Barings BDC, Inc. Q2 FY2025 earnings call

• BBDC delivered strong results fueled by credit performance and franchise scale. Net investment income was strong with excellent credit performance. Origination activity was consistent with prior periods. - Focus on core middle market with lower leverage and stronger risk-adjusted returns. Emphasized sectors with resilient performance. - Actively maximizing value in legacy holdings from MVC Capital and Sierra, seeking to divest at attractive valuations. - Portfolio quality was strong with nonaccrual rate at 50 basis points, weighted average interest coverage 2.4x, and diversified portfolio with 74% secured investments (71% first lien). - Dividend of $0.26 per share declared, annualized yield 9.3% on NAV, and $0.15 supplemental dividend to be paid in installments. - Share repurchase plan active, with 100,000 shares repurchased in the quarter, totaling 250,000 repurchased under the plan.

Net asset value per share was $11.18. Net investment income for the quarter was $0.28 per share, up from $0.25 per share in the first quarter. Gross originations were nearly $200 million with net originations of $32 million. Weighted average yield at fair value was 10.1%. The Board declared a third quarter dividend of $0.26 per share. Origination activity in the second quarter was consistent, with gross originations near $200M and net originations $32M. The portfolio had 95% of assets as Barings originated positions at fair value, nonaccrual rate improved to 50 basis points, and net investment income was boosted by onetime fees and distributions.

• Origination activity forecasting is art, not science; pipeline building with nascent opportunities, qualitative indicators show strong transaction interest, but cautious of false positives in back half of 2025. - Leverage expected to trend back within target range of 0.9 to 1.25x in second half of 2025 supported by asset sales and repayments. - Confident in dividend sustainability due to durable portfolio net investment income, diversified senior secured investments, and favorable forward curve. - Anticipate deployment into middle market corporate issuers leveraging Barings' vast sourcing network.

• Uncertain macroeconomic environment with factors like tariffs creating issuer uncertainty. - Potential false positives in origination activity indicators for back half of 2025. - Constraints on share repurchasing due to blackout periods related to valuation cadence and vehicle operations. - Tariff impacts creating uncertainty in issuer financial results and market sentiment.

Q: Elizabeth, you talked about more sales to Jocassee. Can you expand on maybe the profile of those, if that's going to -- if that would be something in more of the front book or the back book and/or more of a GPF or a solutions bent. And then on its overall leverage, you already up that leverage this quarter how much more -- it sounds like more? What's the target leverage again on that?

A: Elizabeth clarified she needed to know if referring to BDC or Jocassee leverage. Matt Freund responded that Jocassee has ample liquidity, BBDC leverage was higher this quarter, and they expect to run it towards the high end of the target range of 0.9 to 1.25x supported by strong credit quality.

Q: Can you talk about where the larger, maybe largest new name screen vision -- where does that sort of fit in the Barings platform? And then can you kind of talk about in the past year, I guess, post [indiscernible] how much -- like to what extent have the GPF and Cap Solutions platforms blended together? Is it sort of like 1 unit now, but just taking a barbelled approach of of 450 stuff and 850 stuff?

A: Bryan High stated there's collaboration across the platform, sourcing is centralized, underwriting is seamless, and each asset class has separate investment committees. Eric Lloyd highlighted separate investment committees for each asset class/strategy.

Q: Obviously, you had a strong quarter of originations. Can you provide any breakdown to how much the follow-ons for existing borrowers versus new borrowers.

A: Eric James Lloyd said across the franchise, 60%-70% of originations are follow-ons for existing borrowers, and BBDC falls within that range.

Q: How is the pipeline looking after the second quarter close? I know repayments were kind of high this quarter? Are they still going to be in that range? Or are they down?

A: Matthew Freund said they're optimistic about forward origination visibility but cautious about booking before materialization, and they're focused on keeping the portfolio in high-quality credits.

Q: With like all your new originations this quarter, how does the yield on those compared to like the overall yield was, I think, 10.1%, was it higher or lower kind of same range.

A: Eric James Lloyd said new issuance weighted average yield was about 10 basis points higher than the overall portfolio's 10.1% fair value yield.

Q: You previously sized tariff impact is less than 5% of the portfolio. With like the recent like a little bit of clarity we fund, do you have any updates there as it shifted at all?

A: Eric James Lloyd said tariff risk isn't higher, but macro uncertainty is higher with hiring and capital investment delayed.

Q: Dividend coverage was relatively good even after adjusting for the onetime items on the revenue and expense side. So -- how should we think about the sustainability of the dividend, given the forward curve? And it looks like, I guess, the first 50 basis points of rate cuts are only a $0.01 quarterly headwind based on the sensitivity table in the Q.

A: Elizabeth Murray said they have confidence in earning the dividend based on the current forward curve, though rate cuts could change the outlook.

Q: Credit continues to be kind of remarkably strong for most kind of excluding some of the kind of the usual suspects. So I guess where do you think we are in the credit cycle? And like maybe just for the industry, how should we think about credit going forward? Do you think over the next year or 2, we're going to be kind of in the kind of in the same general vicinity -- or do you think credit could worsen for the overall industry?

A: Bryan D. High said looking out 2 years is difficult, but current backdrop of modest growth, stable inflation/unemployment is constructive for credit, though future is uncertain.

Q: I know shareholders appreciate the historical $86 million worth of share repurchases. But the last couple of quarters, the share repurchases have been of a much more modest nature, about 0.1% of shares outstanding. And yet the stock trades at 1 of the widest discounts in terms of price to NAV within its peer group. So I'm just wondering what the temper is in the prosecution of the share repurchase program and why maybe we're not taking a little bit more advantage of this exaggerated discount -- and what other measures do you think that you can take to help shrink that discount in terms of price to NAV?

A: Eric James Lloyd said share repurchasing is constrained by blackout periods related to valuation cadence, but it's a core way to return capital and increase share price. Focus on driving ROE improvements by rotating out non-income-producing assets to narrow NAV gap.

Q: A number of BDCs in this reporting cycle have characterized, in fact, August, specifically as one of the busiest months in a couple of years in terms of indication of interest of new deal activity, are you guys seeing the same thing? And -- how can you manage inflow of new deals relative to a leverage ratio that's already pretty high?

A: Eric James Lloyd said it's early to call August busy, pipeline is higher, but they have balanced capital and will deploy measuredly to ensure diversified performance, and leverage is run towards the high end of the range with confidence in deploying into compelling assets.