At this time, I would like to welcome everyone to Barings BDC, Inc. Conference Call for the quarter and year ending March 31, 2022. [Operator Instructions] Today’s call is being recorded, and a replay will be available approximately 2 hours after the conclusion of the call on the company’s website at www.baringsbdc.com under the Investor Relations section. Please note this call may contain forward-looking statements that include statements regarding the company’s goals, beliefs, strategies, future operating results and cash flows. Although the company believes these statements are reasonable, actual results could differ materially from those projected in the forward-looking statements. These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the section titled Risk Factors and Forward-Looking Statements in the company’s annual report Form 10-K for the fiscal year ended December 31, 2021, as filed with the Securities and Exchange Commission. Barings BDC undertakes no obligation to update or revise any forward-looking statements unless required by law. At this time, I would like to turn the call over to Eric Lloyd, Chief Executive Officer of Barings BDC. Please go ahead, sir.

Thank you, operator, and good morning, everyone. We appreciate you joining us for today’s call, and I hope you and your families are doing well. Please note that throughout today’s call, we’ll be referring to our first quarter 2022 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; Bryan High, Barings’ Head of U.S. Special Situations and Co-Portfolio Manager; and the BDC’s Chief Financial Officer, Jonathan Bock. As we typically do, Ian, Bryan and Jon will review details of our portfolio and fourth quarter results in a moment, but I’ll start off with some high-level comments about the quarter. After a record 2021, we carried that momentum into the first quarter of 2022 with strong net portfolio growth and expanded equity capital base following the close of the Sierra acquisition and strong performance from our direct lending and cross-platform investment strategies. Let’s begin with the market backdrop shown on Slide 5 of the presentation. With rapid changes in the geopolitical and market landscape, broadly syndicated loan prices began to price an increased risk tied to both underlying inflation as well as concerns of an overly aggressive Federal Reserve. BDC equity prices also were not insulated from the current bout of market volatility, and we believe it is in these periods we’re well capitalized, disciplined and highly selective managers can source attractive risk-adjusted returns. Moving to the fourth quarter highlights on Slide 6. Net asset value per share was $11.86 compared to the prior quarter of $11.36. Our net investment income remained at $0.23 per share unchanged from last quarter. This is despite raising approximately $527 million in new equity with the close of the Sierra transaction. It is…

Thanks, Eric, and good morning, everyone. If you turn to Slide 9, you can see additional details on the investment activity that Eric mentioned. Our middle market portfolio increased by $125 million on a net basis in the quarter, with gross fundings of $261 million, offset by sales and repayments of $136 million. New middle market investments included 16 new platform investments totaling $164 million and $97 million of follow-on investments and delayed draw term loan fundings. We also had $69 million of net new cross-platform investments in the quarter. Slide 10 updates the data we show you each quarter on middle market spreads across the capital structure. While we have witnessed volatility in the public markets, it is well understood that the private markets react to market volatility at a much slower pace. And further, the strength of the capital flows into the direct lending asset class may also offset the potential spread widening effects of a more fearful marketplace. As a result, market conditions remain generally competitive across direct lending as evidenced by generally stable spreads loosening terms and higher leverage levels. Turning to Slide 11. A theme we outlined last quarter that continued in the first quarter, is that unitranche executions remain near all-time spread types when compared to first lien, second lien, traditional executions. And the level of Cov-Lite unitranche volume again was an all-time record. This is again a symptom of substantial capital inflows into direct lending, and I don’t expect it to slow down anytime soon. A bridge of our investment portfolio from December 31 to March 31 is shown on Slide 12. On Slide 13, you’ll see a breakdown of the key components of our investment portfolio on March 31. As we have discussed in the past, the goal of this slide is…

Thanks, Ian. Turning to Slide 17. Here’s a full bridge of net asset value per share movement in the first quarter. Our net investment income matched our dividend, net realized gains and losses on our investment portfolio and foreign currency transactions drove a decrease of $0.02 per share, while our unrealized depreciation totaled $0.04 per share. The Sierra transaction, including the credit support agreement, accounted for $0.28 of share. Additional details on this net unrealized depreciation are also shown on Slide 18. On the middle-market portfolio, price appreciation and credit performance resulted in $2 million of net depreciation with the remaining $4 million of depreciation due to FX moves, which are offset in our borrowings. Our cross-platform investments saw total appreciation of approximately $11 million, largely driven by the very strong operating performance in Eclipse Business Capital, our asset-based lender. The legacy MVC portfolio saw total net unrealized depreciation of $2.1 million. And near the bottom of Slide 18, you can see that the credit support agreement decreased by approximately $400,000 from last quarter. Slides 19 and 20 show our income statement and balance sheet for the last 5 quarters. And as we’ve discussed, our net investment income per share remained stable at $0.23 per share for the quarter, driven by a $4 million increase in total investment income. The increase in interest income can be attributed to continued portfolio growth, as well as the Sierra assets being added to the portfolio on February 25. Higher dividend income from our investment in Eclipse Business Capital and 2 of our joint venture investments were also strong contributors to earnings in the quarter. The increase in total investment income was also met with higher interest and financing fees as well as an increased share count following the close of the Sierra transaction.…

[Operator Instructions] Our first question is from Finian O’Shea with Wells Fargo Advisors.

It’s Jordan on for Finian today. I was hoping you guys could give us a little more context about Eclipse Business Capital. It looks like it’s been performing well. It looks like you took a bigger dividend this quarter. So is there anything you can add there on how that’s performing and whether this is kind of a run rate dividend or maybe it’s a catch up?

Sure. So I’ll start with one item and then lateral to my colleague, Bryan, for the second as it relates to kind of the synergies between both ourselves and Eclipse. But the short line is, Jordan, in periods of market uncertainty or geopolitical volatility, what you’ll find is these underlying obligors that keep higher outstandings. And so as you have a higher level of outstanding plus a continued level of measured growth, the opportunity or profit effectively falls down to the bottom line. Our expectation on run rate, here, we were operating under-levered, and so we have the ability to increase the dividend payout. Typically, we like to profile at around an 8% cash distribution. And so you can kind of expect that, that will probably normalize over time, but the underlying cash generation, or the NAV of the business, still remains intact and also continues to be amplified by our strong partnership with Eclipse and our cross-platform and special situations team. And Bryan, if you just want to outline that partnership and the growth in deal I think that would be very worthwhile.

Sure. Thanks, Jon. Yes. I think, generally speaking, the thesis is playing out on Eclipse. They have a strong management team and a platform that has a niche in the market and there’s a growing nonbank market, which is helping them with a little bit of wind behind ourselves, generally speaking. And then as Jon mentioned, the strategic fit from an origination perspective for both Eclipse and Barings, frankly, and seeing new deal flow that they otherwise wouldn’t see has been a consistent theme and the pipelines for both of us are growing as a result of that. And then if you just sort of think about the resilient performance that they have had and will have, given the underlying collateral base that backs their loans, we think it’s sort of a great place to be, given where we are in the cycle and they should continue to benefit from a rising rate environment as well. .

Okay. That’s helpful. And then it looks like you guys inherited maybe another JV this quarter from the Sierra transaction. Is that something that we can expect to be a permanent asset that will join the group of JVs that you have or -- is that something that maybe gets [wind] into another one? Just any color on how you’re going to manage that given you’re kind of against your non-qualifying bucket limit.

Yes. Jordon, you can expect us to slowly wind that down. What we’ll do is maximize -- or sorry, minimize drag and maximize profitability off of the venture, but you can slowly expect it to be returned to us as those loans pay back. So this was an offshoot, and you can expect it to fall over time.

Our next question is from Casey Alexander with Compass Point.

Yes. First of all, congratulations on closing this year transaction on a timely basis. My first question is, if you were to see spreads start to really blow out in the liquid credit markets and the broadly syndicated loan market, would you still be open to taking advantage of that as a way of getting a little more deeper into your leverage ratio and then kind of waiting to directly originate when the directly originate markets kind of square up with liquid credit markets? Is that still an opportunistic strategy that the company would employ?

Casey, this is Jon, and then I’ll lateral to Eric because when you think of the size and scope of Barings across the liquid platform, that can be a great opportunity. You saw us participate in the liquid credit category, particularly when spreads widened out as a result of COVID. We’re not near those levels, but we rely heavily on the expertise and the close partnership with our liquid counterparts, both publicly and privately. And that continues to be a very, very important part of our platform that we all benefit greatly from. But I know, Eric, we always remain very opportunistic across all areas of Barings.

Yes. Casey, I’d say, the short answer is yes, we would look at that. As Jon said, the levels aren’t there right now. But if they were to get there, we absolutely would look at that. Making sure that you pick up a true illiquidity premium is really important, as we all know, on the illiquid assets. And when spreads widen out, but let’s just say, theoretically, right, the liquid spreads probably syndicated loans went to 700 over. All of a sudden, a 100 to 150 basis point premium on illiquid credit isn’t really attractive relative to when spreads are 300 over liquid credit and then all of a sudden pick up 150 or 200. They are attractive. So it’s making sure you really pick up a proportionate amount of that liquidity premium. So we stay very close to the liquid side. And between Bryan, I and Thomas involved in the BDC, we absolutely would look at that at that were to occur. .

All right. Great. That’s very helpful. My second question is you picked up a number of, I think, 5 companies that are nonaccrual at Sierra and have probably been on nonaccrual for quite some time. I’m just wondering if in your guys’ analysis and diligence, is there anything salvageable? Or are those pretty much just debt issues?

We actually -- I mean kind of, look at the underlying collateral, believe that there are forward opportunities. You had to -- you have a good company, but also bad balance sheet. And so with a number of the individuals that also joined us from the Sierra platform, they’re very active in realizing that value. And because of the scale and size of the platform with which we’re working at similar to some of the other peers, Casey, that you follow, the probability of further driving a successful outcome over time, not today, but not forever -- or not never is much higher. So yes, and it’s a slow and steady wins the race on those names, at about $14 million of fair value. .

Our next question is from Paul Johnson with KBW.

Just following up on the assets that you inherited from Sierra, not just the nonaccruals, but really the entire book. I think it’s like $430 million or so that came over in the first quarter. Is the focus, I guess, to rotate out of these assets as you’ve kind of identified these opportunities? Or are you pretty comfortable with basically sitting on these assets and kind of allowing them to just sort of run off over time and focus on your other verticals that you’ve got going? .

I’ll give one initial thought. So when we underwrote the transaction, you always underwrite to hold and invest. But at the same time, we were very focused in on a shareholder alignment, and so again, brought to use the innovative tool of the credit support agreement such that our manager retains the downside on that credit portfolio. Believe it or not, over time, we found even in the MVC portfolio here that there are going to be individual portfolio incumbencies you want to continue with. And then there’ll be ones where, in certain instances if you’re looking for the opportunities to exit, you can effectively raise your hand, and we’ve seen some of that as well. I’d expect it to be measured. The yield profile that we’re receiving off of those loans is attractive, right? They were originated in prior time periods at relatively strong spreads. And so we’re starting to find a good level of income contribution. And so there’s no immediate rush except for some of the special situations where we might find that we just don’t like the underlying risk return, and we’ve been cycling out of those near term. It’s not necessarily a dollar-based question answer for you, Paul, but more a philosophical one. We’re happy to own them, but we also find that there are going to be select assets where, over time, we’re just looking forward to the exits, and we are starting to see that as well.

Paul, I think the good news is when we announced the deal over 6 months ago and then we’ve inherited the portfolio that the portfolio is performing at least in line with what we expected, probably a little bit better than what we expected from the asset underwriting that we did. And as Jon said, some are a little worse, some a little bit better. Some will probably rotate out of, so are the ones we’re very comfortable with that company were to refinance of stepping in and continuing to support that company. So I think the good news, on a blended basis, is the portfolio is performing at least consistent with, if not better than what we originally underwrote when we announced this deal 6 months ago. .

Got it. Appreciate that. Then just going back to the -- I know you touched on what kind of drove the write-up for the Eclipse business and how things are going pretty well there. I’m curious, do you kind of see the increased dividend income that we got in the first quarter is something that’s sustainable from here on out? Or is that more kind of like a temporary effect, just based on what’s sort of going on in the ABL markets? .

I think what it will outline is the underlying profitability of the investment, and that profitability shows up in BBDC’s income statement too -- or it shows up in BBDC’s financials 2 ways. It can be through dividend distribution or can also be through NAV growth. And oftentimes, we like to target on our cross-platform investments generally or JV typically an 8% distribution or cash distribution. It was higher this quarter just given the fact that we were operating from an underlevered base, given the $500 million in new equity that was issued with the Sierra deal. And so I’d say you could expect to see that the dividend income moderate, but the view into Eclipse is an operating business or a subsidiary shows that the underlying profitability is very strong. And so while you might not see less in dividend income, you can see it also growth in NAV in that underlying instant investment due to retained earnings.

Appreciate it. Last question, just kind of a bigger picture question, but wondering to get your guys’ views on basically Europe versus the U.S.? I know you deployed a little bit of capital there this quarter. How do you think about the spread opportunity here, just given obviously the recent invasion, the military buildup of Europe and proximity to the conflict over there? Just any kind of color on your views of the value opportunity there.

Yes, it’s Ian. I’ll take this and anyone else can jump in. It’s interesting in the first quarter in terms of deal flow and just being more robust in terms of the quality of the credits, in terms of the higher OID, lower leverage and higher spreads, Europe was just on a relative value basis, a much more attractive market than the U.S. And to your comment regarding the geopolitical risk, you would think that wouldn’t be the case, but we’re seeing really good businesses in Europe that are new platforms that are coming to market. And just given our position as one of the top leading lenders to private equity firms, we’re really well positioned to take advantage of them, and that really brings in the benefit of the platform and our wide range of opportunities that we can pursue. So I don’t know how long that lasts, but just on a relative basis, it’s just been more attractive than the U.S. Unfortunately, on the U.S. side, we have our portfolio which has been really instrumental in terms of driving origination for our business. And quite frankly, going into a potential recession, being able to rely on add-on acquisitions, you’re basically looking at a portfolio that’s becoming larger in scale in terms of the business themselves and more diversified itself from a credit perspective that’s very attractive.

Our next question is from Robert Dodd with Raymond James.

Congratulations on getting the Sierra deal closed and the good quarter. First question, on the cross-platform, I mean, it’s about 1/3 of revenues now? I mean, it’s -- you are starting to bump up against the BDC limits about how much you can have in all these different JVs, which the JVs have a big advantage, right? They get you into markets that are potentially less competitive, not as crowded with some of the enormous pools of capital out there. Is it a view that you’d like to continue expanding the cross-platform mix of the portfolio? And if so, are you going to take -- there are obviously some -- I don’t want to call it a gimmick, but there are some ways to manage around the BDC nonqualified buckets with balanced -- end-of-quarter balance sheet management and things like that. Is that something we should expect to see? Or do you want to keep everything kind of plain vanilla on that side? .

I think maybe just to dive into what the cross-platform investment bucket is, you can find that there is a healthy amount of which is qualified, right? And so the JVs, which you correctly pointed out, would be nonqualified given that’s how they are across all of the BDC space, but a number of the operating companies or in specific, some of the special situation or infrastructure opportunities, they certainly are. And so you’ll find us continue to manage diversification the way we always have. But at the same time, I think there are some growth opportunities that exist, Bryan, when you start to think of the infrastructure opportunities that exist in some certain areas across platform that are worth mentioning and at the same time, qualified investments. Bryan? .

Yes. I think in the infrastructure space, specifically, I think we’re very interested in finding opportunities that similar to Eclipse have real asset value behind them, especially in this sort of part of the cycle where we’re late stage and you have some real collateral to sort of clean on, and that can be across multiple different silos in the infrastructure space. And it’s something that is a decent chunk of our pipeline today and has been a place where we’ve been deploying capital more recently. And we think the underlying fundamental value supporting those investments make them attractive, risk-adjusted return, when you’re trying to sort of maximize your return per unit of risk.

I appreciate that. If I can one more since Ian mentioned the recession word. What’s the institutional view maybe on the economic outlook? I mean, obviously, with Eclipse, with ABL, right, that can do, as you pointed out, in volatile periods and the security is really good there. Some of the middle market, I’m not saying a pure cash flow loan tends to be, say, less recession resistant than an ABL loan. But what’s the institutional view of the economic outlook since the R word was said? .

Ian, do you want to go through a little bit on [indiscernible], how we characterize the portfolio from an impact of potential rate rises or inflation. Because I think that gives a good idea as to how this portfolio is positioned. And before Ian does that, maybe, Robert, I’ll just say that every time we underwrite an asset, whether it be today, 6 months ago, 6 years ago, given the illiquidity nature of the asset, we always assume there’s going to be some type of economic or credit cycle during the course of that asset. That’s kind of how we underwrite credit. And if you go back over time, I think they said the average leveraging the portfolio right now is about 5.5x through our assets. If you go back over time, it’s kind of always around that kind of 5.25x to 5.5x. We’re not going to chase it up into the 6s. We’re not going to see us scope down into the 4s. And we kind of feel like those type of companies can weather kind of a market cycle or an economic cycle well. Obviously, besides the recession, the rate environment, the positive is, right, asset prices are up, meaning the yields are up based on the rates. The negative is interest coverages are down for the borrowers, combined with some inflationary pressure that they have on input. So -- that’s kind of where we look at it overall. But Ian, maybe you can cover some of the stuff we talked about yesterday.

Yes. Sorry, Robert, I guess I opened a can of worms. I said potential recession. I didn’t say recession. But good question. And look, I mean, obviously, when we’re underwriting these deals, we’re very much focused on where we think yields and spreads could go and base rates could go and the impact to those companies’ ability to make their payments. I think just stepping back, one of the key things in this asset class is really being on top of portfolio. And I think, for me, just looking at previous cycles, right, it’s not an efficient market. You really have to be in touch with management teams. You need to find out how companies are performing. There’s a lot of like-work that has to be done. And you’ve got to have the team to get in there and connect with your management teams. We did this during COVID, and I think we were pretty proactive in terms of the way we were able to manage COVID and the impact on our portfolio. Right now, our deal teams have been actively in contact with management teams. And obviously, we’re focusing on not just inflationary pressures, but there’s still some supply chain disruptions. There’s labor availability issues freight and commodity risk. And as we’ve gone through the portfolio, just in terms of breaking out into labor and then input costs on a labor basis, 71% of our portfolio, we believe, is very low risk to any labor market challenges and then 26% would be medium. Probably the biggest issue with labor right now is just low skill labors and that’s often associated with lower EBITDA margin businesses, and we just don’t have those types of businesses in our portfolio, so think of like restaurants, retail, things like that. On the input…

That’s really helpful. Thanks a lot for all the detail. If I can break the rules and ask one more because it relates to all of this and a comment you made earlier. How do you balance -- if spreads start to move, if a potential recession likelihood does increase or the syndicate spreads are likely to move wider, it creates that opportunistic potential. But how do you balance the fact that with liquid public credit, you get data quarterly with a lag probably versus middle-market loans, you get -- or getting it monthly, and you can just call the CEO in many cases, right? So you can get much more dynamic up-to-date data in the middle market than you can in the liquid credit markets -- and what’s the value of that data early if before we’re in a recession. If recession rallies are elevating more current data, I would think, would be worth more the relative premium between middle-market and liquid market begins to change a little bit in dynamics? Is that -- how do you manage that? .

Look, I think that’s very fair, Robert. And I think it’s a balance of things, right? To your point, the information is sooner and you maybe have a more intimate relationship with the management team. That being said, we’ve got dozens and dozens of research analysts on the liquid side, who also know their industries and their portfolio companies and their management teams extremely well. And so I wasn’t trying to insinuate that we would go way, way, way into the broadly syndicated market if there were so. But part of the benefit, I think, of the Barings platform is that we do have such a deep liquid credit team and experience and a great track record that on the margin where we see those opportunities, we would step into it. That doesn’t mean that you’re going to see us make a wholesale change or anything like that. But on the margin, where we see those attractive opportunities as we’ve stepped in, taking into account information flow, value, price, relative value, illiquidity credit and all those other factors. .

We reached the end of our question-and-answer session. I would like to turn the conference back over to Eric for closing comments.

Thanks, operator, and I appreciate it. And thank you all for participating in the call today. Please stay safe, and have a great day.

Thank you. This does conclude today’s conference. You may disconnect your lines at this time, and thank you for your participation.