Barings BDC Q1 2025 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2025

There are 5 speakers on the call.

Operator

At this time, I'd like to welcome everyone to the Barings BDC, Inc. Conference Call for the Quarter Ended 03/31/2025. 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 two hours after the conclusion of the call on the company's website at www.baringsbdc.com under the Investor Relations section.

Operator

At this time, I'll turn the call over to Joe Mazzoli, Head of Investor Relations for Barings BDC. Please go ahead, Joe.

Speaker 1

Good morning and thank you for joining today's 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 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 03/31/2025, 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.

Speaker 1

I will now turn the call over to Eric Lloyd, Chief Executive Officer of Barings 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 first quarter twenty twenty five 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, Matt Freund Chief Financial Officer, Elizabeth Murray and Barings Head of Global Private Finance and BBDC Portfolio Manager, Ryan Hai. In the first quarter, BBDC delivered another strong and consistent set of results fueled by leading credit performance and supported by the scale and stability of our franchise.

Speaker 2

The uptick in origination activity that we noted during the fourth quarter continued into the first three months of twenty twenty five with net originations of more than $100,000,000 during the period. Strong deployment combined with a benign credit environment and our focus on the top of the capital structure investments and middle market issuers combined to serve our investors well. Our focus on the core of the middle market is driven by the sector's low leverage levels and more attractive risk adjusted returns which is why we find this to be the best segment of the market for BBDC and our shareholders. Further, we have strong alignment with the broader Barings LLC ecosystem focusing on sectors that will perform with resilience across economic environments. This combination of senior secured financing solutions, core middle market focus and defensive non cyclical sectors worldwide offers our investors strong relative value and portfolio differentiation compared to the broader BDC sector.

Speaker 2

Consistent with how we have defined our strategy in the past discussions, our portfolio strategy is outlined in greater detail on Slide five and we continue to successfully invest throughout the market and deliver compelling returns to our shareholders. As you will have seen in our press release, the Board of BBDC has accepted a proposal from Barings LLC to terminate the credit support agreement related to the MVC Capital transaction for the maximum consideration of $23,000,000 We have outlined some of the key benefits of this transaction on Slide 14. Our managers proactive measure to settle this obligation is another clear demonstration of their and our alignment with fellow BBDC shareholders and our focus on simplifying the portfolio. The payment to settle the CSA will be made from bearings to BBDC during the second quarter and will be available for deployment into attractive income producing private credit opportunities immediately demonstrating the accretive nature of this transaction. In short, this move will rotate capital into income producing investments and enhance the core earnings power of our portfolio.

Speaker 2

As Matt will touch on in a moment, we believe that volatility is on the horizon and as such we believe BDC shareholders should be more focused on alignment with the investment advisor more than ever before. Private credit managers have proliferated over the recent years. In our view, we have very strong economic alignment. Our ownership structure is unequaled in the asset management ecosystem. We are anchored by patient long term capital that has seen this industry grow for decades and we have built portfolios that can weather a variety of economic cycles because our long term horizon and experience across multiple decades.

Speaker 2

Additionally, we are proud of the fact that BBDC has the highest hurdle rate of any listed BDC demonstrating that we hold ourselves to a high standard in terms of delivering value to shareholders. Bearings is a $440,000,000,000 credit focused asset management franchise. Credit is not simply a vertical of Bearings, it is a specialty and we have developed an expertise across countless strategies. We believe our focus on credit with scale and track record that outstrips the broader BDC landscape will deliver superior and consistent risk adjusted returns for shareholders. Turning to our expectations for deployment in the current environment, we articulated during the first quarter that the pace of buyout opportunities was subject to a number of variables that were difficult to predict.

Speaker 2

As we move further into 2025, we will take the opportunity to reiterate that focusing forecasting origination activity in the current environment is more of an art than science. We continue to selectively underwrite new opportunities, but we anticipate a reduction in transaction activity during the second quarter compared to strong deployment experienced during the early part of twenty twenty five. Add on transactions will remain a compelling way for private equity firms to enhance the value of portfolio companies and allows Barings to deploy capital into those companies we already know. Additionally, our strategic investments in Rocade and Eclipse offer us consistent differentiated credit exposure across a range of verticals beyond our sponsor backed corporate lending. Turning to BBDC's financial performance in the quarter, net asset value per share was $11.29 unchanged compared to prior quarter and a testament to the portfolio stability.

Speaker 2

Net investment income for the quarter was $0.25 per share. Now digging a bit deeper into the portfolio, we continue to actively maximize the value in legacy holdings acquired from MVC Capital and Sierra. We are seeking to divest these assets at attractive valuations as we did in the first quarter. As of quarter end, Barings originated positions now make up 94% of the BBDC portfolio at fair value, up from 76% at the beginning of twenty twenty two. Our investment portfolio performed well in the first quarter with non accrual rate of 60 basis points at fair value as of March 31, well below industry averages and comfortably below our long term expectations.

Speaker 2

There is no substitute for fundamental credit analysis, which has always been at the core of our investment philosophy and is reflected in the health of the BBDC portfolio today. Turning to the earnings power of the portfolio, the weighted average yield at fair value was 10.1% down from 10.4% during the prior quarter. The decline in yield is predominantly a function of reductions in reference rates within the portfolio and to a lesser extent repricing activity that occurred during the period. Our Board declared a second 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 $11.29 As we have previously announced, our board declared $0.15 of supplemental dividends that will be paid in three quarterly installments during the calendar year of 2025.

Speaker 2

Taken together with our regular scheduled base dividends, the dividend level equates to 11% yield based on March's net asset value. We believe our portfolio is on strong footing and we're advancing our strategic imperatives. As Matt will cover momentarily, BBC is well positioned to navigate the current market volatility and deliver consistent risk adjusted returns in the quarters ahead. I'll now turn the call over to Matt.

Speaker 3

Thanks, Eric. I'd like to start by discussing how the macroeconomic landscape is currently impacting our issuer base and how we have worked to understand and triage anticipated challenges. Following the presidential inauguration, our team began analyzing the impacts of prospective tariffs should the administration choose to pursue them. Recall that we lived in this journey during 2020 and anticipated some degree of tariff impact in light of the rhetoric during the twenty twenty four election cycle. In mid February, we reached out to nearly 200 issuers in the portfolio to understand how prospective tariffs would impact their businesses.

Speaker 3

The takeaway is at that time suggested that issuers that we defined as having a high impact consisted of less than 5% of the portfolio. Perhaps not surprisingly, the issuers which presented the largest concern operated in industries such as manufacturing, industrial technologies and international sourcing. Following April 2, we again engaged the issuer base, most of whom we had remained in active dialogues with and determined that the initial indications on risk were directionally accurate, but the secondary levels of impact were of greater concern given the broad nature of the initial policy measures that were rolled out. Specifically, issuers across a host of industries expressed the possibility that a meaningful amount of downstream impact related to tariffs were possible, but were difficult to assign a probability. Taking a step back, what we ultimately learned in speaking with the issuers on this topic was that the tariffs in and of themselves do not pose the greatest concern to the majority of our borrowers.

Speaker 3

More than 80% of the issuer base is providing services, domestic sourcing and other businesses generating majority of their revenue from non tariff impacted industries. The most direct consequence rather of the current trade discussions has resulted in an effective freeze on the decision making within the issuer community. Hiring, capital investments and sales efforts are at the core of commerce and all require a reasonable degree of visibility regarding the near to intermediate landscape for companies to make decisions with confidence. The management teams we have spoken to do not have any degree of visibility at this time. The consequence of which has been a reticence to commit to spending plans.

Speaker 3

Instead, we are seeing management team settle in for what could be a protracted period of uncertainty and move into defensive positioning. As a result, we've heard that hiring plans have not been have been put on hold, not canceled and the same is true of capital investments. We anticipate the intermediate term impacts of trade uncertainty will begin to surface later this year. Over the course of the past five years, a period which includes COVID, bank failures, supply chain challenges and a significant rise in interest rates, we have observed that macroeconomic events have not historically produced widespread defaults. Rather idiosyncratic risk unique to specific issuers has created the biggest challenge.

Speaker 3

Failed acquisitions, poor management teams and botched ERP implementations have been responsible for more underperformance in our portfolio than exogenous factors. We underwrite every transaction as though we will experience a recession during our whole period and are encouraged about the positioning of the portfolio today. For this reason, we are comforted by our current non accrual percentage among the strongest in the sector, small component of PIK, again leading in the industry and a very small number of risk rated five issuers within the BBDC portfolio. We anticipate some disruption in the direct lending space and we are keeping a vigilant eye on opportunities that this dislocation may present. Turning to an overview of our current portfolio, 74% consists of secured investments with approximately 71% of investments constituting first lien securities.

Speaker 3

Interest coverage within the portfolio remains strong with weighted average interest coverage this quarter of 2.4 times above industry averages and slightly ahead of the prior quarter. We believe strong interest coverage demonstrates the merits of our approach of focusing on leading companies in defensive sectors and thoroughly underwriting their ability to weather a range of economic conditions. The portfolio composition remains highly diversified with the top issuers top 10 issuers accounting for 23% of fair market value. The top two positions within the portfolio, Eclipse Business Capital and Rocade Holdings are strategic platform investments that provide BBDG shareholders with access to differentiated compelling opportunity to invest in asset backed loans and litigation funding solutions. Two specialized areas that we believe will provide attractive total return and diversification benefits.

Speaker 3

Turning to portfolio quality, risk ratings exhibited positive movement during the quarter as our issuers exhibited exhibiting the most stress classified as risk ratings four and five were 8% on a combined basis quarter over quarter compared to 11% in the immediately preceding quarter. The improvement in the underlying risk ratings was driven by upgrades to certain issuers that have been experiencing temporary performance challenges. We believe that our risk rating metrics continue to provide indicative guidance on the health of the portfolio in the quarters to come. Non accruals accounted for 0.6% of assets on a fair value basis and 1.8% on a cost basis, which we believe is one of the lowest levels of non accruals in the industry. We remain confident in the credit quality of the underlying portfolio.

Speaker 3

We expect BBDC's differentiated reach and scale coupled with its core focus on middle market credit and a focus on shareholders will continue driving positive outcomes in the quarters and years to come. The BBDC portfolio is a through the cycle portfolio designed to withstand a variety of economic environments and prevailing interest rate levels. To this end, BBDC was structured to align both fees and credit performance hurdles with shareholders. I'll now turn the call over to Elizabeth.

Speaker 4

Thanks Matt. As Eric and Matt have said, BBDC is performing well and demonstrating solid core earnings power of our portfolio while preserving leading credit quality and generating attractive yield for our fellow shareholders. We are especially excited about the coming increases to that earnings power as we are able to rotate more of our assets into income producing investments with the early termination of the MVCCSA which I'll discuss further shortly. On slide 16, can see the full bridge of the NAV per share movement in the first quarter. NAV per share was 11.29 as of March 31, which is flat quarter over quarter.

Speaker 4

Net unrealized depreciation on investments, credit support agreements and foreign exchange was $07 This was partially offset by net realized losses on the portfolio and FX of $01 per share. The net realized loss on the portfolio was predominantly due to the exit of legal solutions, MVCP fund and Rhonda which were offset by the reversal of unrealized depreciation. The valuation of the credit support agreements increased by approximately 4,400,000.0 The fair value of the Sierra CSA increased from $44,200,000 in the fourth quarter to $44,800,000 as of March 31. During the first quarter the Sierra portfolio had sales and repayments of approximately $21,000,000 and had 20 positions remaining in the portfolio down from 23 positions as of December 31. The fair value of the MVCCSA increased from $19,300,000 in the fourth quarter to $23,000,000 in the first quarter due to the expected termination in the second quarter.

Speaker 4

We generated net investment income of zero two five dollars per share for the quarter compared to $0.28 per share in the prior quarter and $0.28 per share for the first quarter of twenty twenty four. Our investment income in the quarter was predominantly impacted by lower weighted average yield and origination activity more heavily weighted at the end of the quarter. Despite lower NII in the quarter, we advanced our efforts to defensively position the portfolio for the current investment landscape. In Q1, we had net originations of over $100,000,000 rotated out of over $20,000,000 of the Sierra portfolio, exited two MVC assets and returned $3,000,000 of our non core JVs Thompson Rivers and Waccamaw. We will continue to divest from Sierra and MVC assets opportunistically in the quarters ahead.

Speaker 4

Our net leverage ratio which is defined as regulatory leverage net of unrestricted cash and net unsettled transactions was 1.24 times at quarter end up slightly from 1.16 times in the quarter ended December 31 which is in the range of our long term target of 0.9 to 1.25 times. Currently we have approximately $420,000,000 of investable dry powder which provides ample capacity to seize opportunities and pursue attractive deployments in the quarters to come. More broadly our funding mix remains well structured and well aligned with our strategic approach to asset liability management. Our liabilities are well diversified in terms of duration, seniority and structure with an industry leading percentage of unsecured debt in our capital structure. Specifically at March 31, our unsecured debt accounted for approximately $1,000,000,000 of our funding and equated to approximately 70% of our outstanding balances.

Speaker 4

Now on to capital allocation. As mentioned earlier, the board declared a second quarter dividend of $0.26 per share and a special dividend of $05 totaling $0.31 per share. This equates to 11% distribution yield on NAV and it's consistent with the prior quarter. In the first and second quarter, we are paying out a portion of the spillover income we generated over the past year as part of the dividend. Our board assesses dividend coverage on an annual basis and at this time is confident in the core earnings power of our portfolio.

Speaker 4

The board is always evaluating our capital allocation strategy and knows the importance of consistency when considering our long term dividend strategy. On 03/01/2025, we commenced our share repurchase program. Our board authorized BPDC to buy back $30,000,000 of stock over the subsequent twelve months. In the first quarter, we repurchased 150,000 shares. This capital allocation initiative and as example of our focus on delivering value for our shareholders and further advancing shareholder alignment overall as well as our confidence in BBDC's portfolio and view it as an extremely compelling investment at a discount to NAV.

Speaker 4

As Eric laid out, we are very focused on rotating our portfolio further and further towards Barings originated income producing assets that earn current cash income for our investors. We prosecute that focus with a combination of urgency, diligence and thoughtfulness all underpinned by our consistent emphasis on what is the best interest of the BBDC common shareholders. The early termination of the NBC credit support agreement we announced yesterday demonstrates all of this quality and we view it as a major step in optimizing the BBDC portfolio. Our managers decision to eliminate the CSA through a one time $23,000,000 payment will not just mitigate for the risk but also enhance the core earnings power of our portfolio. This $23,000,000 payment will rotate capital into income producing investments.

Speaker 4

In addition to the extent the remaining two legacy MVC assets generate gain such gain will be retained solely by BBDC and the payment of the CSA is not conditioned on a recapture to the extent these two assets outperform current marks. Looking ahead, we will continue to evaluate opportunities to create value for our shareholders while optimizing our portfolio for the long term. To close, I'll offer a little color on the second quarter. To date, Barings BDC has made $130,000,000 of new commitments in Q2 of which $106,000,000 closed and funded. Our overall liquidity remains strong with over four twenty million dollars of available capital and we are well positioned to navigate uncertain market conditions and be a reliable capital partner to sponsors and borrowers through such uncertainty which we expect will result in compelling investor opportunities for us to pursue on behalf of BBDC shareholders.

Speaker 4

With that, I would like to open the call up for questions.

Operator

Thank you. We'll now be conducting a question and answer session. We have reached the end of our question and answer session. I'd like to turn the floor back over for any further or closing comments.

Speaker 2

Thank you everybody for joining and I hope everybody has a great weekend.

Operator

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.

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Key Takeaways

  • In Q1 Barings BDC achieved net originations of over $100 million, delivered net investment income of $0.25 per share, maintained NAV at $11.29, and reported a non-accrual rate of just 0.6%.
  • The Board approved the early termination of the MVC credit support agreement for $23 million, rotating capital into income-producing private credit and enhancing the portfolio’s core earnings power.
  • As of quarter-end, 94% of the portfolio at fair value comprised Barings-originated investments, with 74% secured (71% first-lien) and strong weighted average interest coverage of 2.4×, while the top 10 issuers represent 23% of fair market value.
  • In Q2 to date, BBDC has committed $130 million of new financings (with $106 million closed and funded), supported by approximately $420 million of available capital, as origination activity is expected to moderate amid market volatility and trade uncertainty.
  • The Board declared a second-quarter base dividend of $0.26 plus a $0.15 supplemental dividend, equating to an 11% yield on NAV, and initiated a $30 million share repurchase program to enhance shareholder value.
A.I. generated. May contain errors.
Earnings Conference Call
Barings BDC Q1 2025
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