Barings BDC Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
February 23, 2024

There are 11 speakers on the call.

Operator

For the Quarter Ended and Year Ended December 31, 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 approximately 2 hours after the conclusion of the call on the company's website at www.bearingsbdc.com under the Investor Relations section. At this time, I will turn the call over to Joe Manzoli, Head of Investor Relations for Barings BDC.

Speaker 1

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 these projected and 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 Form 10 ks for the fiscal year ended December 31, 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. I'll now turn the call over to Eric Lloyd, Chief Executive Officer of Barron's BDC.

Speaker 2

Thanks, Joe, 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 Q4 2023 earnings presentation that was 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 the BDC's Chief Financial Officer, Elizabeth Murray and BDC's Co Portfolio Managers, Brian Hai and Matt Froehn. We will dive into some quarterly results momentarily, but first I would like to comment on some of the successes we experienced during the entirety of 2023.

Speaker 2

Investing in illiquid assets is often poorly suited for short term investors. Measuring performance in a single quarter rarely gives investors the appropriate lens to measure a manager's performance. Net investment income, total dividends paid to shareholders and NAV for BBDC all increased during 2023. While these items are important, we are eagerly focused on some developments not immediately captured in these metrics. During 2023, we continued executing on our commitment to rotate out of non core assets including 3 legacy MVC capital positions and more than $25,000,000 of investments to legacy Sierra income positions.

Speaker 2

We again demonstrated our best in class alignment with shareholders, repurchasing more than 1,800,000 shares for nearly $15,000,000 The number of issuers on non accrual declined from 7 at December 2022 to 4 as of December 2023. We manage our portfolio based on operational metrics that drive stability of returns and we expect that in the coming quarters the commitment to our core strategies will continue to deliver for shareholders. Successful financial results such as those measured by NAV and distributions over time are the outputs, not the inputs to a successful asset manager. BBDC exhibited stability and strong operating results during the quarter ended December 31. Our focus on the top of the capital structure, investments in sponsor backed issuers is serving investors well in these uncertain times.

Speaker 2

Our portfolio is predominantly sponsor backed as complemented by a selection of non sponsored and platform investments. Our portfolio strategy is outlined in greater detail on Slide 5. This strategy serves as our guiding light as we continue to successfully invest throughout the market and deliver compelling returns to our shareholders. Net asset value per share was $11.28 compared to the prior quarter of $11.25 and $11.05 at

Operator

dollars at December 2022,

Speaker 2

reflecting a year over year increase of 2.1%. Net investment income for the quarter was $0.31 unchanged from prior quarter. Our performance is the result of our focus on the top of the capital structure and within more defensive industries. We believe BBDC remains well positioned for any further volatility and uncertainty in the market going forward. Investment activity during the quarter reflected a modest degree of net repayments driven by light transaction activity during the quarter and balancing the use of our share repurchase program with other opportunities.

Speaker 2

As our shareholders know, we are actively working to maximize the value in the legacy holdings acquired from MVC Capital and CRE Income and rotate them into compelling Barings originated positions. Non Barings originated assets now only amount to 11% of the portfolio at fair value. That's down from 24% at the beginning of 2022 and potential losses from these assets are protected by the credit support agreements limiting downside risk for BBDC investors. Our investment portfolio continued to perform well in the 3rd quarter. Including the acquired Sierra and MVC assets, our total amount accruals are 2.5% of the portfolio on a cost basis and 1.5% on a fair value basis with 3 assets being removed from non accrual during the quarter.

Speaker 2

With the exception of 2 investments, all of our non accrual assets were from acquired portfolios and therefore are covered by our credit support agreements. Subsequent to year end, we removed our investment in Core Scientific Inc. From non accrual status in connection with its January 2024 exit from Chapter 11 bankruptcy and our receipt of shares of its common stock in exchange for the debt investments that we previously held in part of the bankruptcy proceedings. On a pro form a basis, removing Core Scientific that takes non accruals down to 0.6% on a fair value basis and 1.3% on a cost basis. Turning to the earnings power of the portfolio, the increase in base rates has largely been reflected within the portfolio with weighted average yields on floating rate investments stabilizing at 11.2%, substantially comparable to the prior quarter's figures.

Speaker 2

We remain conservative on our base dividend policy and our Board declared a 4th quarter dividend of $0.26 per share consistent with the prior quarter. On an annualized basis, the dividend level equates to a 9.2% yield on our net asset value of $11.28 Now I'll turn the call over to Ian.

Speaker 3

Thanks, Eric, and good morning. Recall that BBDC is managed by Barings LLC, a credit focused asset manager with more than $300,000,000,000 of assets under management. The bulk of the portfolio is sourced from the global private finance team, an organization with more than 100 investment professionals located around the globe providing financing solutions to preeminent middle market companies sponsored by private equity firms. BBDC's portfolio decreased by $51,000,000 on a net basis in the quarter, with gross fundings of $192,000,000 offset by $244,000,000 of repayments in sales, which included approximately $50,000,000 of sales to our Jocassee joint venture. Activity during the 4th quarter continued to be tempered as private equity buyers take a pause in the rising rate environment, which we believe has a meaningful impact on enterprise valuations.

Speaker 3

Based on recent conversations, investment bankers who serve as the tip of the spear have reiterated their expectation that LBO activity is expected to meaningfully increase in the quarters to come. With that said, messaging has been consistent for the past 12 months as more and more opportunities are being added to the backlog, but the dam has not yet broken. Consistent with the prior two quarters, we have seen an increase in the number of early stage opportunities within the platform, but unfortunately conversion rates to close deals are trending towards historic lows. Sponsors continue to execute on add ons for companies already within their portfolios, which makes sense as add on multiples are below original platform purchase price, in effect enabling sponsors to reduce their cost basis and hedge against any compression and exit multiples. Investors in Barings BDC benefit by having a seasoned portfolio that provides opportunities to deploy capital into issuers we already know well.

Speaker 3

Refinancing activity has started to increase as performing issuers have plentiful access to capital without the need to sell.

Operator

There is

Speaker 3

a logical reason to believe transaction volumes improve in the months to come, namely a record backlog of sell side mandates among the investment banking community and a need for private equity managers to show distributions to their LPs. Counter to those facts is a high level of uncertainty created by 2 arm conflicts, persistently high inflation, rapid increase in interest rates in the forthcoming political cycle. When opportunities ultimately do convert into an increase in closed transactions, we will continue to use our disciplined underwriting strategy to invest capital in the most compelling opportunities. Turning to our current portfolio, 74% consists of secured investments with approximately 67% of investments constituting 1st lien securities. Interest coverage within the portfolio stood at 2.2x, modest decline from 2.3x a quarter earlier.

Speaker 3

We are forecasting that a steady state weighted average interest coverage for the portfolio will ultimately fall between 2 and 2.25 times as the full impact of higher rates is reflected in issuers' financials and performance. Our avoidance of various industries prone to economic volatility, oil and gas, restaurants, retail, metals among them, has proven to be a sound strategy against a backdrop of less economic predictability. One of the benefits to a predominantly sponsored back strategy has proven out over the past several quarters. Combined with what we believe were reasonable going in leverage multiples, the median gross margin in the North American Global Private Finance portfolio, a portfolio similar to BBDC, stood at 49%, up from 45% 1 year earlier and gives us confidence that our issuers are successfully pushing through price increases to combat inflationary pressures in their businesses. Adjusted EBITDA margins for the same sample set were 22%, up from 21% in prior year's period, believed to be a reflection of the fact that wage gains have consumed some degree of gross margin expansion previously noted.

Speaker 3

While not perfectly comparable metric period to period as the volume of transaction activity in the past 5 quarters will skew these metrics somewhat, we believe we have reason to feel comfortable with the performance of the portfolio. The portfolio composition remains highly diversified with the top 10 issuers accounting for 20.1% of fair market value. Recall that the 2 top positions within the portfolio, Eclipse Business Capital and Rokaid Holdings, are platform investments originating middle market loans. These positions have a number of underlying issuers. Assets included in the other classification include structured positions and certain acquired positions that will not be originated on a new basis going forward.

Speaker 3

As Eric highlighted, we anticipate rotating out these positions as market conditions allow in the quarters to come. Risk ratings exhibited minimal movement during the quarter as issuers exhibiting the most stress classified as risk ratings 4 and 5 were 7% on a combined basis quarter over quarter. We anticipate this figure to decline when rolling to the Q1 in light of public developments with 1 of our issuers, Core Scientific, as Eric mentioned. Encouragingly, we also experienced some positive movement at certain issuers performing consistent with expectations that underwriting have outperformed during 4th quarter. We remain confident in the credit quality of the underlying portfolio, the uncorrelated nature and associated value investments in Eclipse and Rocaid should bolster the portfolio in the event the economy enters into a long expected recession.

Speaker 3

BBDC is committed to delivering an attractive risk adjusted return to shareholders over a long time horizon. We are investors of credit in middle market companies. Our global reach and significant scale across asset classes gives BBDC a unique ability to select risk and return compared to other managers, but at our core middle market credit is what we do. I'll now turn the call over to Elizabeth.

Speaker 4

Thanks, Ian. On Slide 15, you can see the full bridge of the NAV per share movement in the Q4. NAV per share was 11.28 dollars as of December 31, which is an increase of 0.3% over the prior quarter and more than a 2% increase versus December 31, 2022. Our net investment income exceeded the $0.26 per share dividend by 19% and share repurchases added another $0.01 per share. This was partially offset by net unrealized depreciation and realized gains of $0.03 per share.

Speaker 4

The valuation of the credit support agreements increased by approximately $3,600,000 which is driven by unrealized depreciation in the underlying Sierra portfolio and a reduction in the applicable discount rates during the quarter. Our net investment income was $0.31 per share for the quarter or $0.33 per share on a pre tax basis compared to $0.31 per share in the prior quarter. This is driven by continued benefits from higher base rates and dividend income from our platform investments and joint ventures. Our net leverage ratio, which is defined as regulatory leverage net of cash and net unsettled transactions was 1.15 times at quarter end, down modestly from 1.18 times in the quarter ended September 30 and currently sits within our long term target of 0.9 to 1.25 times. Our funding mix remains highly defensible, both in terms of seniority and asset class, including the significant level of support provided by the unsecured debt and our capital structure.

Speaker 4

At December 31, our unsecured debt accounted for $725,000,000 of our fundings and equated to 50% of our outstanding balances. During the Q1 of 2024, Barings CDC issued a new 300,000,000 dollars senior unsecured note to enhance the flexibility of our capital structure. The note issuance was significantly oversubscribed and we are pleased to position BBDC with significant operating flexibility in the quarters to come. Pro form a for the note issuance, BBDC now has more than $1,000,000,000 of unsecured debt liabilities accounting for more than 70% of our debt outstanding. We continue to maintain significant flexibility in our capital structure with the next bond maturity in the second half of twenty twenty five and pro form a for the $300,000,000 notes issued, we have expanded our ladder maturities out to 2029.

Speaker 4

Barings BDC currently has $241,000,000 of unfunded commitments to our portfolio of companies as well as $65,000,000 of outstanding commitments to our joint ventures. We have available cushion against our leverage limit to meet the entirety of these commitments if called upon. Eric noted earlier that we have actively been utilizing our share repurchase plan during 2023. The 4th quarter was no exception as we repurchased nearly 450,000 shares during the period and over 1,800,000 shares in total for 2023. In addition, the Board authorized new $30,000,000 share repurchase plan for 2024.

Speaker 4

Our focus on share repurchases is one example of BBDC's thoughtful approach to aligning our interests with shareholders. As mentioned earlier, the Board declared a 1st quarter dividend of $0.26 per share, a 9.2% distribution on net asset value. We consistently evaluate our dividend policy in the same manner we manage our broader business, driven by stability. Since Barings became the advisor in 2018, we have a track record of increasing or maintaining a stable dividend. We believe we can maintain a stable dividend even in normalized rate environment and we expect that our platform investments, Eclipse and I'll wrap up our prepared remarks with a note on our investment pipeline.

Speaker 4

Thus far in Q1, we have made $42,000,000 of new commitments, of which $35,000,000 have closed and funded. With that, operator, we'll open the line for questions.

Operator

Thank you. The floor is now open for questions. The first question is coming from Finian O'Shea of Wells Fargo Securities. Please go ahead.

Speaker 5

Hey, everyone. Good morning. Question for Ian. I appreciated your color on transaction volumes being slow to transpire. Question is, if that continues to stall, do you think we're looking at sort of a triage, a great triage from private equity?

Speaker 5

And if so, if you then have to take keys for companies, can you talk about how well you are positioned for that? Maybe how many sets of keys you could practically take on at the platform? Thank you.

Speaker 3

Good morning, Fin. Yes, so yes, like I said, we had hoped that things were going to pick up that's investment bankers are pretty good about talking their book. And that really hasn't happened thus far this year. Now what I will say is there's a lot of pressure for this market to open up. So I would unless there's some kind of black swan event, I would be really surprised if we have a low anemic year again of M and A activity.

Speaker 3

I mean, we're looking at base rates have plateaued. The Fed has telegraphed that they're likely coming down. That's obviously a positive given the valuation gaps that exist in the market between buyers and sellers. We have the election, so we need to get through that political uncertainty. I think most importantly though, and you raised private equity and obviously we're focused on private equity.

Speaker 3

I think one of the biggest triggers is the pressure on private equity and the fact that a lot of LPs now are tying LP commitments to realizations. And so quite frankly, I think based on what we've seen, the data we've seen that the valuation gap isn't huge, but it's not what private equity firms were expecting. And I think ultimately they're going to be forced to to realize some companies maybe lose a turn or 2 on the exit multiple, but still generate historically decent returns. So I think volume is going to pick up in 2024 as we get later in the year and 2025. If rates come down materially, it could be a watershed environment.

Speaker 3

Of course, if that doesn't happen, we're still in this period of and for those platforms that have matured portfolios, there's still that incentive to do add on acquisitions and create value and that allows us to put more money to work. 70% of our origination last year came from our portfolio. It also means low runoff and so that creates AUM stability. So that's positive. If this really gets stretched out, I think is where you're going with your question, then we're going to have to figure out how to deal with some of these companies.

Speaker 3

If they're not performing, we're course prepared. It's something we don't want to do to take the keys. I can tell you that it's not in the BDC, but we had one company during COVID that we had to take the keys in North America and the company is up for sale. So we've got experience doing that. We also have a very large team, over 100 people globally.

Speaker 3

So I think we're pretty well prepared. If we have to go down that road, but that's kind of the that's something you don't really want to go to unless you have to.

Speaker 2

And I'll just build on that. The 100 that Ian referenced, that's just on the investment side in the direct lending area. In addition to that, we have a deep legal team internally that has strong experience working through situations like this. We have a special situations now called Capital Solutions team, has a lot of experience working through things like this. So at a firm level, we kind of bring all resources to bear all expertise to bear to make sure we have the best outcome for our investors in those type of challenging situations.

Speaker 5

Very helpful. Thank you. I guess I'll do a follow-up on the recent bond issuance this quarter, January or February. Understanding the benefit of unsecured, it's also a more expensive market and it looks like you already had adequate unsecured debt for your ratings and so forth. So seeing if you could provide color on the thinking there and the timing and why more unsecured?

Speaker 5

Thank you.

Speaker 4

Yes. Thanks, Ben. When we originally went to market in 2021, we had messaged at that point that we would be a serial issuer. And so, of course, the markets have been closed for the past couple of years and they've recently opened up with several other BDCs in the market and looking at our maturity ladder and also our mix between secured and unsecured. We felt like it was an appropriate time and this again extends our maturity ladder.

Speaker 4

As soon as the $300,000,000 came in, we used that to repay some of our credit facility. So I think long term this really sets us up for success. I'll also say, Ben, that we did swap the interest rate on this. So we have a swap in place.

Speaker 5

Thanks so much.

Operator

The next question is coming from Kyle Joseph of Jefferies.

Speaker 6

I think first one for Ian. Just kind of want to get your take on how the competitive environment has evolved over the last few years with kind of the slower deal flow, as you mentioned, but also recognizing BDCs, at least publicly, have been resilient to higher rates and inflation. But give us a sense for what spreads have been doing and what if the steel environment were to come to fruition, expectations for spreads in that environment?

Speaker 3

Yes, great question, Kyle. Good morning. So, Leon, like I said, obviously, the economy is slow, M and A activity down. In our space, in the last few years, there's more platforms that M and A market. So there's a lot of pressure coming from investors for managers to deploy capital.

Speaker 3

Again, I think you've got a portfolio, you're in a sweet spot because at least you're putting capital to work in companies you know well and helping those companies become bigger, better, stronger, more diversified credits. So that's sort of a safer bet than if you've got to play the new M and A market, which not only being low in volume, the quality of deals has been very inconsistent. And so that's a tough place to be to have that pressure to put money to work. I think there's so much capital being raised because we're in this nirvana situation where for this asset class, it's the first time historically in years where you've had both an increase in base rates and spreads. And as we've talked about in the past, you're generating all in yields in the low double digits.

Speaker 3

I will say that just given the competitive nature and the number of platforms, it is getting competitive, especially for good quality deals. You can't really compete on leverage just given where rates are. So we're really seeing deals being moderately levered around, call it, 4.5x senior. Docs are still in our favor as lenders. But as you kind of raise, we are seeing some compression in spreads in the last quarter of last year.

Speaker 3

I'd say spread or last half of last year, I'd say spreads compressed about 50 basis points to 75 basis points, up front about 50 basis points. But all in all, you're still generating upper single digit yields. I think as the market opens up and more attractive opportunities are out there, I think that competitive nature will continue. I mean it's again historically this asset class generates senior debt 6% to 8 percent. We're over that right now.

Speaker 3

So I think you have to expect over time as the market becomes more normalized, have some reversion of all in yields back to sort of the historical returns that we've had in the asset class.

Speaker 6

Got it. Helpful. And then one follow-up, just the on repayments. Obviously, they were elevated in the Q4, but it sounds like some of that was self induced for lack of a better term and you guys are rotating out of Sierra and MVC. But if we do get this pickup in deal flow, would you expect a corresponding increase in repayments as well?

Speaker 6

Or how does the higher rate environment influence that?

Speaker 7

Yes, Kyle, this is Matt. I would certainly agree with the sentiment that if we see kind of an increase in deployment opportunities, that's necessarily going to be a corollary to increased exit opportunities on the other side. I think that if we look at the portfolio, average hold horizon is kind of stretched up to call it 4 ish years plus or minus. And while we feel really good about the quality of the credit in the portfolio, eventually we're going to see some turnover. And so it's not something that serve us

Speaker 8

in any capacity, but I think

Speaker 7

it will start to return to kind of a historical mean. Did that answer your question?

Speaker 6

Yes. Thanks guys. Appreciate it.

Operator

Thank you. The next question is coming from Robert Dodd of Raymond James. Please go ahead.

Speaker 9

Hi, guys. On the Core Scientific, you mentioned, by my math, you've probably got a little over 6,000,000 shares now on that after the exchange? I mean, is it is that like is it the same class of stock that's publicly traded? And what's the intent there? I mean, are you intending to hold that?

Speaker 9

Are you locked up or are you looking to liquidate the shares you've got from that position and maybe rotate them into something you'll come produce?

Speaker 10

Yes. Hey, Robert, this is Brian. So in terms of the stock itself, it is the same stock that you would see on the public markets. Our intent there is to maximize recoveries, but also I think we've been pretty clear that that's not part of our ongoing strategy. So marrying those two things together over the course of coming quarters is sort of on us to make decisions around what to do with that.

Speaker 10

Obviously, having a public stock gives us some liquidity and that was the intent in making that election within the bankruptcy proceeding.

Speaker 9

Got it. Thank you. And I mean, because it ties in, I mean, the 15% equity, some of that obviously is encompassing with the Canadian etcetera. But obviously, this as of today, pro form a for this equity, you're going to be 16% plus, I think my math is right. Can you give us a recap about what's a reasonable timeline to get at least the non income producing pieces of equity down into the into that maybe the mid single digit range?

Speaker 7

So it's a great question. And so as we've tried to articulate in past quarters, we have described our investment philosophy and kind of buckets around strategy. And as it sits as of twelvethirty one, we kind of have 8% of the portfolio that sits in other. The big kind of noteworthy items in that other bucket today would include 2 large European equity positions, the position in Core Scientific that was previously a debt security and will now be an equity position as you know. And then a handful of other candidly non core, non future style strategies.

Speaker 7

As we think about where that 8% goes over and so I think organizationally we're really focused on the 8%, not necessarily just on the equity piece of it, but on the 8% of the other. And the important distinction is that, Rocaid and Eclipse both constitute equity, but we expect those will be part of our go forward strategy kind of into perpetuity. And so as we kind of roll forward 4 quarters in the future, our hope would be that we could cut that number that 8% non core to something closer to 4% to 5% by the time we get to the end of the year. The biggest movers in that are going to be 1 of the 2 large European equity positions we're hoping to monetize and then core scientific public equity which we are hoping to monetize, of course, only at levels that we find to be reasonable returns of capital. And so I would guide you to that benchmark, as we look forward to the next handful of quarters.

Speaker 2

And as a reminder, those 2 large European equity positions that don't have yield were acquired. Those aren't things that we made an underwritten investment on, unlike Unlike Rokayna clubs which have attractive yields that come off them.

Speaker 9

Got it. Got it. Yes. One more if I can, it relates to this. On Macade, I mean, you made, well, I think, dollars 15,000,000 incremental investment.

Speaker 9

I'm sure the platform made

Speaker 3

more, but

Speaker 9

in that business, I mean, is that was that opportunistic that it was a big case or whatever it is, however I should turn that or so again, is that kind of a temporary increase? Or should we expect it to continue to potentially grow at that pace? I mean, it grew about $30,000,000 during 2023. Is that the kind of growth that platform could add? And it's income producing and a good return as well.

Speaker 9

So not criticizing, just trying to scale the growth opportunity there.

Speaker 4

Yes, Robert, good question. And on RHOCADE, when we initially made the investment, the platform as a whole had a 2 $50,000,000 preferred equity target. And so they're able to draw on that. And so the 15,000,000 you're referencing was just a preferred draw. And I believe we have about $17,000,000 left on that draw.

Speaker 4

We don't anticipate much to be drawn in 2024. It was just they were ramping in 2023 and getting a credit facility in place. But you can just know that once that unfunded amount has been drawn, we are not going to make any additional commitments at the BDC level.

Speaker 9

Got it. Thank you.

Operator

Thank you. The next question is coming from Casey Alexander of Compass Point. Please go ahead.

Speaker 8

Hi, good morning and thank you for taking my questions. First off, there's been some offhand criticism of the BDC surrounding the degree of complexity that the BDC has. And a good for instance here in this quarter is the puts and takes from forward currency contracts that cost about 9 $500,000 or about a $0.09 per share swing that had it not happened at all, this would have been a fabulous quarter. So I think investors would benefit if you could explain why these puts or takes are there, what the foreign currency contracts are covering, are they doing what they're expected to do relative to the investments that they're covering? And what should we expect from that in the future?

Speaker 8

Because that's a pretty big swing to earnings that could have made this a good quarter, a really fabulous quarter.

Speaker 7

Yes. Thank you for the question, Casey. And certainly agree that there are layers, pardon me, to our strategy and to our structure based on kind of a historical makeup that have just clouded some of the picture. We're working to simplify it and we will continue to do so. Specific to your question and so let me just at a high level describe why these are in place and then give you some perspective in terms of how global focus at Barings and historically speaking whenever the public vehicle was acquired in 2018 and then subsequently ramped, we use a fair percentage of European assets to do that.

Speaker 7

And so as we think about the non USD denominated portions of our portfolio, we are not in the business of taking FX risk on those par and principal positions. And so what we do is we are rolling FX we maintain rolling FX hedges on a quarterly basis that actually insulate kind of the portfolio performance from the FX movement. Admittedly, as you have appropriately noted, that will that can have the capacity to create volatility if the FX movements are happening within the quarter and then whenever the FX hedges are themselves rolled. And so that did happen this quarter that also coincidentally happened last quarter. If you look at the movement between the USD EUR FX rate from October 1 to December 31, you'll see that the euro strengthened meaningfully.

Speaker 7

As part of that, whenever those contracts were rolled, there was a meaningful FX gain that was kind of recognized with respect to that position. In terms of the go forward strategy, I'm confident in telling you that foreign transactions, non U. S. Denominated transactions will be a lower percentage of the portfolio as we continue moving forward. And we are also actively working to kind of figure out ways to mitigate the severity of the movement that we see on the FX line because we agree with you that it creates a little bit more of a cloud that actually intended to be a net neutral impact to the underlying shareholder.

Speaker 8

All right. Thank you. Secondly, in the originations and repayment schedule, there was a significant amount of repayments that were actual sales, not to the JV, but outside the platform. And I'm looking at the net debt to equity ratio that you're reporting on the last page of your release of 1.15 times. I mean, should we think I mean, it clearly looks like you're trying to manage to a particular level.

Speaker 8

Should we be thinking about that as kind of the sweet spot of where you'd like to stay? Or do you think that you've calmed things down in the portfolio a little bit as you get rid of some of the non income producing equity, you can take that number up a little bit and generate a little higher ROA. How are you thinking about managing to that level?

Speaker 7

Yes. I'll start and then want to make sure that Elizabeth has a comment has an ability to comment on the leverage targets generally. So our stated target is 0.9 to 1.25. We will and intend to operate within that range. As a theme for us this quarter, I think that we wanted to demonstrate flexibility.

Speaker 7

So we were focused on kind of the senior unsecured issuance, which gives flexibility to our capital structure. We appreciate that historically we've run a little bit higher in terms of our leverage ratio than perhaps we really wanted to. And so I think that there was certainly an active there was a very active momentum around freeing up some capacity for possible investment opportunities here moving into 2024. And so as we think about where we want to be, where we will operate, we have no change in our guidance to the 0.9 to 1.25. But I do think that to your point, is there capacity when we see opportunity to invest to perhaps increase that leverage ratio?

Speaker 7

The answer to that I think is absolutely. I want to make sure that Elizabeth had a chance to maybe augment any of those comments.

Speaker 4

Yes. What I would add, Casey, when we look long term at our leverage, we're trending between 1.1x and 1.2x and I think you're going to continue to see that trend. But we also want to have that flexibility if we do see investment opportunities to be able to take them and then we also balance that with share repurchases. We don't ever want to be in a position where leverage is so high that we aren't able to repurchase shares. So we balance all three of them.

Speaker 8

Well, fair enough. Thank you for that, Elizabeth, because I do think that where the stock closed last night at 0.81 times, shareholders would like you to see it continue with the share repurchases. My last question, and you may want to pass on this, but I'm going to throw it out there anyway. The core position, equipment leasing position was actually significantly larger than just what you held on balance sheet at Barings. It was probably close to double that size.

Speaker 8

So I'm just wondering, are you guys managing the equity position in coordination with the rest of the platform? Or are you guys managing your position independent of the position that's held at the rest of the Barings platform? And that would be my last question. Thank you.

Speaker 10

Yes. Casey, appreciate the question. It's Brian again. I don't think we're going to comment on the broader Barings platform strategy. So I will take you up on passing on that question, but

Speaker 8

I'm not surprised, but it was worth a shot. It cost me nothing to ask the question.

Speaker 10

No worries.

Speaker 8

All right. Thanks, Brian.

Operator

Thank you. At this time, I'd like to turn the floor back over to Mr. Lloyd for closing comments.

Speaker 2

Just really want to thank everybody for dialing in and your interest in us and we look forward to following up with you and putting together another great quarter for you. Thanks very much.

Operator

Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.

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Earnings Conference Call
Barings BDC Q4 2023
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