At this time, we welcome everyone to Barings BDC's Earnings Conference Call for the Quarter Ended September 30, 2024. All participants are in 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 investors.barings.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.
Please note that this call may contain forward-looking statements..
Thank you. 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, 2024, 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. We appreciate you joining us for today's call. Please note that throughout today's call, we will be referring to our third quarter 2024 earnings presentation that is posted on the Investor Relations section of our website.
On the call today, I am joined by Barings BDC's President, Matt Freund, Chief Financial Officer, Elizabeth Murray, and Barings Head of Global Private Finance and BBDC Portfolio Manager, Bryan High.
In the third quarter, BBDC delivered another strong and consistent set of results fueled by best-in-class credit performance and the strength and stability of our franchise. Our focus on the top of the capital structure investments and sponsor-backed middle market issuers continues to serve our investors well.
Our focus on the core of the middle market is reflective of lower 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.
The core portfolio is complemented by a selection of non-sponsored and platform investments that we believe benefit our shareholders in the form of higher potential returns and diversification.
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 we reflect on the first three quarters of 2024, the performance of BBDC has been strong against a relatively benign economic backdrop.
Interest rates, while elevated, have been stable for several quarters. Credit performance appears to be holding up broadly across the industry, save a few idiosyncratic examples. Inflation has started to recede, and with it, interest rates are likely to follow in the quarters to come.
As we have discussed previously, we believe that a reduction in interest rates, long hoped for soft landing appears to be coming into clearer focus, will have an overall positive impact on our business as it further improves credit metrics in the existing portfolio and sparks a sentiment shift among sponsors and spurs further deal activity, which in turn may drive higher spreads and additional transaction fees.
While a soft landing is possible, BBDC's portfolio has been intentionally constructed to withstand a variety of economic conditions. To the extent volatility is on the horizon, we have confidence in our credit selection and believe our underwriting discipline will continue to provide stable returns in the quarters to come.
We are extremely happy to announce that we have extended the maturities of our revolving credit facility on terms we find extremely compelling.
Elizabeth will touch on this development in greater detail, but I wanted to be sure and express my personal appreciation for the support of our lending partners in accomplishing this important goal of ours in 2024.
Turning to some specifics of BBDC, net asset value per share was $11.32 compared to $11.28 at the prior fiscal year-end, reflecting an increase of 0.4%, a testament to the portfolio's stability. Net investment income for the quarter was $0.29 per share and out-earned our dividend of $0.26 per share.
Non-accruals as a percent of fair value were modest at 0.5%. As our investors know, the stability of our performance is a result of our focus on thorough and conservative underwriting at the top of the capital structure with more defensive industries.
Taking a bit deeper into the portfolio, we continue to actively maximize the value of legacy holdings acquired from MVC Capital and Sierra. Our goal remains to divest of these assets at attractive valuations as we did this quarter. Barings' origination positions are now 92% of the portfolio at fair value, up from 76% at the beginning of 2022.
As a reminder, potential losses from acquired assets are protected by credit support agreements, limiting downside for BBDC investors. Our investment portfolio continued to perform well in the third quarter.
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 BBDC's portfolio today. Including the acquired Sierra and MVC assets, our total non-accruals are an industry-leading 0.5% on a fair value basis and 1.8% of the portfolio on a cost basis.
This is down from 1.5% on a fair value basis as of December 31, 2023. Turning to the earnings power of the portfolio, the weighted average yields at fair value was 11%. We remain conservative on our base dividend policy. 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 9.2% yield on our net asset value of $11.32. We believe the best measures of the portfolio's performance—non-accruals, net asset value, and NII—are extremely compelling for the September quarter and anticipate continued strength in the quarters ahead. I will now turn it over to Matt..
Thanks, Eric. Recall that BBDC is managed by Barings LLC, a credit-focused asset manager with over $431 billion of assets under management.
The bulk of BBDC's portfolio is sourced from the global private finance team, an organization with more than one hundred investment professionals located around the globe providing financing solutions to high-quality, market-leading middle market companies sponsored by top-tier private equity firms.
BBDC deployed $125 million of capital this quarter, offset by $121 million of sales and repayments, resulting in net deployments of $4 million. Repayments during the quarter included a large position inherited from Sierra Income, Aviation Technical Services, and reflect the continued execution of our stated strategy to rotate out of acquired assets.
As Eric noted, we are executing the strategy we have been telegraphing for the past eighteen months, simplifying the portfolio and selectively investing in what we believe are the most compelling direct lending opportunities in the market.
LBO activity during 2024 remains muted, but the third quarter began exhibiting some green shoots as deployment opportunities improved over the first and second quarters.
Data reviewed by our liquid high yield team, which we use as a proxy for market data related to private markets, revealed that only 13% of transaction volume through the year-to-date July period was new money transactions, with the overwhelming majority of capital being dedicated towards refinancings and repricings.
The long-term historical average for new money transactions ranges between 40% and 45%. While we are encouraged that activity and pipeline opportunities have improved in recent months, we cannot be certain if this marks a sustained trend or a temporary pop ahead of the election cycle. We are optimistic in the former.
Nevertheless, the scale of BBDC's portfolio and the number of issuers remain an important differentiator, with approximately one-third of gross fundings during the quarter supporting existing issuers with either incremental facilities or advances on existing commitments.
Turning to our current portfolio, 72% consists of secured investments, with approximately 68% of investments constituting first lien securities.
BBDC has experienced a stabilization of interest coverage during 2024 and finished the quarter with a weighted average interest coverage throughout the portfolio of 2.2 times, above industry averages, and demonstrating the merits of our approach focusing on lending to companies in defensive sectors and thoroughly underwriting their ability to weather a range of economic conditions.
Given the current shape of the forward SOFR curve, we believe the portfolio now reflects the full negative impact of rate rises, and credit and cash flow metrics are likely to result from the benefit of any decline in base rates.
Furthermore, as base rates decline, our hurdle rate structure will continue demonstrating shareholder alignment with our manager. The portfolio composition remains highly diversified, with the top ten issuers accounting for 24% of the fair market value.
Recall that the top two positions within the portfolio, Eclipse Business Capital and Rake's Holdings, are strategic platform investments that we own to provide BBDC shareholders access to differentiated, compelling opportunities to invest in asset-backed loans and litigation funding solutions, specialized areas we believe provide attractive total return and diversification benefits.
Risk ratings exhibited minimal movement during the quarter as our issuers exhibit low stress. Classified as risk ratings four and five were 10% on a combined basis quarter over quarter and compared to 9% in the immediately preceding quarter.
Non-accruals accounted for only $13 million of fair market value in the portfolio, or 0.5% of assets, 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.
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, as outlined on slide fourteen. With the increase in base rates experienced over the past two years, effectively all publicly listed BDCs have delivered earnings in excess of their hurdle rates.
The relative distinction between hurdle rate levels has fallen out of focus. However, as base rates begin to fall, BBDC investors will again benefit from the impact of a high hurdle rate at our strategy compared to other industry participants.
As noted on Slide fifteen, we have endeavored to illustrate the benefits of BBDC's fee structure compared with the fee structure within the public BDC ecosystem. We want to stress that this analysis requires making a number of assumptions requiring the "all else equal" designation, but the result cannot be argued.
BBDC's hurdle rate of 8.25% compares to a median of 7.03% among our externally managed public peers, with some managers having significantly lower hurdles.
To the extent BBDC's pre-incentive fee returns fall between 8.25% and 10.3%, shareholders can expect the stability of an 8.25% return, while BDCs with lower hurdle rates experiencing the same pre-incentive fees will receive lower net returns. With that, I would like to now turn the call over to Elizabeth..
Thanks, Matt. On slide sixteen, you can see the full bridge of the NAV per share movement in the third quarter. NAV per share was $11.32 as of September 30, which is a decrease of 0.4% over the prior quarter and an increase of 0.6% year over year. Our net investment income exceeded the $0.26 per share dividend by $0.03 per share, or 10%.
Net unrealized appreciation from investments, GSAs, and FX equals two cents and was offset by net realized losses on the portfolio and FX of $0.10 per share. The net realized loss on the portfolio was predominantly due to the exit of our investment in ANG Software, which was reclassed from unrealized depreciation.
The valuation of the credit support agreements increased by approximately $0.7 million. The fair value of the Sierra CSA decreased from $32.6 million in the second quarter to $32.2 million as of September 30.
During the third quarter, the Sierra portfolio had sales and repayments of approximately $30 million and had 28 positions remaining in the portfolio, down from 29 positions as of June 30.
The fair value of the MVC CSA increased from $18 million to $19 million as of September 30, predominantly due to rolling the maturity of the contract forward one quarter with our four positions remaining.
Our net investment income was $0.29 per share for the quarter, or $0.30 per share on a pretax basis, compared to $0.40 per share in the prior quarter and $0.31 per share for the third quarter of 2023.
Investment income in the quarter was primarily driven by repayment activity at the end of the second quarter and the beginning of the third quarter that was redeployed late in the third quarter and early in the fourth quarter, and dividends from joint ventures and platform investments.
Incentive fee expense returned to normalized levels versus the capped incentive fee in the second quarter. Our net leverage ratio, which is defined as regulatory leverage net of cash, was up slightly from 1.07 times in the quarter ended June 30 and currently sits within our long-term target of 0.9 to 1.25 times.
Our current leverage provides ample capacity to seize opportunities and pursue attractive deployment in the quarters to come. 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 in our capital structure.
At September 30, our unsecured debt accounted for $1 billion of our fundings and equated to 75% of our outstanding debt balances. Since our last earnings call, we are pleased to announce we amended and extended our revolving credit facility.
As part of the amendment, the facility size was reduced to $825 million, and with our second public unsecured issuance earlier this year. In addition, the revolving period and stated maturity of the facility were extended, with the final maturity date being reset from February 2026 to November 2029.
Lastly, we reduced the spread on facility borrowings from 200 basis points to 187.5 basis points. This extension provides further flexibility in our capital structure and further diversifies our ladder of maturities out to 2029.
Barings BDC currently has $241 million of unfunded commitments to our portfolio companies, as well as $65 million of outstanding commitments to our joint venture investments.
Our overall liquidity remains strong, with over $540 million of available capital, and we are well-positioned to continue to support our unfunded commitments and new origination activity.
As mentioned earlier, the Board declared a fourth-quarter dividend of $0.26 per share, a 9.2% distribution on net asset value, and is consistent with our third-quarter 2024 dividend.
In addition, we continue to be active users of our 2024 share repurchase plan and repurchased almost 200,000 shares during the period, and we have repurchased over 500,000 shares through September 30. Our focus on share repurchases is one example of BBDC's thoughtful approach aligning our interests with shareholders.
I will wrap up our prepared remarks with a note on our investment pipeline. Thus far in the fourth quarter, we have made $117 million in new commitments and funded $96 million. With that, operator, we will open the line for questions..
So we are not sure about others on the line, but we are experiencing some technical difficulties here. Some of us have received a couple of emails saying that other people are having issues. We will stay available for any questions that people have, but we need to get those access through the system.
And so I just ask for your patience to remain, and we are communicating with the people at the company now to try and make sure we can get the questions so we can make sure we are responsive to any questions from any analysts or any shareholders. We are having a difficult time accessing any questions, and for that, we apologize.
It is not on our end; it is through the system and the organization that arranged the call. What I would encourage you to do, many of you know the executive management team, you can reach out to us directly, the investor hotline, whatever is the most appropriate from your perspective.
Because we want to make sure we are responsive to any questions from anybody. And we greatly apologize for this inconvenience. With that, I am just going to terminate the call rather than ask people just to hold on, understanding I am not sure when this would be resolved..