Barings BDC, Inc. — 2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with fiscal 2021. The filing also reports fourth-quarter results. Barings BDC is an externally managed business development company (BDC) and regulated investment company (RIC), investing mainly in senior secured debt of middle-market businesses.
Financial results and position
| Metric | FY 2022 | FY 2021 |
|---|---|---|
| Investment income | $219.1 million | $135.3 million |
| Operating expenses | $102.9 million | $76.4 million |
| Net investment income after taxes | $115.7 million; $1.12 per share | $59.0 million; $0.90 per share |
| Net realized gains (losses) | $12.9 million | $(3.4) million |
| Net unrealized appreciation (depreciation) | $(123.0) million | $22.1 million |
| Net increase in net assets from operations | $4.7 million; $0.05 per share | $77.7 million; $1.19 per share |
| Distributions per share | $0.95 | $0.82 |
Fourth quarter 2022: Investment income was $63.5 million, net investment income was $37.0 million, and operations decreased net assets by $1.3 million. Net investment income was $0.34 per share.
Portfolio and NAV: Investments at fair value were $2.449 billion, up from $1.801 billion; the portfolio comprised 322 companies versus 212 a year earlier. NAV was $1.192 billion, or $11.05 per share, compared with $741.9 million, or $11.36 per share. At year-end, the $8.15 share price represented an approximately 26.2% discount to NAV.
Cash flow and liquidity: Operating activities provided $86.3 million and financing activities used $31.1 million; cash and foreign currencies ended the year at $139.4 million. The company said available cash, borrowing capacity and expected operating cash flows should cover daily needs for at least 12 months.
Debt and coverage: Total borrowings were approximately $1.454 billion: $729.1 million under the secured revolving facility and $725.0 million principal amount of unsecured notes (reported net of financing fees on the balance sheet). Asset coverage was 183.0%, above the statutory 150% minimum. Year-end weighted-average borrowing cost was 4.705%; the revolving facility’s weighted-average rate was 5.6% at year-end. The company reported compliance with its financing covenants.
Material changes and notable items
- The February 2022 Sierra merger added approximately $442.2 million of investments and 45.99 million shares; Barings provided up to $100 million of credit support for the acquired portfolio. The credit support’s year-end fair value was $40.7 million. A separate MVC portfolio credit support agreement has a $23 million cap and was valued at $12.4 million.
- Higher average portfolio size, rising base rates, fee accretion on repayments, and higher portfolio and joint-venture dividends drove income growth. The weighted-average yield on performing debt investments rose to 9.7% from 7.2%.
- Interest and financing costs increased to $56.9 million from $33.0 million, reflecting higher borrowings and rates. Base management fees rose to $29.5 million from $19.5 million; income incentive fees fell to $6.6 million from $14.7 million.
- Unrealized depreciation of $123.0 million was driven primarily by broad market movements ($94.1 million) and foreign exchange effects on investments ($22.3 million), with credit or fundamental performance contributing $5.9 million of depreciation. This more than offset improved net investment income and realized results.
- Seven portfolio companies were on non-accrual at year-end, versus two in 2021. Their investments had $24.3 million fair value against $98.8 million cost; Core Scientific and Custom Alloy were among the significant markdowns disclosed.
- The company repurchased $30 million under the Sierra-related program and reported $32.1 million of total share repurchases in cash flows for 2022. In February 2023, the Board authorized a new program of up to $30 million through March 1, 2024.
Outlook, risks and contingencies
Management provided no numerical earnings or portfolio guidance. It cited inflation, possible recession, higher rates, market volatility, borrower credit deterioration and refinancing availability as material uncertainties. Most investments are below investment grade or would be if rated; many private holdings are illiquid and valued using significant unobservable inputs. The auditor identified investment fair value assessment as a critical audit matter, while issuing unqualified opinions on the financial statements and internal controls.
Floating-rate assets can benefit from higher rates, but borrowing costs also rise; the filing estimates that a 100-basis-point increase would raise annual investment income by $19.0 million and interest expense by $7.3 million, increasing net income by $11.8 million before income-based fees. The company had no interest-rate hedges at year-end and noted the continuing transition from LIBOR. Other items to monitor include $308.5 million of unused portfolio commitments, foreign-currency exposure, potential guarantees, RIC distribution requirements, and the risks of leverage and non-cash PIK income.
Important facts for investors to verify
- Whether the large 2022 unrealized depreciation and the rise in non-accrual investments continue, reverse, or lead to realized losses.
- The composition and valuation assumptions behind Level 3 assets, including the acquired Sierra portfolio and the credit support agreements.
- Debt maturities, revolving-facility availability and pricing, covenant headroom, and asset coverage under adverse portfolio valuations.
- The sustainability of net investment income and the $0.95 annual distribution, including cash collected versus accrued PIK or other non-cash income.
- The extent to which foreign exchange gains, portfolio transactions and merger-related effects contributed to 2022 results and may not recur.