquidity and complexity premium spread, as outlined here, Barings BDC deployed $566 million at an all-in spread of 760 basis points, which represents a 297 basis points spread premium to comparable liquid market indices at the same risk profile. Diving deeper into our core middle market segment across Europe and North America, we average the 265 basis points spread relative to liquid market indices. And within the cross-platform investment strategy, you can see the incremental premium that this asset category provides with premiums from 717 to 1,026 basis points. The bottom line is that in a period of increased repayment velocity, we and others expect to see in 2021, portfolio diversification and a wide frame of investment reference will be key. We believe our ability to invest across platforms and generate excess shareholder return via illiquidity and complexity premiums will be a key differentiator for Barings BDC in this upcoming repayment cycle. Now I'll conclude with Slide 29, which summarizes our new investment activities so far, during the first quarter of 2021 and our investment pipeline. Well, note that record-setting pace of the fourth quarter, the first quarter has been extremely active with approximately $224 million of new commitments, of which $202 million have been closed and funded, of these new commitments, 80% are first lien senior secured loans and 12% are in joint ventures, and the weighted average origination margin or DM-3 was 7.5%. We've also funded approximately $27 million of previously committed delayed drop term loans, the current Barings global private finance investment pipeline is approximately $1.8 billion on a probability weighted basis, and is predominantly first lien and senior secured investments. As a reminder, that pipeline is estimated based on our expected closing rates for all deals in our investment pipeline. And with that, Kevin, we will turn the line back to you for question-and-answer session.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question today is coming from Finian O'Shea from Wells Fargo. Your line is now live.

Thank you. Hi, everyone. Good morning. First question I think, Ian talked about the ability to rotate still. Just looking at the portfolio, obviously, you're now out of BSL. You have these very high yielding assets from MVC. So I would have thought that rotation would be a headwind. Can you just provide a little more context there on the benefit of rotation for the portfolio?

I think what I can, Fin, is I'll talk about some of the sources of liquidity and the opportunity to generate investment capital and then Ian and the team can outline kind of the spreads at which one deploys. So if we look at the current MVC Capital assets, we've not seen material pre-payment continue to accelerate. Those loans continue to perform as expected and where we start to see additional portfolio opportunity for rotation will come out of the ability to generate liquidity through transactions and settle downs with our joint venture partner in Jocassee. And based on the the current opportunity set, we're starting to still see that there are attractive illiquidity premium to invest that in that current market. And then I'll also leave open that over time, our non-core asset base, particularly as it relates to non-yielding equity, that can be realized, but it will be realized in an appropriate time to maximize net asset value, but I will turn it over to Ian, as we outlined the ability to invest it current spread and what the remainder of 2021 looks like from an investment perspective.

Good morning, Fin. When we look at the third quarter and fourth quarter, we saw spreads that were wider than first quarter 2020 and fourth quarter 2019. Anywhere from 25 to 50 basis points, OID was was wider, too, because at that point, sponsors were looking for commitments and reliability and just based on the way our portfolio performed through COVID, we were in an offensive position in terms of pivoting the take advantage of opportunities in the market and pick up market share while a number of our competitors were dealing with right side balance sheet capital issues, or portfolio issues, or quite frankly, both. So we were able to take advantage of that and generate some really attractive investments. Now, I will say that as you look at 2021, we're definitely seeing compression and yields were not correlated to the liquid market, we follow the liquid markets. So eventually, we'll head in the same direction and that's occurring now; so some of that will dissipate. But, even in the beginning of 2021, there were pretty attractive yields. And the thing I'll say also, which I've never seen in my career, is just the volume of activity at the end of last year with really high quality assets. Because these assets were assets that obviously performed well through COVID and we're under writable and very attractive. So it was a really unique opportunity.

Okay, that's helpful. And then I guess, sort of similar topic. You just address partially post quarter you're finally getting some repays, which you haven't had. It helps the top line you haven't had material, at least. It looks like post-quarter, these are picking up, I don't know how much, we have most of the quarter's data. I don't know how much this is expected to continue and pressure, the top line of your core middle market book, I assume it's mostly that. I think you've mentioned wide frame of reference, most managers will claim that. But what do you think this environment does on a net basis? Does the return compression going forwards swallow this fee income you'll start to receive? I guess just on the core book.

I think you'll likely see, Fin -- this is John -- you'd likely see it match and a couple of points. So while we point to a top-line level of potential when we haven't seen repayments materialized to a point where you which would jeopardize the return profile offered and there is a second point as well, there is the issue as it relate to the top line, Fin. What happens is given where hurdle rates get set inside the BDC space, that return compression that occurs impacts a number of BDCs as it relates to the bottom, because the hurdle rate is set at a low level relative to the dividend yield. So in our case, what you find is, even if there is a level of repayment compression on redeployment, which does get offset by the natural attrition of upfront fee income that's amortized, the investors don't feel that level of experience as a result of how the alignment was effectively established. In terms of the the frame of reference, I think you kind of see there is a pretty wide berth in where we focused with the opportunities that generated net asset appreciation above our cost and that will continue. But really, we highlight the differentiation that shows stability on the top line, but that added layer of alignment and incentive protection that occurs on the bottom line, that's a bit differentiated relative to the field.

Thank you. Our next question today is coming from Kyle Joseph from Jefferies. Your line is now live.

Hey, good morning, guys. Congrats on a very, very busy close to 2020 and what looks like a good start already in 2021. I think it'd be helpful; obviously, the portfolio has gone through a big transformation, particularly in the fourth quarter away from BSLs, with MVC and cross-platform. I think it'd be helpful if you remind us of kind of how you're thinking about the appropriate leverage for the BDC given the portfolio transition.

I'll I'll take this with the view that our leverage expectations remain absolutely constant at a 1.251x to 1.25x leverage band. In addition to the absolute leverage level, a lot ties into the mix of what that leverage level is because on an absolute basis, it's one part of the story. And so for us, we heavily value the flexibility that comes with the unsecured debt, private placements that were that were done and we appreciate that with our partners, as well as in our work with the rating agencies. I'd argue that you'll likely see continued stability in both the mix and absolute level that you're seeing today, with no intention to move too far out of either band, Kyle.

Hey, Kyle, this is Eric. I'd add to what John said. Just you go back to our original revolver we put in place and at the time, going back a couple years, we ended up taking a couple $100 million more than we originally looked for and really said at that time, I was willing to pay the unused fee on that amount for that increased optionality or flexibility. And you've seen us do it here on the unsecured debt issuance. A higher cost, so a little bit of a drain from a net perspective, but we believe that that mix is the right place to go. We really want to always make sure we look at that cushion on our borrowing base of our -- really, for the most part hits our core middle market assets and make sure we have plenty of cushion on that. So we never get into a difficult position on that. So the liability side of this we spend a lot of time on and and we're willing to give a little bit at times to make sure we maintain that kind of cushion and flexibility.

Very helpful, thanks. And I'll just ask one follow-up. Obviously, we know your credit in the Barings book is the solid no non-accruals. But just want to get a sense for the revenue and EBITDA growth trends you saw in the fourth quarter, how that compared to the third quarter, and any changes year-to-date?

This is Ian, Kyle. I can say in terms of our book and again, as you look at portfolio construction for us and credit philosophy, one of the areas that we tend to avoid and de-emphasize is consumer facing businesses, especially those with consumer discretion risk. And so, a lot of the businesses that was dealing with consumers such as gyms, retail restaurants were all areas that we avoided. The other thing I would notice that most of the businesses that we have in our portfolio, in fact, pretty much all the businesses in the portfolio were deemed at some point to be essential businesses. So, if you look at the entire Barings platform, there is -- and again, it all depends on the industry and the recovery through shelter in place and lockdowns. But in terms of enterprise value, feel very confident about all the businesses that we have in the portfolio. In terms of liquidity, same. There are some businesses that lost two or three months of revenue, like dental management practices, but they've come back. So overall and then obviously, we have businesses that actually performed really well during COVID. So if you look at it from a portfolio perspective, it's definitely flat to up on both revenue and EBITDA.

Hey, Kyle. Eric here. I would just add to what Ian said. In the portfolio characteristics deck, we laid out December 31. If you look at that middle market portfolio, numbers off top my head, I think were 5.2x through the first lien, 5.6x through the total. And that's really pretty consistent with what you've seen over time. That's a metric we track, making sure that we don't get too extended on either the senior leverage, which is primarily where we are from a tranche perspective or the total leverage. And to Ian's point, I think, the fact we've had no non-accruals is a real positive on our core book. And I'd say businesses are impacted differently. So I don't have a good index for you, as far as the exact percentage, because you have some businesses that this COVID has really benefited. And then there's plenty others that I'd say, in general, they're kind of flattish and blended up to Ian's point, it's up. Meaning from a from a revenue and EBITDA perspective and I think it's representative in some of those statistics you see there, understanding that we put a lot of new assets on the books. So that 5.2x, if you compare it to the third quarter, which I believe is a similar number, at that time, it can be skewed. You can just look at it as assuming that the portfolio companies all stayed at the same leverage because we put on a bunch of new assets in the fourth quarter.

Ian, I would just add that the interest coverage is over 4x, which is a pretty good metric.

Thank you. Our next question is coming from Ryan Lynch from KBW. Your line is now live.

Hey, good morning, guys. First question I had was you mentioned kind of one area that could really help offset the strong level of prepayments that could be coming down the road, is you guys' diversity in your platform and the ability to do cross-platform investments, which have a much higher yield. But as I look at at least the the fourth quarter activity, you guys only had $38 million in new originations and only $13 million of a net increase in cross-platform investments. That's a pretty small number and probably the most robust quarter that we're going to have in a long time period for that vertical. So can you just talk about, do you expect that to increase? And why would why would that do so?

This is Eric. I'll take a crack at it first. Go ahead, Bob [ph].

No, no. I'd say we can complement. I'd argue that really it depends on end-space time and what we outlined in the discussion as it relates to repayment is another rail that we believe are important for investors to prepare for. You prepared for the worst and hope for the best. Our expectation at the fourth quarter had a significant amount of illiquidity premium that was being generated inside the core little market category. That continued to move into the first quarter and as you think about the repayment spectrum, where we focus in the core middle of the middle market, you find more insulated repayment trends that can occur as opposed to the differentiation of the upper end of the middle market or in more junior debt style transactions at that upper end of the middle market. So as a result, our view in the fourth quarter and also continued to the first quarter, we continue to drive materially amount of opportunity inside the core direct channel and to the extent that that either ebbs and flows or we see more prepayments where you have the opportunity to invest in other channels at the same time. But really, it's what presents the best illiquidity premium or the best complexity premium to date. And so it's a little less of one's great ones, not it's all kind of seen at one point in time and you can kind of get a sense that to the extent there were prepayment velocity increasing. There is a lot of the additional places to make sure that we can retain focus that Barings does very well. But I'll turn it to Eric.

Hey, Ryan. I was looking at a couple. For one and then cross platforms about 15% of the portfolio right now and so in any one quarter, it may be more or less depending on what the opportunity we see. Brian High who's on the phone runs our special situations business here in the U.S. Tom McDonnell who is on the phone is one of our Senior Portfolio Managers and liquid credit which also ties into our structure products. So we look at that relative value very actively to see where that value is and frankly in the fourth quarter, we saw better value into direct business than we did in some of those other cross-platform opportunities. Now, that would be different and sometimes in the second or third quarter of this past year, when you saw real volatility in the liquid markets. We saw the value there. And I think it's evidenced by I think John referenced at about $11 million of unrealized gains in our cross-platform investments. That's really a result of some of that volatility we saw earlier in the year for the most part, because if you go back two years ago, we weren't really talking about cross-platform, we were talking about the core part of the business. I'd say the second part of it would be frankly when we saw the volume coming in in the fourth quarter. So if you think of we did 24 new platforms in the fourth quarter, that's a pretty incredible statistics in our core business and we really want to make sure we manage our leverage appropriately when we saw that pipeline coming in to make sure that we didn't put on too many other assets of cross-platform. And then this went all these new platforms and then get our leverage as we referenced, we kind of want to keep that number between one and one and-a-quarter. And we also look at the leverage, assuming that we have all the commitments we have to get drawn, meaning our delay draw term loans and our JV, as John referenced there, it's about one-three [ph]. And so balancing that dynamic of leverage, given the opportunity set, there's another one that we put everything through.

Okay. Understood, that's helpful. Helpful color on that. Kind of on that same theme, you all have a pretty strong international presence. And I think that that really was visible in the fourth quarter with with a good amount of capital deployed in Europe and in Asia Pacific. Can you maybe just talk about from from the middle market lending standpoint? How do those markets -- and again, I'm sure each of those different markets, whether it's different countries in Europe, or obviously, different countries in Asia, but but how do those markets from a high-level look relative to U.S. middle market, from a kind of a term structure is just favorability of blending in there versus over the...

Okay. I'll take a crack at it first and then turn it over to Ian to add some color to it. So we do have balanced businesses in the U.S. and Europe and if you look at some of the latest statistics in Europe, depending on what service you want to use, we were kind of the number two provider of capital for direct lending to our sponsors in Europe. So it's a place that we believe we have a lead position in the marketplace and we're very active. I would say Europe came out of the COVID a little quicker than the U.S. So if you think of the fourth quarter activity that we saw in the U.S. market, I'd say we saw that kind of begin to happen in the third quarter in Europe. And as Ian referenced earlier, at really attractive spreads and upfront fees in the U.S., the same would have been true in Europe. So I'd say it was kind of a quarter-ish ahead. But the fourth quarter remained very strong for us too, as you saw and it continues to be strong year in the first quarter on our European business. Europe for us is not exclusively but primarily UK, France, Germany, Benelux and the Nordics. That's primarily where we operate. UK is our largest market, France is our second largest market. That does make up the majority of the portfolio. In the European market, the financing is different than the U.S.. What we see in the U.S. is primarily a sponsor will work with us and then they'll call us up with one or two or three other parties. In Europe, it's almost exclusively kind of bilateral or one provider of capital arrangements. So it's kind of a winner take all market for the most part in European and European business. Last thing I'd say is probably from Europe perspective is the performance of those assets and that portfolio of our European business would be consistent with our North American business, meaning it's had really strong credit performance through cycles and really good team. Now going to the Asia Pacific because people will be going saying, 'What are you doing there?' It's really based in Australia. Adam Wheeler, who is Co-head of our Global Direct Lending business with Ian Fowler. Adam is based in London, leads our business outside of the U.S. He relocated from Sydney to London a number of years ago and we have a team on the ground in Australia. I think this is our 11th year that we've had business in Australia. Let's go back and check that for sure. So it's a market we've operated direct lending in consistently. Last thing I'd say is if we think of these markets, [indiscernible] Europe, which you're seeing activity, it's very similar in philosophy to what we do in the U.S. The middle part of the middle market, think of it is $25 million to $30 million dollars, euros, pounds, pick your term and all private equity backed primarily. So very consistent philosophy across the two portfolios. In fact, if you looked at our systems and our portfolio management system, our screening memos, you name it, you took a deal from Europe and you took a deal from the U.S., other than the currency, you wouldn't be able to tell the difference between the two. And then our portfolio management system, they're all in a common portfolio management system that we're able to integrate and provide reporting and every everything else we need to investors institutional or to BDC. Ian, what did I miss there would you add?

You did a great job. The only thing I'd throw out is that on a total leverage basis, European deals are typically less leveraged. You don't really see senior capital over there in the OID. It's wider. So it's a pretty attractive risk adjusted return and then from a credit perspective, what's really interesting over there, a lot of times, yes, you do have companies that are in different markets, meaning different countries, but a lot of times you're dealing with a company that is focused in a market, that's one country and basically that that creates a very strong defensive position. And so, they really become, a duopoly or a major player in that country and it's tough for other businesses and base in other countries to penetrate that market. So we like that kind of diversification from an investment perspective.

Thank you. Our next question is coming from Robert Dodd from Raymond James. Your line is now live.

Hi, guys. Congratulations on a very, very active quarter. [Indiscernible] first on the JV, Jocassee, John, you mentioned that it could present an opportunity to enable the rotation. But I mean, the bigger question I guess is, it's been quite a good performer. It has generated a return for you in terms of return on capital, but not in the form of dividends so far. So can you give us any any color on when or even if we should expect Jocassee to start paying dividends to the BDC? And obviously, as an independent board, but any color you can give us on that point?

Sure. You made the point on the independent board to the extent that a dividend were to be paid, it would be that decision and maybe it might be important to take just a higher level approach of how we looked at JVs. What we want to do is make sure that it runs contrast to perhaps a previous view that one should put as much item or as much in it -- liquid, credit or otherwise -- over-lever it and then overly rely on that cash flow stream to pay dividends and even in stress situations. Well, our view is joint ventures allow for material diversification. Barings has a wide frame of reference and having that strong joint venture partner, participate in a number of those assets alongside the BDC helps manage for diversification purposes, for clarity purpose, and then it gets to the fundamental question, if one view that there was great opportunity to retain earnings inside the venture and it does not compromise the earnings profile of either partner, the BDC or the pension provider, then retaining capital inside the venture may be a great course of action because you also get equity builds on the reinvestment of that capital in those attractive assets. So it kind of harkens to a point that I think you've you've made, which is that, BDCs that both demonstrate dividend stability and growth, and NAV growth are often the best ones to generate perpetual premiums above NAV. And so, no set policy as it relates to the dividend or distribution from Jocassee, but the view is pretty simple that if you have the ability to reinvest your capital, and grow NAV inside that venture, that's a positive outcome.

Got it, I appreciate the color on that. And another one, if I can on kind of the combo, you always give us a lot of market information, which I find very, very useful. If we look at the combo of kind of Slide 12 and Slide 28, the median EBITDA in the BDC for the direct lending is $23 million. That's the median for an average for BDCs in general is probably double that. The median for the BSL market is probably 10x that. So when I looked at Slide 28 and I looked at your middle market lending North America, slightly north of 700 spreads, well above the liquid. Can you give us any color on how much of that comes from the illiquidity premium? How much of that comes from size of the borrowers? And maybe how the dynamics in competitively spread OID, et cetera as they shift, how those are going in your $20 million plus EBITDA versus the the the larger end of private credit versus the syndicated markets. So I realized that was a lot of a question.

So, Robert, I'll start and then Eric, and John can jump in where I've missed something. But just at a high-level, our view when you look at relative value, it's always been in the middle of the middle market. And that is both from a risk and return perspective. From a risk perspective, you're dealing with companies with greater size than the small end of the market. Actually, those the pricing wasn't all that different between the low end and the middle market. And then with the large end of the middle market, maybe it's great that you put more money out the door, but the structural protection is pretty unattractive, or has been unattractive. And so from a risk return per se [ph], we like that middle and actually from a repayment side, and John mentioned this, we feel like we're somewhat insulated, but not immune from the repayments. They're going to curve eventually to reach us, but it's going to hit the large end of the market first. Regarding the the illiquidity premium and the size, what's really attractive about that size of business is for us, it's typically a platform company. And I would say over 80% of the time, the investment thesis from the private equity firm is to grow that platform by consolidating within an industry. So that allows us, A, to because of our ability to write checks up to $250 million we can provide the capital upfront. The sponsor doesn't have to worry about that. So they know they're going to get the capital they need. That puts us in a driver spot in terms of the documentation and we get paid for it through the OID. And then you also get a better spread than you would at the larger end of the market. And we can take that platform company and we've had examples even companies lower $10 million of EBITDA that we've been able to help grow to $50 million or $60 million and then as the incumbent lender provides financing to the next buyer, it will grow to $100 million in EBITDA. To me from a risk perspective and origination perspective, that's what's really attractive about the private equity market. Eric, John, you got something?

Well said. The only thing I would add is I wouldn't say, for us, Robert, that's our strategy and I think the key is that we stick to our strategy. I call them hobbies. Sometimes it's style drift, but people then at various [ph] times, they kind of go out there and say, 'Oh, that looks like an interesting place to go'. Or, 'That looks like an interesting place to go'. An example for us is we don't do energy in our direct lending business and when energy has had some volatility and spreads have been really wide, people have come in and said to us, 'Why aren't you investing in energy right now?' And I'm like, because we didn't do it before for a reason. We're not gonna do it now just because it appears cheap. We're not excellent at that. So we're trying to go where we think we're excellent and where the attractive return is. Ian said it very well, that's the starting point, watch companies grow. There's some people at the upper end of the market that do it extremely well, too at their part of the market and they're excellent at that part of the market. And so I think the key is to make sure you know what you're good at, you know what your focus is, you know what your strategy is and you stay intensely disciplined on that. And if you do that, I think then that's the key part. For us, we think it's the better place to be. It doesn't mean some of the other places are bad, just as the one that aligns best with what we believe is the best value.

Thank you. Our next question today is from [indiscernible]. Your line is now live.

Yes. Good morning, everyone. I wanted to ask a high-level question. Just thinking about the outlook for this year and next year because we're starting to see some meaningful wholesale price inflation and some tightness in at least parts of the labor market, despite what we're reading about unemployment. So I'd like to understand how you feel about your borrower's ability to pass those cost increases on to their customers and protect their margins and their ability to service the debt that they have with you?

I can start, Mickey, to see and then Eric, if you want to jump in. We mentioned the high quality assets that we that we saw last year. That was the starting point of our underwriting and I think you got to break it out into if the company was benefiting from COVID, the question is, is that sustainable? And so, maybe you got to strip that away and look at a normalized run rate as you underwrite that business. Every single deal that we look at, we still continue. Even though they were high quality assets that performed well through COVID, the reality is, we actually don't know the geometry of the recovery here. Like you said, there's things out there, there's definitely some inflationary pressures out there. On the flip side, you've got the government from a fiscal standpoint providing a lot of stimulus, you've got monetary support. So you have those big picture factors, macro factors in there. So when we underwrite these companies, that analysis of that company's ability to maintain those margins and being able to do it in a number of different ways including passing on price increases is part of our ongoing analysis. As we looked at all these deals that we've underwritten in the last -- forever, but like, certainly, we didn't give it up in the last two quarters. We're also focused on a downside case and looking at these companies through a recession and that obviously includes things like pressure, margin pressure, and things like that. So totally agree with you can't just say that these companies because they performed well and during COVID aren't going to have any issues down the road.

Thank you for that. That's interesting insight. And in terms of the uncertainty about the geometry of the recovery, I can't agree with you more and there are still uncertainty as to how the pandemic will progress. And it looks like it will take longer than anybody would have hoped. So apart from industries like software, there are still companies that are under severe stress and I think in your prepared remarks, you mentioned that overall, you're fairly pleased with liquidity amongst your borrowers, but in those industries that are stressed, whether it's hospitality, or restaurants, or gyms, how do you feel about the level of those borrowers' ability to sustain themselves through the pandemic in terms of their liquidity and their need for you to provide additional support to them?

I can sleep at night because we don't have exposure to those industries. I think you're right, there are some broken or impaired business models out there. And I don't know how they're going to recover, certainly to the position they were pre-COVID. And so, again, this is just part of our philosophy as a middle market direct lender. Those industries that you're referring to are just really tough industries to to underwrite. And we weren't underwriting it because of really the consumer discretion, and how you underwrite that like with retail and restaurants, for example. And so, we avoided that, and that obviously worked out well for us during COVID. Eric?

The only thing I'd add to that, Mickey, is we actually are a provider of revolvers to many of our portfolio companies, which is different than a number of other direct lenders that maybe aren't in a position to provide those revolvers to the extent that we are and so that liquidity is something that we have really direct oversight of, date daily information on what those borrowings are. It's not like we're relying on a local bank that's providing the revolver and we're just providing the term debt. So I think that you we view it as an attractive risk mitigation tool, that access to that revolver knowledge and what's going on in that liquidity and the fact that it sits here with us, we think is a positive.

Thank you, we reached out of our question-and-answer session. I'd like to turn the floor back over to Eric for any further or closing comments.

Thank you, Kevin. I guess I want to conclude by just saying thank you to everybody on the phone. Now, we started this journey a couple years ago when we purchased TCAP and externalized the manager. And we told many of you that are following us and they're on the call now, then what our plan was, and we hope we've proved out that that was the plan and we stuck true to what we said we were going to do. And I want to also conclude by thanking the team here at Barings, as I referenced. The fourth quarter, 24 new platform companies, the level of work and dedication that it came from, our teammates on our investment teams -- not just our direct lending, but totally across the platform -- our partners in legal operations and all the other areas. It was a really proud moment for Barings in the fourth quarter and I think it's really going to benefit shareholders going forward. So thanks, everybody, for joining, and we look forward to talking to you next quarter.

Thank you, that does conclude today's teleconference and webcast. You may disconnect your lines at this time and have a wonderful day. We thank you for your participation today.