At this time, I would like to welcome everyone to the Barings BDC, Inc. conference call for the quarter ended June 30, 2022. [Operator Instructions]. Today's call is being recorded, and a replay will be available approximately 2 hours after the conclusion of the call on the company's website at www.baringsbdc.com under the Investor Relations section. Please note that this call may contain forward-looking statements that include statements regarding the company's goals, beliefs, strategies, future operating results and cash flows. 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 the Form 10-K for the fiscal year ended December 31, 2021, and the quarterly report on Form 10-Q for the quarter ended June 30, 2022, each 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 will turn the call over to Eric Lloyd, Chief Executive Officer of Barings BDC.

Thank you, operator, and good morning, everyone. We appreciate you joining us for today's call. Please note that throughout today's call, we'll be referring to our second 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, Baring's Head of Capital Solutions and Co-Portfolio Manager; and the BDC's Chief Financial Officer, Jonathan Bock. As we typically do, Ian, Bryan and John 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. Let's begin with the market backdrop shown on Slide 5 of the presentation. With significant economic uncertainty, Barings syndicated loan spreads increased due to increased macroeconomic fears tied to both underlying inflation and the potential of a Fed overcorrection. Loan prices broadly and BDC equity prices specifically were also not immune from increasing risk premiums, down 4% and 9% from the end of Q1 through July 31, respectively. Looking at second quarter highlights on Slide 6. Net asset value per share was $11.41 compared to the prior quarter of $11.86, down 3.8% driven primarily due to unrealized write-downs tied to macro market factors and spread widening as opposed to fundamental credit-related factors. Our net investment income increased to $0.29 per share compared to $0.23 per share last quarter as a result of increasing interest and fee income as well as the elimination of our income incentive fee due to our shareholder-friendly fee structure, specifically in the incentive look-back feature, which includes realized and unrealized gains and losses. Regarding new investments, we had gross originations of $352 million in the second quarter. This was offset by $299 million of sales and…

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 $3 million on a net basis in the quarter, with gross fundings of $227 million, offset by sales and repayments of $224 million. New middle-market investments included 22 new platform investments totaling $156 million and $171 million of follow-on investments and delayed draw term loan fundings. We also had $108 million of net cross-platform investments in the quarter. Slide 10 updates the data we show you each quarter on middle-market spreads across the capital structure, and it is easy to reference that investment spreads across public and private asset classes have widened. Notice a degree of spread winding in the private credit category has a much more lagged effect when compared to broadly syndicated loan spreads, which are outlined in red. That said, we continue to see spread widening in our core market as a welcome benefit to long-term investment return, particularly for those who have flexible investment capital. Turn to Slide 11. Many of you have heard me outline the competitive dynamic at play in unitranche transactions. I'm pleased to see as a result of emerging underwriter discipline tight potential economic fears that spreads began to widen ever so slightly and may likely continue their upward trend. While underlying covenant light activity in these transactions remain high, we also continue to see improvements in loan documentation that tilt towards patient investors. In many years in this asset class, I'll outline that these changes are slow and gradual, but they do occur. And the key remains keeping focus on pricing discipline across your origination footprint. A bridge of our investment portfolio from March 31 to June 30 is shown on Slide…

Thanks, Ian. And turning to Slide 17. Here's the full bridge of NAV per share movement in the second quarter. Our net investment income exceeded our dividend by $0.05 per share. Net realized losses on our investment portfolio and foreign currency transaction drove a decrease of $0.09 per share, while our unrealized depreciation totaled $0.41 per share. Additional details on this net unrealized depreciation are shown on Slide 18. Of the total $45 million in unrealized depreciation in the second quarter, approximately $32 million was attributed to price or spread widening. Of this, our cross-platform investments total depreciation of approximately $20 million. And notably, the legacy MVC portfolio saw a total depreciation of $11 million with the majority tied to underlying credit performance while the Sierra portfolio had total depreciation of $16 million, $12 million of which was attributed to price movements, predominantly tied to CLO equity positions and the Sierra joint venture. Near the bottom of Slide 18, you can also see that the credit support agreements decreased $13 million as a result of increasing rates and discount rates. Slides 19 and 20 show our income statement and balance sheet for the last 5 quarters. As we've discussed, our net investment income per share increased to $0.29 for the quarter driven by a $12 million increase in total investment income as well as the elimination of the income incentive fee resulting from unrealized marks on the investment portfolio. And from a balance sheet perspective on Slide 20, total debt to equity was 1.23x at June 30, although this level is artificially high given the timing of certain asset sales, and was 1x after adjusting for cash, cash equivalents and unsettled transactions. Turning to Slide 21. You can see how our funding mix ties to our asset mix, both in…

Thank you, Jon. I want to take a moment to highlight that the Barings BDC Board approved a number of promotions and recognition of the work done on behalf of Barings BDC shareholders. Effective September 1, I'll assume the title of Executive Chairman of Barings BDC. Jonathan Bock will become the BDC's Chief Executive Officer, Jonathan Lansberg will become the Chief Financial Officer, and Elizabeth Murray will become the BDC's Chief Operating Officer and remain the Chief Accounting Officer. Ian Fowler will remain President of Barings BDC. I share the Board's confidence in the BDC's management team, and I'm very grateful for their leadership and dedication to the Barings BDC shareholders. With that, operator, we'll open the line for questions.

[Operator Instructions]. Our first question comes from the line of Kyle Joseph with Jefferies.

Start with the congratulations to Bock, and Elizabeth on the promotions, before we dig into it. Let me start on -- so just obviously, volatility has increased -- 2 questions as we think about originations, should we think about a rotation towards cross-platform. And then in terms of the acquired portfolios, how does this impact your outlook for potential repayments there?

I'll start with just -- you can expect to see the same level of cross-platform investment as you've seen in the past. And I think we've outlined about 30%, give or take, generally speaking, which is right around where we're at. And so in terms of additional velocity or prepayment velocity on either of those investments or importantly, the acquired investments, we're continuing to see an uptick. And the reason we're doing so is we're very active in repositioning ourselves out of a number of those loans. And so you saw that last quarter with roughly $57 million coming off of Sierra, and you can expect to see that in the future really as the performance of that portfolio has surpassed our expectations.

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

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

Yes. So in terms of the portfolio, we've done a lot of proactive work in the last couple of quarters going through all of our portfolio companies which obviously includes the BDC complex, and really focused on wage inflation, rising rates and input cost inflation. And I think I mentioned this at the last earnings call, most of our portfolio, around 70% are more defensive service sectors, software, IT managed services, info services, financial services, professional services. So really not impacted by input cost inflation and where we do have manufacturing, it's more light niche high-margin manufacturing, more light assemblers versus heavy manufacturing. So I feel very good about the portfolio, the way it's positioned. We still see revenue growth, a number -- just given the fundamental value of those businesses the strength of those businesses and the leadership in the industry of those businesses, they're able to pass through cost increases. Now there have been a few that have lagged in terms of putting through price increases, and we've seen a little margin degradation on those, but that would be a minority.

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

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

Yes. Sure. So Fin, if you were going to think about the present -- the future value of the payment, just given as we continue to work through 1 investment in specific, right, that would -- future value payment would be close to the $23 million of fully utilized CSA, if you were to liquidate everything at this moment, right? So that's where we'd be if you fast forward 8 years and nothing changed. However, right, the reason you see a level of depreciation essentially on the credit support agreement is simply because as rates and discount rates have risen, that future value payments, right, discounted back to the present has a lower present value as a result of rising rates. And so on a go-forward basis, as we continue to manage a number of strong investments with attractive equity upside in addition to in managing existing investments there with both an eye towards exit and repositioning while also being good fiduciaries for our capital and for the trust you place in us. But we remain very confident that over time, we will exit without a high degree of credit support premium or credit support payment made. But in the future, that's really the math. If you were to kind of just stop today and assume nothing has had occurred, you'd be close to the $23 million fair value. But then they discount that back to the present, which is why you see it down a little bit quarter-over-quarter.

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

Yes. And let me throw in my congratulations on the personnel changes. I speak for the analytical community, I think we all take great comfort in knowing that we have now somebody highly qualified and capable in the CFO seat. So just messing with you. Congratulations. Jon and Elizabeth. And Jon, I think it's all very well deserved. I have a couple of questions. Going to Slide 15. I noticed a new entry in that top 10, in core scientific. That is a name that's had some -- a number of articles written about it, has arranged for a $100 million equity line with an investment bank. Is that an equipment finance structure? Or is that a term loan structure? How is that particular one kind of set up just because it's one that's sort of been in the news?

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

That's what I guess that it was going to be. Rolling up a couple to my favorite slide, Slide 13. If we look at the yield at fair value of investments of the 4 sleeves that you point to there, and this is really just a math question. Can you give us a sense of -- if you were talking about today where each of those sleeves yield at fair value would be by the end of the quarter, and I'm guessing cross-platform would have less movement than the other 3 in that it has more bespoke-type investments, many of -- some of which are more fixed rate in nature.

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

Sure. I think on the traditional sort of debt instruments in the portfolio, a lot of them are floating rate. So you would see some increase there. But clearly, Eclipse is in that column. That's a return on equity effectively. And there's -- if you think about their portfolio, the benefit of LIBOR floors is going away. So there's a lot of puts and takes there as what I would say, Casey. So I think you're right in that. The other 3 columns are much more floating rate in nature just across the board. So they would probably move more so than the cross platform as a whole. But I would say that still the majority of the investments on the cross-platform side are floating rate as well, just lower percentage.

You have some degree of -- on the 3 -- on the middle market, MVC and SIC sleeves, about how much you think they would move quarter-over-quarter?

MVC wouldn't move much. As a result, there's a little bit of fixed rate -- more fixed rate exposure there. But granted, it's very small. Of course, on the Sierra portfolio predominantly floating rate, so you'd see that net benefit there.

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

And let me echo the congratulations everybody on the new positions. I think Eric might be the winner, if this means he doesn't have to deal with earnings calls as much anymore potentially. But moving on to a question about bit. So Sierra, I mean, as you said, I think it was $57 million in repayments this quarter. A fair chunk of that seems to have been a reduction not part to market in the size of their loan JV, i.e., there are a lot of repayments within that or sales within that. Can you give us any -- I mean it generated $1.6 million in dividend income. It's positively exposed to floating rates. But how fast do you expect to wind that down given -- again, it is a Sierra asset. On the other hand, it's potentially got some decent prospects in the midterm.

So I'll start with that. First, the way the JV was effectively levered, it was less than efficient than what Barings was able to both put in place a structure with our lender partners. So you have the ability to effectively design a loan structure backed by all that collateral that made it much more efficient from a financing perspective to then effectively pull dollars out. In terms of the wind down, it will move fairly quick. And the reason why, Robert, is because our approach to joint venture investments is that they're here to expand the frame of reference and add to diversification, right? Just simply to buy liquid collateral and then over lever in order to hope that it pays a better yield profile. That's really how we choose not to do things. And so you can expect it to move fairly rapidly tied to the collateral and us to continue to invest and then redeploy. Yes, it's generated an 8% -- 8%-plus-ish net return, which is great. But if you start to look across the investment opportunity sets across Ian's business and Bryan's business, the yield and net return profiles are there higher with much less underlying price volatility.

Understood, and I am a big fan of the other cross-platform investments. and diversification, which brings me to those. If we look at Eclipse, I mean, obviously, it was marked down a little bit this quarter, but still a return on average equity just looking at the dividend, not internally to Eclipse, looks to be almost 10% at Thompson Rivers almost 15%. I mean some of these things are generating very high returns currently with potential floating rate benefit as well. I mean, are those kind of returns sustainable for those businesses, i.e., I mean, ex the Sierra dividend maybe, is the dividend income from those businesses sustainable to maybe ticking up? Or have they been benefiting from some onetime distributions in either Q1 or Q2?

I'll take a Eclipse here for a moment. So there, you have the benefit of when macroeconomic uncertainties increase. So two, do folks tend to hold loan outstandings. And so the growth of that book has been very, very strong because not only is the interest income high, it's because folks are holding their loans out longer. The credit performance remains very, very good, and the ability for the Eclipse team in terms of their partnership with Bryan and the Cap Solutions team at Barings, their ability to partner and provide solutions on a number of bespoke transactions has only increased. And so I'd say you could bias returns higher, not only through both a rate benefit but also through an underlying growth benefit as -- when stresses occur, people turn to their assets to borrow. And so that's been very, very positive. Across the rest of the network, you're starting to find a much higher net return as a result of increasing base rates, which is what you would expect for us, right? We also have to compete with the substitutes of IG or increasing spread on liquid markets. And so we remain very positive looking forward on both interest income contribution from our private markets businesses and direct lending as well as the cross-platform and the joint ventures.

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

Thank you, operator, and thank you to all of you who participate on today's call. Like you, I'm very proud of the promotions that we put forth and what we've done in the last 4 years, and I'm confident the new management team will build on that with great success. Please stay safe, and have a great day.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.