Barings BDC, Inc. — Q3 2023 Form 10-Q
Business context and reporting period
Barings BDC is an externally managed business development company (BDC) that primarily lends to middle-market businesses. This unaudited filing covers the quarter and nine months ended September 30, 2023; balance-sheet comparisons are with December 31, 2022. Figures below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q3 2023 | Comparable period / date |
|---|---|---|
| Investment income | $70.8 | $56.3 in Q3 2022 |
| Net investment income after tax | $33.3; $0.31 per share | $27.9; $0.26 per share in Q3 2022 |
| Net increase in net assets from operations | $18.3; $0.17 per share | $9.9; $0.09 per share in Q3 2022 |
| Distributions per share | $0.26 | $0.24 in Q3 2022 |
| Net asset value per share | $11.25 | $11.05 at Dec. 31, 2022 |
| Portfolio fair value | $2,521.6 | $2,448.9 at Dec. 31, 2022 |
| Cash and foreign currencies | $49.8 | $139.4 at Dec. 31, 2022 |
| Borrowings | $1,516.3 total: $796.1 credit facilities and $720.2 notes, net | $1,448.1 at Dec. 31, 2022 |
| Asset coverage ratio | 178.2% | 150% statutory minimum under the company’s elected framework |
For the nine months, investment income was $213.4 versus $155.7 in 2022; net investment income after tax was $94.4 versus $78.7. Net assets from operations increased $98.1 versus $5.9, reflecting $75.5 of realized losses more than offset by $79.0 of net unrealized appreciation and net investment income. Net investment income after tax was about 47% of investment income in Q3 and 44% year to date, compared with about 50% in each 2022 comparable period.
Operating cash flow was negative $62.1 for the first nine months, principally reflecting portfolio purchases; financing cash outflow was $27.6, including $81.3 of distributions and $10.9 of share repurchases, partly offset by $67.0 of net credit-facility borrowings. Cash and foreign currencies fell $89.7 from year-end. Management says cash, borrowing capacity and expected operating cash flows should cover operating needs for at least 12 months.
Material changes versus comparable periods
- Q3 investment income increased 26% year over year, mainly from higher base rates, a larger average portfolio, higher dividends and more payment-in-kind (PIK) interest. The weighted average yield on performing debt investments was 10.6% at quarter-end versus 8.6% a year earlier.
- Q3 interest and financing fees rose to $21.8 from $15.3; the reported weighted average rate on the credit facility was 7.1% versus 4.1% a year earlier. Incentive fees increased to $4.6 from $1.8.
- Year-to-date investment activity was lower than in 2022, which included the Sierra merger and substantially more new investments. The company reported $365.4 of new investments in the portfolio roll-forward for 2023 versus $930.6 in 2022, including merger-acquired assets.
- Year-to-date realized losses were $75.5, primarily including a $43.6 realized loss on exiting Custom Alloy debt investments and $17.1 of losses on forward currency contracts. The 2023 unrealized gain included reclassification of previously recognized depreciation when investments were realized.
- Fair value of affiliate investments rose to $382.3 from $290.0 at year-end; control investments declined to $94.9 from $106.3. Total shares outstanding fell to 106.5 million from 107.9 million, including 1.4 million repurchased year to date.
Outlook, commentary, risks and unusual items
- No quantified earnings or portfolio guidance is provided. Management cautions that interim results are not necessarily indicative of full-year results and describes forward-looking statements as uncertain.
- The Board declared a $0.26-per-share quarterly distribution on November 9, 2023, payable December 13 to holders of record December 6. The company states distributions depend on available assets, regulatory and debt restrictions, taxable income and other factors.
- At September 30, seven portfolio companies were on non-accrual, with $40.1 fair value (1.6% of portfolio fair value), compared with $24.3 (1.0%) at year-end. Anju Software and Wawona were placed on non-accrual during 2023. PIK income is non-cash when recognized and can increase taxable income and distribution requirements.
- Unfunded financing commitments were $338.6, up from $308.5 at year-end. The filing says commitments may expire undrawn and management believed it had adequate resources to satisfy them. The company also guaranteed €9.9 million of MVC Auto credit facilities; no liability was recorded for the guarantee.
- Portfolio valuations rely substantially on Level 3 inputs: $2,238.4 of investments subject to the fair-value hierarchy were Level 3 at quarter-end. The Adviser is valuation designee, and reported values may differ from eventual realizations.
- Interest-rate risk is material: about $1,943.9 principal of debt investments bore variable rates. The filing’s hypothetical sensitivity shows a 100-basis-point rate increase would raise annual net income by $11.5, while a 50-basis-point decrease would reduce it by $5.7, before income-based fees and excluding foreign-exchange effects. The company had no interest-rate hedges at quarter-end and describes recession, lower rates, credit deterioration, foreign-exchange movements and market volatility as risks.
- The company reported covenant compliance at September 30. Its revolving credit facility’s revolving period was extended to February 21, 2025, followed by a one-year repayment period; facility maturity was extended to February 21, 2026.
- Subsequent to quarter-end, the company reported $96.7 of new investments closed and funded, with a 13.1% weighted average debt yield, plus $9.7 of previously committed delayed-draw loans and $2.5 of preferred equity funding.
Most important facts for investors to verify
- Whether the $40.1 of non-accrual assets, including Anju Software and Core Scientific, recover value or require further write-downs.
- How much of higher investment income is cash-generating versus PIK, and whether borrower performance can sustain current yields and distributions.
- Available borrowing capacity under the credit facility after borrowing-base limits, covenants and the $338.6 of unfunded commitments; the filing does not provide a clear net availability figure.
- Portfolio fair values and the performance of major affiliate and control exposures, especially given substantial Level 3 valuation inputs and currency exposure.
- Whether realized losses, financing costs and incentive fees affect future net investment income, NAV and the sustainability of the $0.26 quarterly distribution.