At this time, I would like to welcome everyone to the Barings BDC Inc. Conference Call for the Quarter ended June 30th, 2023. All participants are in a listen-only mode. A question-and-answer session will follow the company's formal remarks. [Operator Instructions] Today's call is being recorded and a replay will be available approximately two hours after the conclusion of the call on the company's website at www.baringsbdc.com under the Investor Relations section of the website. At this time, I’ll now turn the call over to Jeff Chillag, Head of Investor Relations for Barings BDC. Please proceed.

Thank you, operator and good morning, everyone. Thank you for joining us on the call. 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 June 30th, 2023 is filed with the Securities and Exchange Commission. Barings BDC undertakes no obligation to update or revise any forward-looking statements unless required by law. I’ll now turn the call over to Eric Lloyd, Chief Executive Officer of Barings BDC.

Thanks, Jeff. Good morning, everyone. I also want to apologize if you hear some background noise. We're having quite the thunderstorm here in Charlotte, North Carolina. So if you hear some thunder and stuff in the background, apologize for any of that noise, but obviously not anything we can do about it. I appreciate everybody joining them. Please note that throughout today's call, we'll be referring to our second quarter 2023 earnings presentation that is posted on the Investor Relations section of our website. On the call today I'm joined by Barings’s Co-Head of Global Private Finance and President of Barings BDC, Ian Fowler; Barings Head of Capital Solutions and Co-Portfolio Manager of the BDC, Bryan High; and that’s thunder and lightning I was talking about. And the BDC's Chief Financial Officer, Elizabeth Murray. During today's call Ian, Bryan and Elizabeth 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. I'd like to start by expressing my enthusiasm for a very strong quarter at BBDC. Really as measured on a number of financial metrics. It's clear that investors remain concerned about rates, inflation and economic weakness. Even in this challenging environment. BBDC’s portfolio continues to deliver strong results for shareholders. Net asset value per share was $11.34 compared to the prior quarter of $11.17. That's a net increase of 1.5%. Net investment income for the quarter was $0.31 as compared to $0.25 in the prior quarter. Strong NII was fueled by a combination of really elevated yields from rising base rates to favorable dividends flowing from platform investments and JVs and three continue strong credit performance within the portfolio. Our performance is the result of a focus on the top of the capital structure…

Thanks, Eric. Recall that BBDC is managed by Barings LLC, a credit focus asset manager with more than $350 billion of assets under management. The bulk of the portfolio is sourced from the global private finance team, an organization with more than 85 investment professionals located around the globe providing financing solutions to preeminent middle market companies sponsored by private equity firms. BBDC’s portfolio decreased by $70 million on a net basis in the quarter with gross funding of $66 million offset by $135 million of repayments and sales which included $50 million of sales to Jocassee. Activity during the first half of the year has been tempered as private equity buyers take a pause in this rising rate environment to likely determine any impact on valuations, regardless of financial models have changed. And valuations have declined modestly, as Casa leverage has increased dramatically, as a rough thumbnail with reference rates at 0% in 2021, private equity buyers could reasonably leverage companies at 5x to 5x, which supported purchase prices in the 13x to 14x range. Today, with the increase in base rates and slightly higher spreads, those same businesses can support leverage in the 4x to 4.5x range, which supports purchase prices in the 10x to 12x range. The reality of the sponsor back market is that a significant portion of transaction volume is on a sponsor to sponsor deal flow. Sponsors appear reticent to bridge the valuation gap between 2021 Purchase Price multiples, and today's range based on financing costs. However, sponsors continue to execute on portfolio acquisitions, which makes sense as add-on multiples are below original platform purchase prices, in effect, enabling sponsors to reduce their cost basis, and hedge against any compression and exit multiples. Nevertheless, deployment from the Barings global private finance team is roughly…

Thanks, Ian. Turning to slide 14, you can see the full bridge of the NAV per share business in the second quarter. Our net investment income exceeded the $0.25 per share dividend by 24% even with this quarter’s higher incentive fees. Net unrealized appreciation from investments to CSAs and FX lifted NAV per share by $0.51, which was partially offset by net realized losses on the portfolio of $0.45 per share. The $0.45 per share realized loss was predominantly due to the exit of our debt investments and custom outway, which was already reclassified from unrealized depreciation. We are very pleased with our portfolio's performance amid 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 15. Near the bottom of the slide, you can see the credit support agreements increased approximately $2 million, which is driven by the acceleration of the expected timeline of exiting the MVC investments. Slide 16 and 17 show our income statement and balance sheet for the last five quarters. Our net investment income per share was $0.31 for the quarter driven by a 12% quarter-over-quarter increase in total investment 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 calculation. From a balance sheet perspective on slide 17, total debt to equity was 1.24x at June 30. Our net leverage ratio was 1.15x down from 1.19x. And we view this measure as more reflective of the true leveraged position of the vehicle, which currently sits within our long-term target of 0.9x to 1.25x. In addition, as previously disclosed in May, we were pleased to extend the maturity of our senior secured revolving…

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

Hey, good morning, guys. And thanks for taking my questions. Appreciate all the color you gave on the deal environment, but just trying to get a sense for the outlook for repayment, particularly if we're on the cusp of a potential Fed pause.

So, hey, Kyle, It’s Ian. Morning, I'll start with that and then let anyone jump in. So like, I mean, look, I mean, obviously, as we discussed, it's been rather anemic in terms of volume this year. And I think the reason for that is M&A activities just been soft as private equity firms are taking a pause to see in this rising rate environment, what happens to multiples enterprise values. And as we're getting through to the end of this rising rate cycle, and with only a modest decline in purchase prices, I think we're going to see a thaw in the second half of the year, might going to hold my breath, but and we have iBank who are saying there's a lot of books are going to come out. But sort of expect that that to occur. As we look at the remainder of the year, it's also time everyone starts thinking about year end and putting money to work. So I think there's going to be, a lot of pressure to put deals to work and do deals. So being highly, I'm cautious. We're cautious about the remainder of the year in terms of putting deals to work.

And part of the net, Kyle, it’s Eric, part of the net number is really us managing leverage, given the share repurchases we did also so we were balancing deployment with leverage with share repurchases, given where things were, and all that. So it's never a perfect science within that, but that's kind of part of what impacted our net number from repayments versus deployments.

Yes, and the other thing I would just throw out there to Kyle, I mean, look, we're not going to end that, we mentioned this, right, we're not going to chase deals, we're not forced to do deals, we have a portfolio that's been very active. And I think any manager that has a large, mature portfolio is going to see a lot of activity from that portfolio, as add-on acquisitions has been a main source of adding and creating value as part of the investment thesis. And, 70% of our volume is coming from our portfolio. And these are, less risky deals, because they're going into companies we know and understand, and helping those companies become bigger, better, stronger, more diverse credits. And so that's kind of like a no brainer. And, I think we're out of the woods in terms of a recession. But even economists are wrong, and I'm not going to bet one way or the other. But is it really the time to back up the truck and just kind of do anything that comes to market right now? Our decision was not to do that.

Yes, very helpful. Thanks for that. And then a follow up, with everything that's gone on with regional banks. Just wanted to get your take, how that impacts the Barings but also, the industry more broadly, is it just kind of a continuation of the theme of banks pulling back. Where do you think it's kind of a more material catalyst? Thanks.

Hey, Kyle, it's Bryan. I would just say that clearly, some of the ratings actions that Moody's have taken with smaller regional banks, we've seen a pullback across various markets, not necessarily markets that would benefit the BDCs. But private credit in general, I think, in alternative capital has become a broader theme across what we've seen in the broader Barings pipeline, I guess, I would say, but I don't know that they're, what we've seen so far would be a great fit for a vehicle like Barings BDC.

And I just highlight from a liability perspective is as Elizabeth referenced, we extended our bank group 100% of our partners, and our bank group extended with us. And so from an exposure perspective, on the liability side, we don't have that. And we're just in this environment, we're banks it's more challenging from a financing perspective to have 100% of them, continue to support us and see what we're doing. We viewed as a real kind of testament to what we've done and how we've done it.

Our next question comes from Finian O'Shea with Wells Fargo.

Hey, everyone, good morning. Question on the joint ventures, it sounded like Eclipse, Rocade brocade and Jocassee were highlighted as part of the key future game plan as at least more central tofuture differentiation. On all the other ones it looks like Thompson Rivers is running down. But there are a few more, and seeing what the sort of game plan is for. Thompson Waccamaw, the SLP. And if you are running those down how long that would take. Thank you.

Thanks, Fin, it was a part of what we committed to when we kind of did a little bit of a reboot here from a management team perspective is to take out some of the complexity in the BDC and simplify things the best we could. So what I'd say is yes, I’ll turn it over to Bryan here in a second, we are running down some of those JVs. That's intentional, just to take out some of the complexity within the vehicle. We do believe that and it's shown over time, that Eclipse for now a number of years, Rocade recently, and Jocassee for a number of years have generated really attractive returns for the BDC. And so I wouldn't say as much as they're central or core to what we do, I'd say that we view them as very complementary to what we do, and not as correlated to certain other credit assets to what we do. Eclipse as an example is one where when cashflow lending could be more challenged in a certain economic environment, they're going to see an increase in opportunities for that type of business. So the core is going to be first lien senior secured deals generated and underwritten by Ian's team on the global private finance area. And then these other parts will be complementary, that we think are within that but as I've communicated, couple or rather quarter ago, you should not expect to see us do incrementally more deals that look like Eclipse or Rocade or anything that in the near term. We're really focusing on taking out the complexity, simplifying the BDC, and then what we do believe what we have is really, really attractive between Jocassee, Rocade and Eclipse. And yes, the other JVs we will be managing those down over time. As far as how much time that takes. It's really hard to predict what that looks like. But you should continue to see a decrease in each of those JVs over time, as it makes sense for the shareholders to do that over time. I don’t know, Bryan if you could add anything?

No, I think that was well said, the only thing I would add is if you think about the Eclipse and Rocade then those underlying loans in those portfolios are middle market secured first lien facilities at the end of the day, and Jocassee the portfolio, it provides liquidity to what we're doing by being able to sell down loans. And those debt portfolio looks very similar to what would be in Barings BDC and the strategy that Eric just outlined. So as it relates to Thompson Rivers and Waccamaw, those don't look like what Barings BDC’s overall portfolio looks like and we would look to wind those down over time.

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

Hello, everybody. Good morning. So just a follow on to that. What should we -- could you give us any kind of like the base level return to the BDC? Not necessarily the internal [inaudible] the dividend distribution. For something like Eclipse, it's been a bit more volatile than some of the others from a smaller distribution in the fourth quarter or last year to quite a large one this quarter 12% ROE right now. I mean, is that 12% kind of the 12% ROE distribution? Is that the kind of go forward level for that? Or is it going to continue to bounce around? A little bit more than some of the others, which have been a little bit more stack Jocassee [inaudible]?

Yes, hey, Robert, it’s Bryan. And as it relates to Eclipse, we've tried to mirror the dividend more recently, with what we're receiving from a plain middle market, first lien loans so 12%, we felt was in line with what we've -- what we're getting from the rest of the portfolio, the reality is, it could dividend out a lot more, but it's performed incredibly well. And we want to continue to grow that platform and allow them to diversify their portfolio. And so we would like to try to keep it, our goal would be to try to keep the dividend yield from that platform consistent with the rest of the portfolio, I guess, is the way that I would describe it. So as base rates change, that may change, but it shouldn't be volatile relative to the rest of the portfolio if that makes sense.

It does. That's really helpful. Thank you. Elizabeth, you said during, you commented the CSA valuation was impacted by unexpected acceleration in the realization in the MVC assets? I mean, is that driven by just an estimate or is that actual activity? I mean how real is that expected acceleration I guess, how you put it.

Yes. So Robert, the way we think about it is the CSA, it's either the lessor up when we exit the last investment, or 10 years, we are now down to four assets. One of which we should exit close to the end of the year, it's a PE Fund, it’s in winddown mode, we have just hired somebody to help us exit the MVC Auto, so that should -- we should exit that over the next couple years. And really, what's left at that point is security holding. And in talking with the team, we believe we will exit that sooner than that 10 year mark, and likely sell that over the next say five to seven years or five years, I should say. So that's really where that acceleration and timeline came from.

Got it. Thank you. And then if I can, on the overall credit quality of your portfolio, nonaccruals went down, et cetera. But maybe for Ian, appreciate the comment on the interest coverage, et cetera. But I mean, what's the go forward interest coverage, if we can like mean SOFR the last 12 months, they've been paying higher interest, but obviously SOFR has been on a pretty steep climb over that duration. So if you look forward, what's your expected interest coverage? And also kind of tied into that I've been asking people, what proportion of your portfolio today has interest coverage below one?

Yes. So great question, because obviously, we are looking backwards and right. The reality is majority of our investors, our borrowers provide monthly reporting. There's probably 20% that are quarterly. So we're looking -- and we haven't received all the quarterly for second quarter reporting packages yet. So what we're doing and I think we've talked about this in the past, or we started way back early in the year stress testing the portfolio for rates increasing to 5%. But obviously, the numbers I'm talking about today are, we're looking at for those that are quarterly reporters, we're taking first quarter and then we're factoring in those that are monthly. So just a couple of things that I'd highlight in terms of the portfolio performance. Number one is the portfolio for the second quarter. And I referenced this, and I think it's important is that a vast majority have been minimally impacted by inflation. So I think number one, when you look at margins, most of our borrowers have been able to pass through price increases, that goes to the composition of the portfolio, we've talked about this in the past that over 75% of our portfolio is service businesses versus manufacturing, which is also important because we don't have companies with a lot of CapEx. So that's number one. Over 50% of our portfolio is generating EBITDA growth. And in terms of those that are in GPF, that have less than one time, so it's less than five issuers. So it's a minority in terms of being under one to one, I do think that as we look at the full year impact of rate increases, which is, as of like right now, and we may have another 25 basis points coming around the quarter. We'll probably see, and I think I indicated this, a little more volatility in the second half of the year, where there will be some companies that are going to have some liquidity needs. But at the end of the day, and Robert, I've been doing this a long time, if you have good businesses with good sponsors, and lenders and management teams are all rowing in the same direction, these companies are going to get through a cycle, and we expect our sponsors to put in equity, and we'll consider picking some of our interests at a premium to get that company through to the other end.

Robert, to build on what Ian said, I mean, that's all if that environment hits us in the face, right, if you look at today, what we know is nonaccruals were almost cut in half from prior quarter. Right? If you look at the only one that nonaccrual that is from something that we didn't acquire within the portfolio. And so the Barings, we talked about rotating out of MVC and Sierra assets into Barings assets. And as we evaluate the portfolio and everything, we've communicated to you, if you look from Barings perspective, those assets continue to perform extremely well. And to Ian’s point if you look at the average leverage in the portfolio, call it 5x to 5.5x within that. And if you are looking at the interest coverage within that type of portfolio. Even if you run it at 10% or so you're running, it's still kind of 2x interest coverage. And as Ian referenced, we have with the service businesses, they just typically have a lot less CapEx and other ease of free cash flow, and more. So very importantly, your free cash flow coverage is still stays very attractive relative to the interest on the company.

Our next question comes from Casey Alexander with Compass Point.

Yes. Good morning. And first of all, let me warn I'm sitting in the same storm here in Charlotte's, so if you hear background noise. You'll have to forgive me. Secondly, I want to acknowledge and hope shareholders appreciate the material execution on the share repurchase program. That was excellent follow through. I want to ask Bryan; it sounds to me like what you're saying about the JVs is that setting the dividend at what you believe loans are earning in the portfolio. Does that mean that -- are you still earning a higher ROE on those JVs? And building NAV through retention of income and those JVs.

Yes, thanks for the question, Casey. As it relates to Eclipse and Rocade, that is correct. Yes. Think high teens type ROE. And we're retaining that and trying to build NAV within the portfolio with that capital.

And so Jocassee would be sort of at the mark, then.

Correct.

Yes. Okay. Secondly, you gave sort of a cumulative review of it. But I was wondering if you could be more specific, what's the mark-to-market loss on MVC to date, SIC to date? What are the each, is each CSA currently marked at what are the caps to the CSAs on each of those individual blocks of business?

Yes, so for MVC, it's currently marked at 15.6, and that CSA is 23. With the losses right now at MVC are 21. So, again, fully covered, the mark on Sierra is around 45. And the losses are around 36. And that is up to $100 million.

The losses are not 30.

Oh, I'm sorry.

These losses are like actual realized losses are like 5 million.

And 36 includes unrealized.

Incremental 30 is unrealized. And so that total if you take the full mark-to-market, and you apply that the 36 will be relative to the 100, as Elizabeth said, so you'd be more than covered on any of that. We feel good about some of the mark-to-market stuff. So there, what we acquired there were some CLO equity, there were some stuffs around a JV that they had existing within their, given what's happened with base rates and broadly syndicated loans, that's impacted both of those type of things. Obviously, CLO equity is going to be impacted by the underlying collateral within that. But we feel good about where the long term recovery of those, but from a mark-to-market basis, again, think of it was 36 relative to 100 and at or 5 relatives to 100.

We have a follow up question from Finian O'Shea with Wells Fargo.

Hi, thanks so much. Just one more on the JVs. Topic du jour. You mentioned building retained earnings on Eclipse and Rocade. Just I guess to what extent what are you thinking size wise, before starting to distribute the earnings? Is it about the scale opportunity and the returns opportunity today? And within that what's the sort of path you see to getting those right sized and distributing returns? Thank you.

Yes. Fin, I think as long as we can continue to generate those types of ROEs, we're going to -- we get certainly distributed more. And we can be tactical around that to the extent we want to do that from a portfolio perspective. But we think that those platforms have momentum. And so we want to continue to create sort of NAV for the overall portfolio over time. And so I don't think that there's a change in strategy or a timeline to get to that point, as long as they are sort of earning that that ROE, we will continue to let them retain. And to the extent we want to take special dividends to bolster the income of BBDC we can do that. So we can kind of use it to help to the extent there are other issues in the portfolio, if that makes sense.

Yes, I mean I just build on that, Fin. I mean, think of a high teens ROE, it's something we want to distribute where it's prudent, as Bryan said, consistent with the rest of the portfolio, but retaining some investment within that to continue to support the growth of that is also a really attractive investment for the BDC because it's consistently going off kind of that high teens type of return. And again, we're something that we think is extremely complementary to the core part of the portfolio, which is going to be cash flow first lien senior secured assets. Any other questions?

We have one more question from David Miyazaki with Confluence Investment Management.

Hi, good morning. I just wanted to share some appreciation for the CSAs that you have in place. I think that it was, it's proven to be something that is very helpful, given that the losses, especially at MVC, are higher than what I'd expected. I'm curious how as you are marching through the winddown of both MVC and Sierra, what has surprised you versus your underwriting? And how does that shape your view toward future or possible consolidation or acquisitions going forward?

Hey, David, thanks for the question. And we're glad that we're providing more transparency around the CSA and appreciate your recognition that it's Barings bears that risk and losses are not to shareholders. I would say on MVC, as you said, we, there are three large assets we underwrote at MVC. We referenced two of them that we still hold which are equity positions. We had one that was a debt position. And we went into that debt position, the customer was the one that's had the realized losses that were significant, which is part of what Elizabeth referenced relative to the CSA. And so the day when we underwrote it, we didn't expect the loss severity on that to be to the extent that it was, obviously, when you underwrite a portfolio that you didn't originate and underwrite, you have a certain amount of information, but not the full type we would normally have and certain type of underwriting. The two equity positions, as Elizabeth referenced one of them, we're in the process right now of beginning a process to look at an exit on that, whether that the timeline of that is kind of TBD. The other one, we believe, a little longer hold on, that will benefit for some of them, basically, some macro reasons that are occurring and kind of the European area that will we think will support infrastructure, those equity positions can obviously come back and basically offset the losses that we've had to date on the MPC portfolio. But time will tell whether that happens or not. So I'd say on MVC, the short answer is the surprise, I guess, if you think of it that way, it was on the one custom outway asset, the loss severity, as we underwrote, it was…

Well, that's very helpful. And I know the CSA creates its own complexity. But at the end of the day, it is a good protection to have in place. And it certainly helps to remind all of us as shareholders that the parent is aligning itself with all of our interests. And I also would have to say, to echo the comments on following through on the share repurchases, I think that's also a good expression of alignment. So thanks for answering all the questions.

Absolutely, David. I really appreciate you recognizing that we are doing everything we can to align with shareholders, again, I think between the two CSAs, we've got over $120 million of Barings risk not BDC risks to insulate shareholders. And we do believe and we've tried to, over time communicate that we think that sends a message as to how we go about business and how we think about making sure we insulate and protect shareholder from an alignment perspective. Thank you. There are no further questions at this time. I would like to turn the floor back over to Mr. Eric Lloyd, CEO for closing comments.

Yes. I guess I first wanted to say thanks. I know it's a busy time for everybody to take the time to join these calls. And I appreciate you taking the time to listen to our call and invest in us and ask the questions that you did. Thanks for putting up with everything from the sirens and the thunder and the lightning that were behind us during the call. And I just want to thank the team, too with Elizabeth and Jeff and Albert and Ian and Matt, and Bryan and everything we've done. I really feel great about where we are, the team we have going forward. Number of you have seen some invites to some shareholder stuff that we want to do to get out there and make sure we're communicating with you and telling our story here over the course of time between now and the end of the year. We're grateful for anytime you're willing to invest in us and hear the story because we feel like there's a lot of compelling attributes we have right now that we believe will really benefit the stock price and shareholders over time. So with that, I'll also say thank you, everybody, be well and I hope everyone's having a great summer.

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