Business context and reporting period
Barings BDC, Inc. is an externally managed business development company investing primarily in senior secured private debt to middle-market businesses, alongside subordinated debt, equity and joint ventures. This Form 10-Q covers the quarter and six months ended June 30, 2022. Results include the Sierra Income Corporation acquisition, completed February 25, 2022.
Financial and operating metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Investment income | $55.6m | $33.2m | $99.4m | $63.7m |
| Net investment income after taxes | $31.8m | $14.6m | $50.8m | $28.9m |
| Net realized and unrealized gains (losses), including foreign currency and credit support agreements | ($54.9m) | $14.8m | ($52.9m) | $22.9m |
| Net increase (decrease) in net assets from operations | ($25.0m) | $29.3m | ($4.0m) | $51.8m |
| Net investment income per share | $0.29 | $0.22 | $0.52 | $0.44 |
| Distributions per share | $0.24 | $0.20 | $0.47 | $0.39 |
Investment income rose approximately 68% for the quarter and 56% for the half year. Net investment income was approximately 57% of investment income in Q2 2022 and 51% for the first half (calculated from reported figures). Management attributed higher income chiefly to a larger portfolio, Sierra-acquired investments, higher portfolio-company and joint-venture dividends, and accelerated fee income on loan repayments. Higher financing costs partly offset the increase.
At June 30, 2022, investments at fair value were $2.389bn, total assets $2.829bn, net assets $1.253bn and NAV per share $11.41, compared with $11.36 at December 31, 2021. The portfolio included 294 companies. The market price at June 30 was $9.31 per share. Debt investments excluding non-accruals had a weighted average yield of 7.6%, versus 7.2% at year-end.
Cash and foreign currencies totaled $197.8m. Six-month operating cash flow was negative $12.7m, while financing activities provided $126.2m; cash and foreign currencies increased $113.5m. Borrowings were $1.533bn: $814.4m under the revolving credit facility and $718.2m in notes, net of financing fees. The facility commitment was $1.1bn; availability is subject to borrowing-base, covenant and other conditions. Asset coverage was 181.4%, and the company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Sierra added approximately $442.2m of investments and $102.0m of cash at acquisition. The company issued 46.0m shares as merger consideration; outstanding shares rose to 109.8m from 65.3m at year-end.
- Fair-value movements reversed the prior-year gains: Q2 investment, credit-support and foreign-currency items produced a $54.9m net loss, versus $14.8m of gains in Q2 2021. First-half results were a $52.9m loss versus $22.9m of gains.
- Investment depreciation in the first half was $62.8m. Management cited broad market movements and foreign-exchange effects, partly offset by improved credit or fundamental performance.
- Non-accrual investments increased from two portfolio companies at December 31, 2021 to seven at June 30, 2022. Their fair value was $20.0m, compared with $36.0m at year-end; cost was $71.1m.
- Interest and financing fees rose to $24.8m for the first half from $15.3m, primarily due to increased revolving borrowings and the November 2026 notes.
Outlook, commentary, risks and unusual items
Management stated that cash and foreign currencies, available facility capacity and anticipated operating cash flows should be adequate for daily operations for at least the next 12 months. No earnings or NAV guidance was provided. Subsequent to quarter-end, the company reported $215.4m of new commitments, of which $171.5m had closed and funded at a weighted average debt yield of 8.2%, plus $11.6m of previously committed delayed-draw loans. On August 9, the Board declared a $0.24-per-share distribution payable September 14, 2022.
- Barings’ credit support agreements cover eligible losses in the acquired MVC and Sierra portfolios, subject to caps of $23m and $100m, respectively. At quarter-end, their combined fair value was $46.0m; their reported quarter-period depreciation contributed to the loss. Settlement is principally through future fee waivers, with cash payment possible under the agreements’ terms.
- Portfolio fair values rely substantially on Level 3 inputs: $2.008bn of investments were Level 3. Actual realizations may differ materially from reported valuations.
- The company reported $279.3m of unused financing commitments and guaranteed €9.9m (about $10.3m) of MVC Auto credit facilities. Commitments may be drawn or expire; guarantees could require payment upon default.
- Many portfolio assets and revolving borrowings have floating rates. The filing estimates that a 200-basis-point rate change could change annual investment income by up to $38.4m and facility interest expense by up to $16.3m, before considering other effects. Management also highlighted rate, recession, credit-spread, foreign-currency and LIBOR-transition risks; it had no interest-rate hedges at quarter-end.
- PIK interest is non-cash when accrued but may affect taxable income and required distributions. COVID-19 impacts on portfolio companies remained a potential risk. The company reported no material pending legal proceedings and no material risk-factor changes during the quarter.
Important facts for investors to verify
- How much of reported investment income and distributable earnings is recurring cash income versus dividends, accelerated fees and non-cash PIK income.
- The credit status, recovery prospects and subsequent developments for the seven non-accrual portfolio companies, particularly investments with large cost-to-fair-value reductions.
- The drivers and valuation assumptions behind the $62.8m first-half investment depreciation and the fair value and enforceability of the MVC and Sierra credit support agreements.
- Actual revolver availability under borrowing-base limits, leverage and asset-coverage headroom, and sensitivity to rising financing costs or falling rates.
- Whether unfunded commitments, portfolio-company guarantees and distributions remain manageable alongside the company’s investment and debt levels.