BBDC - NYSE

Greetings. At this time, I'd like to welcome everyone to the Barings BDC, Inc. conference call for the quarter ended September 30, 2025. [Operator Instructions] Today's call is being recorded, and a replay will be available approximately 2 hours after the conclusion of the call on the company's website at www.baringsbdc.com under the Investor Relations section. At this time, I will turn the call over to Joe Mazzoli, Head of Investor Relations for Barings BDC.

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 September 30, 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. I will now turn the call over to Eric Lloyd, Chief Executive Officer of Barings BDC.

Thanks, Joe, and good morning, everyone. On the call today, I'm joined by Barings BDC's President, Matt Freund; Chief Financial Officer, Elizabeth Murray; Baring's Head of Global Private Finance and BBDC Portfolio Manager, Bryan High, as well as Barings BDC's newly announced incoming Chief Executive Officer, Tom McDonnell. Before I discuss our quarterly results, I'd like to take a moment to speak about the leadership transition that we announced yesterday. As you saw in our press release, effective January 1, 2026, Tom will succeed me as Chief Executive Officer of Barings BDC. While I will continue to serve as Executive Chairman of the Board of BBDC and in my ongoing role as President of Barings LLC. This marks an important and exciting milestone for our company. Over the past decade, Barings has grown into one of the leading middle market lenders anchored by a long-term perspective, disciplined underwriting and strong alignment with our shareholders. Barings BDC is an efficient access point into the Baring's direct lending franchise and reflects the full strength within our business. I'm incredibly proud of what our team accomplished together and confident that the next chapter will build on that foundation. Tom is a proven leader within Barings. During his nearly 2 decades at the firm, he has played a pivotal role across our U.S. high yield and global loan strategies, overseeing complex portfolios through multiple market cycles and helping to shape our credit platform into what it is today. His deep investment experience and commitment to our culture make him exceptionally well suited to lead BBDC going forward. From my vantage point, this transition represents continuity, not change. Tom and I have worked very closely together for many years, and we will continue to do so in the months ahead to ensure a seamless handoff. I wholeheartedly believe he is the right person to step into this role at this time. Importantly, I will remain actively involved as Executive Chairman of the Board of BBDC and as President of Barings LLC, supporting Tom and the overall leadership team as we continue to execute on our long-term strategy. I want to thank our shareholders, partners and the entire Barings team for their continued trust and support. We have built something enduring here, an institution with the scale and discipline to thrive across market environments. And I am confident that under Tom's leadership, BBDC will continue to deliver strong consistent results for our investors in the years ahead. Now turning to our results. In the third quarter, BBDC delivered strong net investment income accompanied by excellent credit performance within the Barings originated portion of the portfolio. Origination activity across the platform during the third quarter reflected continued success in our core strategies. Net deployment was influenced by fund-level leverage and the third quarter reflected a period of net repayments consistent with our prior guidance. A strong portfolio combined with benign credit environment and our focus on the top of the capital structure investments in the middle market issuers has continued to serve our investors well. We focus on the core of the middle market given its lower leverage and stronger risk-adjusted returns, making it the most compelling segment for BBDC and our shareholders. Further, our emphasis on sectors that perform resiliently across economic environments provides an additional level of stability to our portfolio. This combination of senior secured financing solutions, core middle market focus, defensive noncyclical sectors and a global footprint offers our investors strong relative value and meaningful differentiation within the broader BDC landscape. Turning to the specifics of BBDC's financial performance in the quarter. Net asset value per share was $11.10. Net investment income for the quarter was $0.32 per share compared to $0.28 per share in the second quarter. Now digging a bit deeper into the portfolio, we continue to actively maximize the value in the 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 95% of the BBDC portfolio at fair value, up from 76% at the beginning of 2022. Turning to the earnings power of the portfolio. The weighted average yield at fair value was 9.9%, reflecting a slight reduction from the prior quarter due to a reduction in base rates. Our Board declared a fourth quarter dividend of $0.26 per share, consistent with the prior quarter. On an annualized basis, the dividend level equates to a 9.4% yield on our net asset value of $11.10. We believe our portfolio is on strong footing, and we're advancing our strategic imperatives. As Matt will cover momentarily, BBDC is well positioned to navigate the current margin volatility and deliver consistent risk-adjusted returns in the quarters ahead. I'll now turn the call over to Matt.

Thanks, Eric. I would like to spend a minute commenting on recent headlines and how they relate to BBDC. The private credit ecosystem has grown meaningfully in the past decade. As our investors know, we have been investing in core middle market strategies since the mid-'90s and have stayed true to strategy in terms of how we deliver compelling value to our shareholders. While this sound bite will sound familiar to those who have dialed into our prior calls, we feel that Barings repeating this quarter as the news media works to paint a private credit industry with an overly broad brush. BBDC does not have any exposure to First Brands, Tricolor and [ Broadband Telecom ]. As many on this call probably know, First Brands was a broadly syndicated loan issuer and all 3 of these issuers were out of strategy from the opportunities our direct lending business pursues. Article suggesting that these developments are tantamount to a canary in the coal mine are in our view, hyperbolic. Due to alleged in proprieties in these companies' financial statements, the core issues surrounding certain recent bankruptcy filings appears to be related more to factoring facilities than to the loans we would consider to be considered private credit. As part of our underwriting process, we proactively evaluate any factoring facilities within the issuer base. While we do not have a strict prohibition on factoring, the size and utility of factoring lines often combine to make for unattractive investments relative to other opportunities we have in our portfolio. During our prior call, we discussed our private credit managers have expanded rapidly in recent years. We declined to comment on whether recent market activity is reflective of broader trends, but we do believe that remaining consistent with the manager strategy is paramount within private credit platforms. We remain convinced that our unparalleled alignment with shareholders and our ultimate parent, MassMutual is unequaled within the BDC landscape. Now turning to the current state of the M&A environment. As you have seen from our results and those of other credit managers reporting this quarter, market activity continues to show sequential improvement quarter-on-quarter from both the new buyout perspective and add-on financings for the existing portfolio. It can be difficult to assess the broader state of private credit activity as mega deals, those defined as more than $5 billion financing packages, now dominate the reported industry data, which can reflect high degrees of volatility quarter-on-quarter. BBDC typically does not participate in transactions of this nature with a focus on the core of the middle market. For this reason, industry reported data trends will occasionally diverge from our own experience. During the third quarter, it appears that all segments of the market, lower middle market, core and a large corporate market have all shown increased activity. In early 2025, there were rumblings about pent-up M&A demand among middle market private equity firms that would likely support market increases in deployment. No such wave of transactions has materialized. Instead, we have seen steady increases quarter-over-quarter for each of the last 4 quarters in our core strategies. The competition for new assets is aggressive, but we feel the core middle market continues to experience less pressure than other segments of the direct lending ecosystem. Looking forward into the balance of 2025 and into 2026, we anticipate a measured increase in deployment opportunities that will continue to favor scaled franchises such as our own, benefiting from incumbency and deep private equity coverage. We are highly focused on the trends in both base rates and interest rate spreads. Base rates continue to gradually migrate lower from post-COVID highs, while narrowing spreads have begun to shown some level of support. The weighted average spread across assets exited during the quarter was approximately 520 basis points, while the weighted average spread on new investments was above 560 basis points. The benefit of active portfolio rotation we have previously discussed are coming into sharper focus. BBDC shareholders benefit from a largely invested portfolio that can selectively redeploy into the most attractive middle market opportunities across the Barings franchise. Given the size of the portfolio and the illiquid nature of the underlying positions, our ability to rotate the portfolio takes quarters, not months, but we are beginning to see the benefits of this effort in the current quarter. Turning to an overview of our current portfolio. 74% of the portfolio consists of secured investments with approximately 71% constituting first lien securities. Interest coverage within the portfolio remained strong with weighted average interest coverage this quarter of 2.4x, above industry averages and consistent with prior quarter. We believe strong interest coverage demonstrates the merits of our approach, focused on direct lending in defensive sectors and thoroughly underwriting an issuer's ability to weather a range of economic conditions. The portfolio remains highly diversified with the top 2 positions within the portfolio, Eclipse Business Capital and Rocade Holdings being strategic platform investments. These investments provide BBDC shareholders with access to differentiated compelling opportunities to invest in asset-backed loans and litigation funding solutions to specialized areas we believe provide attractive total return and diversification benefits. Turning to portfolio quality. Risk ratings exhibited stability during the quarter as our issuers exhibiting the most stress classified as risk ratings 4 and 5 were 7% on a combined basis and unchanged from the immediately preceding quarter. Non-accruals excluding the assets that are covered by the Sierra CSA accounted for 0.4% of the assets on a fair value basis compared to 0.5% on a fair value basis in the immediately preceding quarter. During the quarter, we removed one asset from non-accrual status that was restructured and moved one asset on to non-accruals that is covered by the Sierra CSA. As our internal marks on Sierra accounts remain below the CSA support amount, any prospective losses at the current marks will offset upon settlement of the CSA. We remain confident in the credit quality of the underlying portfolio. We expect BBDC's differentiated reach and scale, coupled with its core focus on middle market credit and unmatched alignment with shareholders to provide positive outcomes in the quarters and years to come. BBDC's portfolio is a through-cycle portfolio designed to withstand a variety of economic environments and prevailing interest rate levels. With that, I would like to now turn the call over to Elizabeth.

Thanks, Matt. As that Eric and Matt highlighted, BBDC continues to deliver strong, consistent earnings, maintain exceptional credit quality and provide attractive risk-adjusted returns for our fellow shareholders. On Slide 16, we provided a detailed bridge of the NAV per share movement for the third quarter. As of September 30, NAV per share was $11.10, representing a 0.7% decrease quarter-over-quarter. The decrease was driven by net unrealized depreciation on the portfolio credit support agreement and foreign exchange of $0.08 per share and net realized losses on investments and FX of $0.01 per share. This was partially offset by NII per share exceeding both the regular and special dividend by $0.01 per share, reflecting the resilient earnings profile of the portfolio. . We recorded a net realized gain in the portfolio, driven primarily by a gain from the partial sale of our equity position in Accelerant. This is partially offset by the restructuring of our position in synergy which was predominantly reclass from unrealized depreciation. The valuation of the Sierra credit support agreement increased by approximately $1.6 million from $51.2 million in the second quarter to $52.8 million as of September 30. This increase was predominantly due to realized unrealized losses and a reduced discount rate driven by spread compression in credit markets, decreasing base rates and rolling maturity. During the third quarter, the Sierra portfolio had sales and repayments of approximately $3.9 million and had 16 positions remaining in the portfolio at a total value of approximately $79 million, down from 18 positions as of June 30. We reported net investment income of $0.32 per share for the quarter, an increase from $0.28 per share in the prior quarter and $0.29 per share for the third quarter of 2024. Higher earnings were primarily driven by dividends from our preferred equity investment in Flywheel and lower incentive fees quarter-over-quarter due to the incentive fee cap and unrealized depreciation on the underlying portfolio. Our net leverage ratio, which is defined as regulatory leverage net of unrestricted cash and net unsettled transactions was 1.26x at quarter end, down from 1.29x as of June 30, largely in line with our long-term target range of 0.9 to 1.25x. During the third quarter, we sold approximately $90 million of assets to Jocassee. As we at year-end, we anticipate continued sales to Jocassee and additional portfolio repayments. More broadly, our funding profile remains strong and thoughtfully aligned with our disciplined approach to asset liability management. Our liabilities are well diversified by duration, seniority and structure with an industry-leading share of unsecured debt and our capital structure at roughly 78% of our outstanding debt balances. We further increased the share and strengthened our balance sheet during the third quarter by issuing $300 million of senior unsecured notes. We are very pleased with the execution at [ T plus ] 200 basis points over and view this funding as being competitively priced and allowing BBDC to generate attractive shareholder returns. We used the proceeds from this offering to pay down our credit facility and cover the upcoming maturities of our private placement notes, further enhancing our capital structure. Subsequent to quarter end, on November 4, we fully repaid $62.5 million of private placement nets at par, including accrued and unpaid interest. Now on to capital allocation. Our net investment income for the quarter of $0.32 per share covered both our regular dividend of $0.26 per share as well as the final of 3 special dividends of $0.05 per share that was paid during the quarter. As previously mentioned, the Board declared a fourth quarter dividend of $0.26 per share, representing a 9.4% distribution yield on NAV. Looking ahead, we remain comfortable with the stability of our regular dividend. While the current shape of the forward curve does imply lower rates in the near term, our net investment income continues to demonstrate resilience. Our industry-leading hurdle rate of 8.25% provides additional protection as rates decline, reinforcing our focus on shareholder alignment. Our structure is differentiated and allows BBDC to be well positioned amongst BDC peers to deliver attractive returns. This confidence is underpinned by our diversified portfolio of senior secured investments and a well-laddered capital structure, giving us a strong foundation heading into next year. Additionally, we currently have spillover income of $0.65 per share, which equates to more than 2/4 of our regular dividend, reflecting the continued strength of our earnings and portfolio performance, taken together the durability of our earnings and the meaningful spillover provides a solid foundation as we move into 2026. To close, I'll offer a little additional color on the fourth quarter. To date, BBDC has made $73.5 million of new commitments in Q4, of which approximately $41 million are closed and funded. Our overall liquidity remains strong with over $500 million of available capital. We continue to feel that we are well positioned to navigate evolving market conditions, and we'll continue to pursue attractive investment opportunities while being a reliable capital partner to sponsors and borrowers. With that, I would like to open the call up for questions.

[Operator Instructions] And the first question is from the line of Heli Sheth with Raymond James.

So with repayment activity elevated this quarter as base rates come down and with the second Fed cut in October, do you expect to see repayments remain at 3Q levels? Or are you seeing any sort of moderation there?

Yes. Heli, good question. And so as we think about the activity in Q3 and how you perceive kind of the repayments, a meaningful percentage of the repayment line that you're seeing is actually sales to our joint venture within BBDC. And so I would say that we continue to utilize our joint venture really to actively manage our leverage profile as well as provide capacity for the broader BBDC ecosystem. That said, as we kind of look across the broader landscape, we do anticipate a moderate uptick in terms of repayment velocity as we move to the end of the year. That's based on kind of payoffs that were made -- that we've been made aware of through today to be candid, but do not anticipate that it's going to have a meaningful needle mover in the context of the deployed capital within BBDC as a fund. .

Okay. Got it. And historically, you've had $86 million in share buybacks, so they've slowed in recent quarters. With the recent contraction in industry multiples across the board? Are there any plans to ramp up buybacks while your stock is trading at such a discount? .

It's something that we consistently evaluate. Over the course of the past quarter, we were a little bit more restricted in the context of when we could be actively in market. And so as a consequence of that, we were not able to take full utility of the share buyback program as it's been approved by the Board. It is, however, something that we consistently evaluate and you could -- it's very likely that you will see some degree of activity on that in the quarters to come. .

[Operator Instructions] At this time, I'll turn the floor back to Eric for closing comments. .

Well, thank you, everyone, for joining the call, and we look forward to supporting you in the quarters ahead.