At this time, I would like to welcome everyone to the Barings BDC Incorporated Conference Call for the Quarter ended March 31st, 2023. All participants are in a listen-only mode. A question-and-answer session will follow the company's formal remarks. Today's call is being recorded and a replay will be available two hours after the conclusion of the call on the company's website at www.baringsbdc.com under the Investor Relations section. Please note that this call may contain forward-looking statements that include statements regarding the company's goals, beliefs, strategies, future operating results and cash flows. Although the company believes these statements are reasonable, actual results could differ materially from those projected in 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 sections titled Risk Factors and forward-looking statements in the company's quarterly report on Form 10-Q for the quarter ended March 31st, 2023 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.

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 first quarter 2023 earnings presentation that is posted on the Investor Relations section of our website. On the call today, I'm joined by Barings Co-Head of Global Private Finance and President of Barings BDC, Ian Fowler; Barings Head of Capital Solutions and Co-Portfolio Manager, Bryan High; and the BDC's Chief Financial Officer, Elizabeth Murray. During today's call Ian, Bryan and Elizabeth will review details of our portfolio and first 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 five of the presentation. The continued increase in base rates has contributed to elevated volatility in BDC share prices and it's clear that investors remain concerned about rates, inflation and economic weakness. Even in this challenging environment, the BDC's portfolio continues to deliver strong returns. Our strong performance stems largely from our focus on the top of the capital structure and within more defensive industries and we believe the BDC remains well positioned for any further volatility and uncertainty in the market going forward. Turning to the first quarter highlights on slide six. Net asset value per share was $11.17 compared to the prior quarter of $11.05, that's an increase of 1.1%. Our NAV increase quarter-over-quarter was driven by unrealized depreciation on our investment portfolio of $0.10 per share. Our net investment income for Q1 was $0.25 per share compared to $0.35 per share last quarter. The quarter-over-quarter decrease in NII is a function of our shareholder friendly fee structure, Barings did not earn incentive fee last quarter given the total return hurdle in our incentive fee. Turning to…

Thanks Eric, and good morning, everyone. If you turn to slide nine, you can see additional details on the investment activity mentioned previously. Our middle market portfolio increased by $57 million on a net basis in the quarter with gross fundings of $89 million, offset by repayments of $33 million. The increase in interest rates has had a very real impact on the amount of debt, private equity buyers can undertake to support new investments. And as a result, many sellers have remained on the sidelines anchored to 2021 valuations. This naturally has led to lower repayment activity and fewer investment opportunities in the first quarter of 2023. With that said, our backlog continues to grow as sellers likely come to terms with valuations and begin to harvest some of their stronger performing assets. Despite the general market headwinds, new middle market investments included 10 new platform investments, totaling $56 million and $33 million of follow-on investments and delayed draw term loan fundings. We continue to deploy capital at a very attractive risk return profiles in partnership with longstanding sponsors. Our cross platform portfolio increased by $43 million on a net basis in the quarter with $55 million of new originations versus $13 million of repayments. One specific highlight I'd like to call to your attention to is Barings BDC purchase of an equity stake in Rocade Holdings LLC, one of the country's leading litigation finance platforms that specializes in providing financing to plaintiff law firms engaged in mass tort and other civil litigation. During the quarter, Barings BDC along with other affiliated funds invested approximately $45 million in preferred and common equity in this investment. This investment provides a strategic benefit to Barings BDC investors and allows the company to participate in an uncorrelated asset class that offers differentiated…

Thanks, Ian. Turning to slide 16, here's the full bridge of NAV per share movement in the first quarter. Our net investment income matched the $0.25 per share dividend even with this quarter's higher incentive fees. Net unrealized depreciation from investments CSA and FX listed NAV per share by $0.20, which was partially offset by net realized losses on the portfolio of $0.08 per share. We are very pleased with our portfolio's performance and then a backdrop of economic uncertainty and this highlights our conservative approach to underwriting and portfolio construction. Additional details on the net unrealized appreciation are shown on slide 17. Of the $22 million in unrealized appreciation in the first quarter, approximately $8 million was due to price or spreads moves while $1 million was due to credit factors. The cross platform portfolio contributed $13 million of credit related appreciation driven by Core Scientific and Eclipse. While the majority of the price driven write ups was in the middle market portfolio. Notably, the legacy MVC portfolio saw total depreciation of $6 million tied to underlying credit performance, while the Sierra portfolio remained relatively flat quarter-over-quarter. Near the bottom of slide 17, you can see that the credit support agreements increased approximately $6 million as a result of decreases in discount rates. Slide 18 and 19 show our income statement and balance sheet for the last five quarters. Our net investment income per share was $0.25 for the quarter, driven by a 6% quarter-over-quarter increase in total interest income with some of the revenue lift offset by higher incentive fees due to unrealized gains in the quarter and the incentive fee look back calculations. From a balance sheet perspective on slide 19. total debt to equity was 1.24 times at March 31st. Our net leverage ratio was 1.19…

Thank you. We will now be conducting a question-and-answer session. [Operator Instruction] Thank you. Our first question is from Finian O'Shea with Wells Fargo. Please proceed with your question.

Hi, everyone. Good morning. Appreciate the detail you gave Eric on management fortification and those are some fine additions. First question is to, do those folks still have their day jobs or will they be fully dedicated to BBDC matters? And then does the new organizational line-up hold across the BDC franchise including the privates or does the makeup in those parts look different?

So I appreciate the question and I appreciate you're highlighting that we are the fortification of the management. That was clearly a focus. So, Bryan, as you know, is led our Capital Solutions business, which is represented, call it, 20%, 25% of the assets that come into the BDC. He will continue his responsibility running our Capital Solutions business, but add to his responsibilities all the BDC franchise. So that will include BBDC as well as the other two BDC's the perpetual and the private that we manage that he'll have leadership responsibility over. Secondly, so he'll be spending a lot of his time on BDC, but not exclusively on the BDC. Matt Freund who will move over from Ian Fowler's team, which is our Global Private Finance team will be 100% dedicated to the BDC's and focus on the portfolio management and investment selection within the BDC. So he'll be 100% dedicated to that. Joe Mazzoli will move over, will also be 100% dedicated to the BDC franchise and focus there. And then Elizabeth Murray as you know is 100% focused on that, as is Albert as is Jeff. So excluding Bryan, everybody else is a 100% focused on the BDC franchise. And then as I mentioned earlier, they're also similar for the responsibilities for the other two BDC's. Does that answer your question clearly, Fin?

Yes, thank you so much. And a follow-up on the MVC related CSA. Is there a line of sight on when this might settle, I know the -- I think the final settlement date would be in 2031, that's obviously some time from now. Any color you can give us on what the remaining assets are to finalize or terminate before that -- before we move on from that part of the portfolio?

Thanks for the question. So we have six remaining assets in the portfolio and we do anticipate over the next few quarters more than to either repay or sell. I do believe Security Holdings will be one that we hold longer term. So to give you an exact date as to when the CSA will settle, I can't give that, but we do know it's a 10-year term and Security Holdings will probably be the last remaining over the next couple of years.

Okay. Thanks so much.

Thank you. Our next question is from Casey Alexander with Compass Point. Please proceed with your question.

Yes. My first question, Eric, is regarding the share repurchase. There was a significant lag between the end of the last share repurchase and the new share repurchase. The new share repurchase doesn't have a 10b5-1, you didn't repurchase any shares during the quarter. And despite Elizabeth's comment that you intend to use it without the 10b5-1, would the stock at historically low price to NAV. I mean shareholders -- without that clear expectation of the 10b5-1, would have ample reason to suggest that perhaps this repurchase authorization is not operating in the same shareholder friendly fashion as before. Can you give me some color on that?

Yes. I happy to. And so what happened in the first quarter is we had a limited amount of time where we were not in a blackout period. It was about a two week period of time, but recall correctly that we had that we balance that at the time with some commitments we've made on the origination side for deploying capital combined with our net leverage, which we saw creeping up a little bit up into around that 1.2 times level that we wanted to keep, again, in our range of 0.9 to 1.25 times. So given the small timeframe in the first quarter combined with where our commitments were for new deals that we were going to deploy combined with our leverage made it a difficult time to make that. I made a comment, as did Elizabeth definitively in this earnings call that we intend to make share repurchases in the coming quarters and I expect them -- you and other people to hold us accountable to follow through on that, as we fully intend to do that given where the trading levels are.

Are you getting to engage a 10b5-1 program now?

It's not going to be systematic, it's going to be more strategic fit. Casey, I will tell you as soon as the blackout period is over, you can anticipate share repurchases will begin.

Okay. Secondly, Eric, given that all of these personnel changes are internal movements, shareholders could be forgiven for thinking that this is less of a strategic process it more shuffling the deck chairs. Can you speak to that, please?

Yes. I mean -- I guess what I'd ask is, judge us going forward and judge me going forward, I would say that my intention is I looked at the changes and what the skills I wanted to bring in. I wanted to bring people with a more investment focused experience into the BDC franchise. I felt like that's a place that we could benefit from having more people that had true investment experience, that are complemented by people with BDC experience versus the past where we had more BDC experience, but less investment experience and leadership roles, so that was my focus. And I can tell you when I look at the people that have been brought in. Bryan, Matt, Elizabeth who you all already know, Joe, within Barings are some of our best people that we have and some of our most experienced people from an investment perspective. So I understand your perspective, I could have gone outside and made some hires. I felt like that knowing the people that we have internally and the competencies with them in the skills with them, and frankly, the way they work together with other people on the platform. I thought that bringing the team together, which is now -- it's a much more broader team, was going to be the best thing to deliver returns on behalf of shareholders going forward.

This question is for Ian. Ian, you made the statement that it's your expectation that sponsors will start to harvest their better performing assets. But I would simply ask, why would sponsors harvest their better performing assets at this point in time when valuations are at such low levels.

Yes. So Casey actually valuations have just -- actually just cracked a bit. So if you look at sort of the average purchase price multiple, we were at the peak, it was in the 13 times, it's dropped to 12. I think what we're seeing is that, if you have a good platform that's performing well. You have a lot of sponsors that are looking to raise your next fund, they need realizations. And so, I wouldn't say that it's like a watershed of great opportunities coming to the market at this particular moment. But I think that at some point with all the dry powder on the side, you've got -- on one side you've got sponsors have to put money to work. On the other side you've got sponsors that have to get realizations. And we do see some really attractive new platforms that come to the market. And so we'll take advantage of those. But we're not chasing new platforms in the market, we continue to rely on our portfolio, which really is generating at this point probably over 70% of our origination. Does that answers, Casey?

All right. Thank you for that. Yes. And my last question is with Rocade, such a differentiated asset of $45 million allocation to an investment that's clearly sort of outside the bounds of normality for BDC. Can you speak to why the sizing of that position is so large?

Yes, I think, Casey, it's Bryan. As we think about that platform on a go-forward similar to Eclipse, we're looking at it as a long-term play, where we can get differentiated origination and ultimately be able to have a diversified portfolio underneath that similar to Eclipse. So we brought over a portfolio -- basically set up a platform brought in a team and brought in an existing portfolio to get us started and will continue to originate new loans through that platform. So I would think of it similar to Eclipse and that it is a diversified pool of assets inside a specialty finance company that will be a long-term platform for this franchise.

All right. Thank you for taking my questions.

Thank you. Our next question is from Sean-Paul Adams with Raymond James. Please proceed with your question.

Hey, guys. While your dividend coverage looks promising for the remainder of 2023. Will there be a new leverage target for 2024 to accommodate the following SOFR curve.

I think at this time, our leverage target will remain the same.

Okay, perfect. Thank you.

Thank you. Our next question is from Paul Johnson with KBW. Please proceed with your question.

Good morning, guys. On the incentive fee this quarter, I'm just wondering if you can potentially give any sort of guidance for future quarters. I mean, was the incentive fee higher this quarters is due to kind of previously deferred fees and I guess holding else -- holding all else equal. Do you have any sort of sense of where that incentive fee may land future quarters? I'm kind of looking at like $6 million as a full incentive fee. Is there any potential for more recapture, I guess, of those deferred fees?

Yes. So in this quarter -- the reason the incentive fee was higher was because of the unrealized depreciation. So going forward, next quarter we have unrealized depreciation again, there is the likelihood that there will be more recapture. So all else being equal, the portfolio remaining flat, $6 million to $7 million, I think is a good range for you to think about. But to give you a guess on unrealized appreciation is we just -- we can do that and I'm sure what makes it difficult for you to model the incentive fee.

Sure. I understand. That's helpful. And then I'm just kind of curious higher level trying to understand math toward lawsuit financing. Maybe if you could just potentially provide kind of like a brief explanation of how that works. And then you're -- and then second to that your investment in that company seems like it's obviously a long-term investment I mean you kind of intend to potentially grow your investment there or you see that it's pretty much fix today.

Yes. I would think of it as later stage mass tort litigation. So towards the end of the case, providing financing to litigation firms, waiting for ultimate settlements to pay out at attractive -- what we believe are attractive risk adjusted returns. In terms of -- we've made a commitment to sort of grow that platform over time with a partner and are open to continuing to do that in any way that we can raise capital around that platform on a go-forward.

And just so for your modeling purposes we have invested an additional $10 million post quarter end, which leaves us with about $30 million of unfunded commitments.

Okay. Got it. Okay. So there is unfunded commitments. Your return on that investment, I mean, it's a preferred equity investment that you made. I think it's SOFR plus 600, I thought I heard you say a preferred equity investment. I'm just curious, I mean, is there -- are there opportunities for I guess higher returns from potentially like preferred dividends and as such coming out of routine or as 600 kind of what we should think about for the return?

Yes. So the cash investments into the business are at a preferred level of the contractual returns that you just referenced. And then in addition to that, we will own the majority of the equity underneath that preferred instrument. And there can be special dividends made the security over time.

We being the alignment with the preferred, so not -- it's all together. So within the BDC is where the equity is.

Got it. Okay, that's helpful. Yes, thanks. That's all for me. Thank you.

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Eric Lloyd for any closing comments.

Thank you, operator, and thank you for everybody who participated on today's call. Stay safe and have a great weekend.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.