Business context and reporting period
Barings BDC, Inc. (NYSE: BBDC) is an externally managed business development company and regulated investment company, focused primarily on senior secured loans to middle-market businesses. This Form 10-K covers the fiscal year ended December 31, 2023. Figures below are in U.S. dollars; the filing also provides selected unaudited quarterly results.
Financial and portfolio highlights
| Metric | FY 2023 | FY 2022 |
|---|---|---|
| Total investment income | $289.2 million | $219.1 million |
| Operating expenses | $159.4 million | $102.9 million |
| Net investment income after taxes | $127.8 million; $1.19 per share | $115.7 million; $1.12 per share |
| Net increase in net assets from operations | $128.0 million; $1.20 per share | $4.7 million; $0.05 per share |
| Net cash provided by operating activities | $76.9 million | $86.3 million |
| Dividends per share | $1.02 | $0.95 |
At December 31, 2023, total assets were $2.677 billion, net assets were $1.197 billion and NAV was $11.28 per share, versus $2.710 billion, $1.192 billion and $11.05 per share, respectively, a year earlier. Investment portfolio fair value was $2.489 billion across 336 portfolio companies, compared with $2.449 billion across 322 companies. Senior debt and first-lien notes represented 67% of portfolio fair value; equity shares represented 15%.
Debt outstanding was approximately $1.445 billion, including $719.9 million under the revolving credit facility and $725.0 million principal amount of notes. Asset coverage was 183.6%, above the statutory 150% minimum. Year-end cash and foreign currencies totaled $70.5 million. Management stated that cash, borrowing capacity and expected operating cash flows should meet daily operating needs for at least the next 12 months. The filing lists $305.9 million of unfunded investment commitments.
The weighted average yield on performing debt investments was 10.5%, up from 9.7%; including non-accrual debt, it was 10.0%, up from 9.1%. Four portfolio companies were on non-accrual, with fair value of $37.2 million (1.5% of portfolio fair value), versus seven companies and $24.3 million (1.0%) at year-end 2022. Net investment income as a proportion of investment income was approximately 44.2%, versus 52.8%.
Material changes versus the prior comparable period
- Investment income rose 32%, largely reflecting higher base rates, increased portfolio-company dividends and PIK interest. PIK interest income increased to $18.1 million from $12.1 million.
- Operating expenses rose 55%. Interest and financing fees increased to $84.7 million from $56.9 million; incentive fees rose to $32.0 million from $6.6 million. The facility’s weighted average interest rate was 7.1% at year-end, versus 5.6% a year earlier.
- Net investment income increased 10%, but operating expenses grew faster than investment income, reducing the NII-to-income ratio.
- Net realized losses were $62.8 million, versus net realized gains of $12.9 million. The 2023 result included a $43.6 million realized loss on the exit of Custom Alloy Corporation debt and a $7.4 million realized loss on forward currency contracts.
- Net unrealized appreciation was $62.6 million, versus depreciation of $123.0 million in 2022. Accordingly, the increase in net assets from operations improved substantially, despite realized losses.
- Cash declined $68.9 million to $70.5 million. Operating cash flow was $76.9 million; financing activities used $145.8 million, including $109.0 million of distributions, $19.7 million of net credit-facility repayments and $14.8 million of share repurchases.
- New investment activity slowed: 39 new investments totaling $264.6 million in 2023, versus 95 totaling $884.8 million in 2022. The 2022 comparison included the Sierra merger and $442.2 million of acquired investments.
Outlook, commentary, risks and unusual items
The filing does not provide earnings or net investment income guidance. Management describes a strategy centered on senior secured middle-market lending and prudent leverage, and considers liquidity adequate for the next 12 months. Subsequent to year-end, the company reported $35.3 million of funded new investments at an 11.5% weighted average yield, plus $15.7 million of previously committed revolver and delayed-draw funding.
On February 12, 2024, BBDC issued $300 million of 7.000% senior unsecured notes due February 2029, at 98.948% of principal. On February 22, 2024, the Board authorized a new share repurchase program of up to $30 million for March 2024–March 2025 and declared a $0.26-per-share distribution payable March 13, 2024. These are post-period developments, not FY 2023 results.
Key risks include borrower defaults and portfolio-company sensitivity to inflation, economic slowdown and rates; refinancing and covenant risk; leverage and interest expense; illiquid Level 3 valuations; and conflicts arising from Barings’ management of other accounts and fee arrangements. The portfolio is primarily valued using significant unobservable inputs. Credit support agreements from Barings cover up to $23 million for the acquired MVC portfolio and $100 million for the acquired Sierra portfolio, subject to their terms and settlement dates. The filing also reports $305.9 million of unfunded commitments and a €9.9 million guarantee related to MVC Automotive Group. No material pending legal proceedings were reported. KPMG issued unqualified audit opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
For the fourth quarter of 2023, selected unaudited data show investment income of $75.8 million, net investment income of $33.4 million and an increase in net assets from operations of $29.9 million. The comparable 2022 quarter reported $63.5 million, $37.0 million and a $1.3 million decrease, respectively.
Important facts for investors to verify
- Reconcile the $128.0 million increase in net assets from operations to NII, realized losses and unrealized appreciation; assess how much of the unrealized recovery may persist.
- Review the $37.2 million non-accrual portfolio, including Anju Software, Black Angus, Core Scientific and Legal Solutions, and monitor subsequent collections, restructurings and valuations.
- Assess the sensitivity of income and asset coverage to base-rate changes, facility borrowing costs and the 7.000% February 2029 Notes; verify refinancing needs and covenant headroom.
- Examine the assumptions behind Level 3 investment valuations and the fair values, caps and settlement mechanics of Barings’ credit support agreements.
- Compare NAV of $11.28 with the $8.58 year-end share price (a 23.9% discount), and evaluate the effect of distributions and repurchases on liquidity and NAV.
- Track unfunded commitments, guarantee exposure, RIC distribution requirements and the sustainability of cash available for dividends.