At this time, I would like to welcome everyone to the Barings BDC Incorporated Conference Call for the Year Ended December 31, 2019. All participants are in a listen-only mode. A question-and-answer session will follow the Company's formal remarks.

[Operator Instructions] Today's conference 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 Instructions] 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 annual report on Form 10-K for the fiscal year ended December 31, 2019 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. At this time, I will turn the call over to Eric Lloyd, Chief Executive Officer of Barings BDC..

Thank you, operator, and good morning everyone. We appreciate everyone joining us for today's call. And please note that throughout this call, we'll be referring to our fourth quarter 2019 earnings presentation that was posted on the Investor Relations section of our website.

On the call today, I'm joined by Barings BDC's President and Co-Head of Global Private Finance, Ian Fowler; Tom McDonnell, Managing Director and Portfolio Manager in our Global High Yield group; and BDC's Chief Financial Officer, Jonathan Bock.

Ian and Jon will review our fourth quarter results and provide a market update in a few minutes, but I'd like to begin today with some high-level comments about the quarter. Please turn to Slide 5 of the presentation where you can see our fourth quarter highlights.

Overall, results were consistent with the third quarter as we increased proprietary assets exposure and remained active in reducing our broadly syndicated loans. As I've mentioned on prior calls, our investor ramp is both steady and deliberate.

Since August of 2018, we've invested approximately $660 million in middle-market investments, averaging a $110 million per quarter with new middle-market investments totaling 165 million in the fourth quarter of 2019.

Additionally, we matched those four quarter originations with a healthy 169 million of net broadly syndicated loan sales and repayments, bringing our total BSL exposure to below 50% of the portfolio at December 31st.

As we look at 2020, we remain on track with the steady deliberate transition, expecting to average $100 million of proprietary originations per quarter in normalized markets to drive us towards our 8% yield expectation.

For the quarter, NAV per share was $11.66, increased primarily by appreciation of our broadly syndicated loan portfolio while our net investment income was $0.50 per share driven by sales of broadly syndicated loan late quarter middle-market loan findings and lower LIBOR.

We continue to have no loans on non-accrual and the overall credit performance of our portfolio remain strong. Our middle-market debt portfolio was valued at 99.9% of costs at December 31st and our broadly syndicated loan portfolio was valued at 96.5% of cost.

The BSL portfolio appreciation was widespread with 80% of our positions increasing in value during the quarter. We did recognize 2.9 million of net realized losses on select sales within our broadly syndicated loan portfolio during the quarter.

As we continue to analyze this portfolio and the market, we will exit the BSL position at a loss, and we believe we can realize a higher risk adjusted return on the capital by reinvesting it in another position. On Slide 6, we summarized some additional financial highlights for the last five quarters.

Ian will discuss market conditions in more detail, but I'll say that our investment pace is always measured against the market opportunity set. The direct lending environment today requires significant investment discipline, a wide frame of reference and a high degree of shareholder alignment to be successful.

Barings is a $338 billion investment management, has a wide investment funnel across global markets and multiple asset classes. Additionally, our unique ownership by MassMutual and commitment to investor alignment let us to create a market leading fee structure of a high investment accrual, low base management fee and no upfront fees.

The fee structure gives us more flexibility to generate attractive risk adjusted returns to investors while at the same time posting a high-quality true first-lien senior secured investment. Before turning the call over to Ian, I'll continue with this point of alignment and provide an update on our share repurchase program.

Please turn to Slide 7, as a reminder, the share repurchase program we announced for 2019 and repurchased up to 2.5% outstanding shares when Barings BDC stock traded at prices below NAV and repurchased up to 5% of outstanding shares in the event the stock during the prices below 0.9 of NAV.

Based on our trading levels, the target amount for 2019 repurchases was 4.5% of outstanding shares. We reached that target generating $0.07 per share of NAV appreciation for the year.

I'm also happy to announce that our board has approved the sharing purchase program for 2020, authorizing the Company to repurchase up to a maximum of 5% of the outstanding shares during the year at shares trade below NAV, subject to liquidity and regulatory constraints.

With that, I'll ask Ian to provide an update on our investment portfolio and trends we are seeing in the middle-markets..

Thanks, Eric, and good morning everyone. Jumping to Slide 9, you can see a summary of our investment activity for the fourth quarter. New middle-market investments totaled 165 million, the sales and payments of 28 million.

As you can see from the trend over the last six quarters, we have maintained our expected 100 million quarterly middle-market loan originations pace funded BSL sales and borrowings under our credit facility. New investments include 15 new platforms and 8 follow-on investments.

Five of these investments were European platforms and we expect to continue ramping in Europe as we see very favorable terms in that market and believe it is an excellent way to diversify the BDC's portfolio.

On Slide 10, you can see that the end of the 2019 we were invested roughly $606 million of private middle-market loans in equity which included $49 million of unfunded commitments.

Liquid broadly syndicated loans were down to $510 million, which as Eric mentioned, makes this the first quarter where our directly originated portfolio exceeded our BSL portfolio. Our portfolio is high-quality with 97.6 senior secured first-lien assets.

The weighted-average senior leverage for the total portfolio remained consistent with last quarter at 4.9 times.

Focusing on the middle-market portfolio statistics, as of year-end, our $557 million funded middle-market portfolio was spread across 53 portfolio companies, as compared to $422 million across 38 portfolio companies at the end of the third quarter.

Underlying portfolio company fundamentals remained strong with weighted-average senior leverage of 4.7 times and weighted-average interest coverage of 2.7 times. Of the 53 middle-market investments, 51 where first-lien investments and two were selectively chosen second-lien term loans, comprising less than 1.5% of the portfolio.

Average spreads were up this quarter from 519 basis points at September 30th to 528 basis points at December 31st. Despite the increase in spreads, overall yields remained flat at 7.2%, primarily as a result of lower LIBOR. The substantial portion of the spread increase was due to higher spreads associated with 5 new European investments.

As we have said before, our focus continues to be on credit spreads as that is ultimately our compensation for risk. Our middle-market portfolio remains well-diversified as the 53 investments are spread across 17 industries with no single investment exceeding 2.3% of the total portfolio.

Turning to our BSL portfolio, weighted-average spread was 349 basis points and yield the fair value 5.6% at December 31st. Consistent with the middle-market portfolio, while the spread was up 329 basis points at the end of the quarter, the yield remained flat at 5.6% due to lower LIBOR.

As Eric mentioned, as part of our liquid exposure, we did recognize $2.9 million losses on the sales of a selection of BSL and the subsequent reinvestment of the capital including $1.5 million related to the sale of a portion of our position in Mallinckrodt, which we believe their positions portfolio for appreciation going forward.

Our top 10 investments are shown on Slide 11 and reflect another aspect of the overall diversity of our portfolio, as the top 10 positions represent only 20% of the overall portfolio.

Turning to Slide 13 of the presentation, here you will see two graphs showing direct lending volume and spread differentials between unitranche and traditional first-lien second-lien structures.

The first key takeaway here is that while bank-led syndicated middle-market loan volume was down in the fourth quarter, it was one of the best course since 2014 for the direct lending market.

Sponsors focused on direct lending execution to reduce risks caused by volatility in the first-lien second-lien market with a particular focus on unitranche transactions in the fourth quarter.

This shift stands out if you look at the graph on Slide 14, which shows unitranche volume by quarter with the fourth quarter hitting all time highs for both middle-market and large corporate deals.

With a shift in the focus of capital heavy managers to large mega unitranche executions, we've seen a positive dynamic in the middle of the middle-market for transactions that allow us to be selective with better access to deals across the spectrum within our target markets.

Our fee structure does not force us into chasing return with higher risks and our focus as a principal investor is to select the best risk adjusted return.

On Slide 15, you can see that as unitranche volumes have increased, spreads have fallen, reaching historic lows at the end of the 2019 while this graph does not break out the spreads based on company size. The unitranche spread compression is clearly more impactful for higher EBITDA companies.

Spreads for other structures generally increased during the fourth quarter, highlighting the importance of focusing on each individual issuer and structure when pricing risk. Looking ahead, we continue to remain highly selective, keeping a tight focus on our core sponsors and markets across the U.S. and Europe.

This investment frame of reference allows us to continue the pace our shift from BSL to middle-market and proprietary assets without an overemphasis on one product, obligor or geography.

In this market, we cannot stress enough the value of choice and with the large investments funnel across high quality obligor's desperate asset classes in this geographies, we continue to be deliberate and focus on deploying capital to achieve strong risk adjusted returns.

I'll now turn the call over to John who will provide more color on the fourth quarter results..

Thanks Dan. Good morning everyone. On Slide 17, you can see the bridge of the Company's net asset value per share from September 30th to December 31st, 2019. As you pointed out, our NAV was up by $0.08 this quarter to $11.66 per share.

This increase is primarily due to net unrealized appreciation of $0.13, partially offset by $0.06 of net realized losses, both of which were primarily attributable to activity in the BSL portfolio.

Our net investment income for the quarter matched the dividends and our share repurchase program resulted in $0.01 accretion, and previously stated, our board approved the program for 2020 to purchase up to 5% of our outstanding shares, demonstrating our long-term alignment with the shareholders.

Additionally, 500 shares below net asset values accretive to all shareholders and demonstrate our belief in our own underwriting. Slide 18 and 19 show our income statement and balance sheets for the last five quarters. I'd like to highlight a few items here.

First, our total investment income decreased to approximately $900,000 compared to the third quarter. Lower LIBOR and the timing of our continued portfolio transition led to low range income. One-time fees also declined as we had no middle-market investment repayments in the fourth quarter.

Second, on the expense side, lower LIBOR helps total interest expense decreased by $226,000 quarter-over-quarter despite slightly higher total borrowings while our base management fee was virtually unchanged for the quarter, G&A expenses were up by approximately $115,000.

Also loan section separately on Slide 18, you'll see on the income statement, our form 10-K that the net realized and unrealized losses on foreign currency transactions totaled approximately $1 million for 2019. The foreign currency translations relate only to our foreign currency borrowing and hedging transactions and will not reported separately.

Please be aware that the net realized and unrealized gains on investments include approximately $1 million related to foreign currency appreciation for those investments.

To summit, the net impact of foreign currency fluctuations was effectively zero or neutral for 2019, which we would expect given our hedging programs in place if we borrowing foreign currencies to fund foreign currency investments.

As you can see on Slide 19 our balance sheet trends, excluding our short-term investments, total investments to fair value were down approximately $30 million compared to the third quarter due to the rotation out of our BSL portfolio.

As can often happen at the end of the quarter, our cash and short-term investment balances at year-end were transitory and primarily result of quarterly BSL sale where we were taking advantage of favorable market conditions. A portion of these proceeds was used to partially repair BSL credit facility in January.

During the fourth quarter, we lowered the commitment on the BSL facilities from $177 million to $150 million and further lowered it to $80 million subsequent to quarter end to right size of facility relative to our remaining BSL portfolio.

Last week, we also extended the maturity of that BSL facility by one year to August of 2021 and also during the fourth quarter $22 million of the CLO Class A-1 notes were repaid, bringing the total CLO debt principal down to $318 million at year-end.

Details on each of these borrowings are shown on Slide 20 and our leverage as of December 31, 2019 was 1.17 times or 0.9 times after you just cash and short-term investments as well as the net unfilled transactions. Slide 21 update our paid and announced dividends since Barings took over as the advisor to the BDC.

We announced yesterday that, our first quarter 2020 dividend of $0.16 a share will be paid on March 18, 2020. This marks our sixth consecutive increase and aligns our division with the earnings power of the portfolio.

And as you think earnings trajectory in 2020, remember that when we closed the transaction in August of 2018 to become the external managers to the BDC, we implemented a fee structure to steps up to 1.375% in 2020 from 1.125% in 2019 and 1% at the onset.

We are now more than halfway through the ramp to our directly originated portfolio, and at year end only about $150 million of the remaining $510 billion BSL portfolio was held outside of our static CLO. Our portfolio risk continued in 2020 and Slide 23 summarizes our new investment activities since the start of the New Year.

Since Jan 1, we've made approximately a $108 million of new middle market private debt commitments of which $73 million have already closed and funded as well as approximately $5 million for previously committed to delays to our term loan.

Consistent with our investment tenants, these investments were primarily first-lien, syndicated loans with an average three year discount margin at 6.3% and will split roughly two-thirds in U.S., one-third in Europe.

Moving to Slide 24, the current Barings global type of financial investment pipelines approximately $609 million on a probability weighted basis, and it's predominantly first-lien security across a variety of diversified industries. As a reminder, this pipeline estimated based on our expected closing rates for all deals in our investment pipeline.

Finally, I'd like to provide an update on our joint venture with the state of South Carolina Retirement System. As mentioned on prior calls, this vehicle allows us to leverage the broader Barings platform and increases the investment diversity within the BDC.

And as we wrap the vehicle, it'll drive shareholder return through the effective use of our non-qualified asset buckets by investing in a wide variety of illiquid assets across multiple geographies. Now at your end, the BDCs investment remains $10 million. As we continue to ramp the JV portfolio using its subscription leverage facility.

That portfolio was about 94% first lean secured assets with roughly 70% of the portfolio invested in the U.S. and 30% in Europe.

Liquid Assets made up the bulk of the portfolio at 80% while the remaining balance is illiquid assets being 40% to 6% Europe, Middle market loans is 37% U.S., middle market loans as well as 17% in private asset backed securities. We expect the joint ventures wide investment frame of reference will drive uncorrelated returns over time.

And we continue to evaluate opportunities in areas such as European credit, structured credit, and make investments in these areas when they have attractive risk adjusted return profiles. With that operator, we'd like to open up the line for questions..

[Operator Instructions] Our first question comes from the line of Finian O'Shea with Wells Fargo. Please proceed with your question..

First, I'll ask Eric on the earnings ramped. You've opened up talking about this being on piece and outlook should continue on the earnings. Obviously, since you took over here LIBOR moved against you and there's probably, you have a more cautious outlook today at this point in terms of taking on risks.

So, how would you describe to us your position to ramp and grow earnings over 2020 given today's real-time market environment?.

You're right. I mean, obviously, LIBOR moved against us, which has made it challenging kind of philosophically as I address it and then kind of get more specific. From kind of day one, I've said to shareholders that, we're not going to reverse all for what assets we need to generate in order to hit a certain targeted ROE.

That just I think leads people to chasing risk in order to generate a certain return. We come as the other way which is we're going to do what risk we think is a prudent risk adjusted return for a given asset and look at that from an asset level.

So as we sit here today, right with our pre-modeled spreads, the ROE would be more challenging than would've been 18 months ago. Now, I balanced that with one of the benefits of the entire Barings platform, which is something that these kind of markets really can benefit shareholders, right.

We have -- and Tom is here with me, we have a really large liquid investment platform that is able to capitalize on market volatility and. technicals in the market. You combine that with a very strong special situations group that has proprietary asset flow that can find really attractive yields for assets come into the portfolio.

A third leg of that could be our structured credit business, right. And in these types of markets, when we see loans sell off materially, you could see certain BBB tranches of CLOs really trade-off materially, in some cases even more so with those technicals that could brought attractive returns.

Balance all that out to say that, our only source of opportunity isn't just the middle market direct lending, it's really the power of the $330 billion platform that we have. As we sit here today and as John referenced the pipeline and Ian mentioned the market, obviously a lot of people are putting a lot of transactions on hold, right.

People are unsure of what the economy is going to look like or all those things, right. It's a lot of unknowns right now. And so, it is a more challenging environment, most likely over the course of the next month or two or ever period of time for direct originations. Yes. It's likely to be a more challenging period of time than it has been in the past.

But I don't believe that there is not opportunities for us on our platform to invest. And so, I can't tell you exactly what that means as far as what that ROE or earning will be, but I think these times with volatility where we can really play in the flavor of someone like our platform..

I appreciate that color and your willingness to go across to platform more liquid businesses and take advantage. With that, I'll ask a follow on for Ian. You gave some context on European assets improving your spreads. Can you give us color on what sort of risk premium you get on a apples-to-apples, European versus U.S.

deal today?.

Yes. Sure, Dan. Good morning. So, a couple of things, first of all, as I mentioned, it's important just in terms of diversification, accessing that market from a portfolio construction perspective. So, there's that benefit, but then if you actually look at the assets themselves, basically in the European markets. It's the deals that we do in that market.

The deals that are done in that market are maybe a quarter of a turn to maybe half of turn deeper in terms of senior leverage with no leverage behind it. So, it's one tranche with higher spreads and higher OIDs.

The OIDs in the European deals are about a 100 basis points more on average than our North American deals, and if you just think about the velocity that's occurring in the market, whether it's here or overseas in terms of the average duration of these loans compressing, from three and a half to four years on average to two to three years on average now, getting that pickup in OID actually creates a return less..

Sure. I appreciate that and thanks for taking my questions..

Thank you. Our next question comes from the line of Kyle Joseph with Jefferies. Please proceed with your question..

I wanted to commend you on ongoing share repurchase activity. I'd like to start out just on yields dynamics in the quarter, reported yields appeared pretty stable. I know you've mentioned there with some potentially back waiting in terms of the middle market origination.

Can you give us a sense for that, any color there like 75% of the deals were completed in December or something like that just to get a sense for yield dynamics in the quarter?.

Yes, sure, this is Bock, Kyle. So, number one, you could see the over 180 million of BSL sales. There's a two part equations, right. We were reducing BSL consistently throughout the quarter, heavy amounts early. And say, roughly two thirds of our deals closed near the end of December, right.

So, when you start to find that double whammy on both sides led to the timing difference as well as well as pressured earnings. So for us, I'd say, that's probably good bound numbers to look at for the fourth quarter..

And I was going to say on my next question, as you think about the forward curve as you think about your balance of BSL versus no market loans, from a modeling perspective.

How are you guys thinking about consolidated yields going forward? And I guess it might be helpful to talk about this sort of coronavirus impact?.

Yes, this is unknown, right. So, again, yes, I think, Ian mentioned that what we really focus on is credit spread and upfront fees, and basically the combination of those two things, and we don't think the winning model is to play the interest rate game and kind of take a guess or a speculation on what those interest rates are.

If you look at our blended spreads from Q3 to Q4, the blended spread increased from 402 at the end of Q3 to 443 at the end of Q4 and we can control that. What we can't control is what's going to happen in LIBOR or other situations like that. So, then we have to look at again, back to the volatility question.

What opportunities does that provide? We also know that we have a target ROE that we want to generate for shareholders, of which we're the single largest one by a large margin. We want to generate that for ourselves too.

And so that's where I think the comments I made earlier to finish question around the platform and the other places that we can find attractive yields that can compliment and help offset some of the pressure on earnings and return that LIBOR creates..

That's very helpful. Appreciate the time and answering my questions. Thanks..

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

Hi guys. I've got a couple, but first congratulations on extending the repurchase plan. I think that's a good set of shareholders of which, as you know the biggest one. Next, on coronavirus, its early days or COVIT-19 or what I'm supposed to call. It's early days, obviously, right now.

Can you give us any color on potential portfolio impacts? Probably, you don't lend directly to Chinese companies, but it's expanding from China.

But if I look at three of your top 10 industries, for example three of your top 10 investments transportation cargo, now I presume, those are shipping containerships of applying the China-U.S root, but any color you can give us on the sensitivity to the supply chain, the indirect impacts, et cetera?.

Hey, Robert, it's Eric. I'm going to take a crack at this first then I'll turn it over to Ian, and see if Tom has any comments also. So, I'm going to take a kind of step back first and I know this is probably the third time. I'm not going to reference the platform and the benefit of it. We have an investment office in Shanghai.

We have an investment office in Seoul. We have a large investment office also in Hong Kong.

So, our access and knowledge in those Asia-Pacific markets is materially different I believe than a number of other managers who have a very domestic-centric focus and the only information they're getting is through potentially portfolio companies which are maybe getting it second or third hand from somebody else So again, I think our firm knowledge is one that I think brings to bear.

So, what does that mean as far as specifics? We look at it across the liquid and illiquid asset classes because the impact could be the same in some cases. They also could be different in some cases, right.

It's more typical that our larger companies, the companies with 500, 600, $700 million of EBITDA is going to have a more of the global type of revenue source as well as potentially a more global type of supplier source. You balance that with our middle market companies or more typically to have a U.S.

centric revenue source and potentially a more limited supplier source. They also probably have less -- they also have less resources to adjust towards potential challenges. So, what we have been focusing on, you hit it on supply chain and it really how far up the supply chain and given kind of you can get information.

And I don't want to go down the path of sharing what our teams in China and the like have communicated to us because I think that information that we need to keep it within the Barings family, but I can tell you is that, we're all over it and what we haven't done is speculative to what exactly it's going to be for a given company.

You hit the logistics types companies, right. Obviously, goods moving around the world is going too slow and so there are going to be an impact, but we just don't know what that is today. And I'll come back to the last point on diversification. I believe our largest position in the portfolio is about 2.3% or so, right.

From day one, I made the representation that we are going to run a highly diversified portfolio at the expense of ramping faster, right? We could have put larger holes into the BDC, ramp more middle market assets that would have helped to ROE but we were to open up with a position that was 5% or 6% or 7%, and that's inconsistent with how we believe portfolio construction should be done..

So, Rob, I think, Eric hit on all the key points, and obviously the situation is fluid and expanding. We had our team do a review of the portfolio months ago, with companies that has any exposure to any supply chain coming from China.

Some of this gets back to just like good underwriting because if you have any company out there, that is locked into one source of manufacturing or one source of supplier without diversification, that's just not a really good credit.

And I know of one company in the market and portfolio that went to market and as they went to market 100% of their manufacturing will move on. And so, obviously that deal was closed.

And so, we don't have any companies in our portfolio with like materials direct exposure to China, and we were in touch with the management teams in terms of our portfolio companies to make sure that they have plans in place to the extent that they have any exposure to coronavirus issues.

And again, I come back to portfolio construction that Eric mentioned and good underwriting. When we look, we had a deal in our investment committee the other day, commercial cleaning business, 100% of its revenues U.S. domestic.

But you need to look at, to layout the concentration in LA that's got bid and something happens in LA and that market shuts down and everyone goes home. So, it just becomes back to diversification within the portfolio and within the companies..

Yes, this is Tom. I will chime in from the high yield side. So, we're seeing now yesterday really the first cracks in our market with real selling. I think it was very orderly. So the first couple of days of the week and so now we're starting to see a little bit more of a selloff in loans on high yield side. So, what we're doing is evaluate.

Clearly, there's a kind of a first order impact, I'll call it with travel companies, airlines, gaming companies things like that that immediately are backing up in price.

And then the second order impact what you're trying to evaluate, which is sort of the supply chain and then concentration to customers in China, as you know, the broadly syndicated market is more of a worldwide market. So, we're going through all that now.

And so what we're doing as a team in our sectors, are just going through names that we've clearly identified that may have an impact, right.

So identifying where did they sit from a liquidity perspective, whereas leverage, what kind of sponsors support might be there if this thing turns into more of a prolonged and a situation where they see massive disruption in revenues and cash flow..

So, lastly, I would say is, if you're going to have disruption from the middle market perspective, it's fair to have it in the slow part of the year, first two quarters, then the last half of the year, which is where we pick up most of our volume..

I appreciate that color, really helpful, and kind of then flows into the next question. You've talked about the platform and the potential to take advantage of some market disconnects within the liquid side or special situations or things like that.

And I know you're not generally in the business of market timing, but obviously there is a disconnect going on now.

At what point, would you be that those other avenues are not something you've really exploited within the BDC yet? What time is appropriate to do that given there's the old catching and folding nice thing and we don't know where all this stops or how bad coronavirus gets?.

Yes, Robert, so this is Tom. I'll weigh in that because we're kind of actually going through that right now. And so, we've got a targeted list of names. We watch this fall away for some of these names that might not even necessarily be impacted by the situation, right.

Som you've got outflows now occurring out of mutual funds and ETFs, potential forced selling of names. Right now, it's not really a broad across all sort of ratings categories, but so we're looking at that first. We've got a number of names that are on our target list that we have target prices for.

And so as the bids back up on those and we see the conditions become favorable for those kinds of purchases. We're in the process of actually doing that right now..

And Robert, this is Bock. So on Slide 15 just to take a look, this is just one illustrative example. What we outlined there is spreads that occurred in the middle markets. Those are produced by [indiscernible] as well as overlay the Credit Suisse leveraged loan index, it's a single B.

One item is really important I know you've heard Eric and you mentioned it. We are a principal investor first.

And so when you think about how we're owned, right, and where loans effectively go, we always have a view that one, we should never take liquid term and liquid price and put it in an illiquid wrapper because at that point, you've lost the true value of illiquidity.

And so if you look in the fourth quarter of the 18, you can see when yield gapped out and the liquid market, oftentimes the middle market doesn't move.

And you certainly have to ask yourself a question is to, which is better from a relative risk, a relative value perspective? And that's very important because right now, if all you are is monochromatic in your focus and all you see is black and white of direct lending.

This is a world of technicolor and it requires a very wide frame so that you cannot price to middle market loan appropriately, but then look to Tom or other areas of the platform, they can generate good risk-adjusted return..

And I'm just going to wrap it up with, I agree with Tom and John said, and all I can tell you is, we won't get it perfect, right. We're looking at opportunity and if we think the right entry point is 75 or 80, and that's a really attractive place to invest in that, we're going to do that and if that means the next tray down 5 points, that's life.

We can't control that. Where we control is where we enter it and there is a risk return we think is attractive at that time and the technical will be what they are..

I appreciate that color. And then one more if I can on the unitranche versus first-lien, second-lien kind of synthetic blend. Obviously, unitranche has gotten competitive, shall we say, and to some that may not be, an advance total return premium, which is arguable in the first place.

When you look at, your portfolio, obviously you've been, you have more on the kind of the first-lien.

Do you think is there anything changing, ignoring the covert stuff and everything else right now, anything changing in terms of your appetite to do first-lien versus second-lien versus unitranche given that's been pretty big dynamic shifts in affective spreads, et cetera in the fourth quarter?.

Yes, great question, Robert, and so, just a couple of things. One, the key is when you think about portfolio construction, it's really focusing on the credit metrics that we've laid out. So, when we build that portfolio, we're trying to get to around four and a half times average weighted spread in the portfolio.

That will include some deals that are deeper in the capital structure, and will include other deals that are not as deep in the capital structure. It all boils down to the opportunity that you're looking at and making sure that, you're getting paid for the rest.

I think what we're really trying to avoid here and to kind of use this one dimensional thing even within the middle market is making sure that we're getting a price for the risks that we're taking.

So, to the extent we see an opportunity and an example I think I've used in the past is software deal that's 20 times enterprise value in someone's out there with a 7 times unitranche, we want to bifurcate that rest because seven times is not senior debt risk.

And so, we want to bifurcate into the first-lien, second-lien, and we'll pick which side is more attractive, and we'll look at both sides of that equation. That's where we differentiate as a capital solution provider as oppose to someone that's forced based on their fee structure and their return on need to go out and just push unitranche.

And the problem that you're seeing in this market right now is everyone's forced in that type of structure, they're competing on price. And when you see unitranche, they used to carry a premium over traditional first-lien, second-lien, completely erode that premium and is even now being priced less than that.

At the end of the day, what's really being given up is you're not getting paid for that implied in your capital risk..

Thank you. Our next question comes from the line of Casey Alexander with Compass Point. Please proceed with your question..

I have three quick questions.

One the European loans that you've been originating and put on balance sheet this quarter, should we expect to see some or all of those matriculate into the JV after they've spent a quarter on the balance sheet?.

Casey, great question, this is Bock. So, the answer is no, not all. What we're doing there is an important part where we're trying to manage to the 30% bucket test.

So, you can probably see some, greater than 50%, but not effectively be in transferred because our goal is to make sure that one we want to exposure and we can get exposure to these asset classes two way, through our equity investment in the JV as well as having some given now we have ample capacity in the 30% bucket on ECM on the BDC balance sheet as well.

Just all to being smart to pace the growth of that asset bucket to make sure that it's in line but still delivering that return. So expect the transitions down but also but do not expect full sales..

Okay, great. Thank you. Secondly while the top side limit of the share repurchase program continues to be 5%, it looks like some of the technical language has changed.

Could you explain as the share repurchase program become more tactical in what way is the share repurchase program changing?.

Well, number one, I think if you remember last year where we had outlined very programmatic means to repurchase the shares where we would purchase 2.5% of the shares above NAV, 5.5% of shares below NAV. And we looked at it on a daily basis terms on where the stock price traded to determine that number. Number one, right we established that program.

Our commitment to you was to outline where you do what we say we're going to do, right, because there's oftentimes situations where folks are happy to announce your buybacks but not execute them.

We would expect a similar level and similar focus in 2020 as we did in 2019 however once you start to see the geopolitical effects that are occurring as well as the potential for volatility in the markets.

It's really important to make sure that we have free range to make sure that we're going to maximize the ability to repurchase those shares at the right price for you. Having understood that we do what we say we're going to do, which we demonstrated in 2019.

So there's a little bit of to it, but our underlying philosophical view of finding investment opportunities in our assets as well as their own share hasn't changed..

And last question. I guess this is kind of like the million dollar question is. We're clearly seeing some unsettlement in the market and if spreads start really blowing out, and obviously, it looks like cost of liabilities may even be decreasing more.

Would you be willing to considering the fact that the spreads are widening in the broadly syndicated loan market also lever up a little bit higher to take advantage of spreads blowing out while the cost of liabilities is low?.

I think that's exactly the way we think about managing our business. And so, I'm going to take a step back. Fourth quarter, Tom and team, and they sold the technical's in syndicated loan market would be attractive. They sold reasonably aggressively into those attractive bids. That's really benefited us as we sit here right now.

It's sub one to one leverage, right, which is lower than what we've said we might target or go to in that. So, it gives us what's just call it, a quarter turn or so of flexibility that we could capitalize on these technicals with having to sell anything, which would benefit shareholders.

But I want to make sure we're really clear that we have no intention to just aggressively increase leverage into this kind of technical dynamic. I think the optionality of having that leverage, the optionality of the cushion we have, the optionality of the diversification that we have on our liability structure are all positives.

I think it gives the flexibility to do that when the time is right..

Thank you. Our next question comes from Robert Brock with West Family Investments. Please proceed with your question..

Could you talk a little bit about two things? One LIBOR for us and is there any pressure to remove them at all and how low they've gone? Secondly, could you talk a little bit about, whether the Corona virus, if you've seen any signs impacting your businesses, particularly those in Europe.

And third, maybe just generally, you talked about your spreads. Could you just talk about a little bit how they evolved over the fourth quarter? You gave the number for the three months, but just which direction spreads are going? Thank you very much..

Rob, it's Ian Fowler. I'll cover the first two and let others jump in. So, in terms of the European assets, we went through the same exercise there that we went through with our North American portfolio.

There are no material issues with any of those portfolio companies, and like I said earlier, this is a fluid and from a geographic standpoint expanding situation. So, it's dynamic.

We're looking at the portfolio on a constant basis and we're in touch with management teams in the portfolio to make sure that they have plans in place if they're directly impacted.

In terms of the LIBOR for us, majority of our companies do have about 1% floor in the portfolio I think where you start to lose that floors when you move up market, and it's one of the reasons why we stay in the middle of the middle market..

And then, I'll just highlight because we haven't spent that much time talking about our European business.

Roll back to when we closed on the transaction in August of 2018, we've said to you at that time there are certain industries that we don't like to invest in, retail, restaurants, oil and gas, certain like airline type of companies and alike, right. That's consistent in our European business too.

So, these companies that are in there or higher free cash flow type of business. They are not restaurants, retail, gathering places for individuals. And so, the consistent credit mindset that we have, you asked as reply to our European business also..

Finally, Robert, and the answer of your question on spread.

So, we continue to see spreads to be stable to slightly increasing where we outlined, slightly increasing is given the mix shift with as Ian outline focused on Europe, right? When you start to see the ability to deploy an attractive risk adjusted returns there, strong OIDs and strong, you end up finding that really, the overall portfolio mix moves higher as Eric outlines moving from 402 to 443 basis points over LIBOR and then also want new investment deployments given Europe, a part of that transaction dynamic we're seeing is 525 higher.

We've been very, very fortunate to see spreads stable to increasing even while LIBOR declined..

I just want to wrap up on the spread point, goes up oil and someone would sit here and say, well, next quarter is going to go from four 443 to 460. It's going to be whether it makes the most sense from a risk-adjusted return opportunity in the market.

Back to where I started, which is we're not going to reverse all for an asset flow that it fits a certain return profile, because I think that is going to leave you changing risk rather than having discipline what makes the most sense. I think we're going to continue in this environment.

We'll see some spread widening potentially, but if we sold a certain amount of assets into the JV is a European assets and have a little higher spread and the U.S. flow is not as strong and we don't see the opportunities that I referenced earlier in more discounted broadly syndicated loans or special situations.

It may be that that's 430 number is 440 and maybe just 460. I don't know what it'll be, but I just don't want this highlighted this. I don't want people to model in a 40 basis point increases in the next quarter because that's not how we run our business. Any other questions? With that, I just wanted to say thank you again.

Thank you for your support and trust in us in 2019 as we sit here going into 2020. Know that we're being good stewards of your capital and know all these questions around coronavirus and other things is, we're all over that from a platform perspective, but really making sure we're managing the portfolio prudently.

I think comments I've made a couple of times, right. It really starts with underwriting as Ian said and then really starts with diversification, improving portfolio construction.

And I know at times that can be frustrating as far as the pace of the ramp, but I think the flexibility that we generated by running right now at less than one to one leverage by having a single asset be 2.3% of our portfolio, really puts us in a good position.

For whatever the situation might, be I can't promise what the outcomes will be, but we enter that in a strong position. So thank you for all your support..

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