Business Context and Reporting Period
Company: Barings BDC, Inc. (BBDC)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2021
Business Overview: Barings BDC is an externally managed, closed-end, non-diversified business development company (BDC) and regulated investment company (RIC). It invests primarily in senior secured private debt, syndicated senior secured loans, structured products, and equity securities of middle-market companies. The company is managed by Barings LLC.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2021 | Nine Months Ended Sep 30, 2021 | As of Sep 30, 2021 |
|---|---|---|---|
| Total Investment Income | $34.98 million | $98.73 million | - |
| Net Investment Income (NII) | $14.88 million | $43.80 million | - |
| NII Per Share (Basic & Diluted) | $0.23 | $0.67 | - |
| Net Increase in Net Assets from Operations | $14.41 million | $66.21 million | - |
| Net Asset Value (NAV) Per Share | - | - | $11.40 |
| Total Investments (Fair Value) | - | - | $1,652.48 million |
| Total Assets | - | - | $1,799.53 million |
| Total Liabilities | - | - | $1,054.71 million |
| Total Net Assets | - | - | $744.82 million |
| Debt Outstanding (Credit Facilities + Notes) | - | - | $1,036.93 million |
| Cash and Foreign Currencies | - | - | $41.39 million |
Material Changes vs. Prior Comparable Period
- Revenue Growth: Total investment income for the nine months ended September 30, 2021, increased to $98.73 million from $51.15 million in the same period in 2020. This 93% increase was driven by a larger average portfolio size, increased payment-in-kind (PIK) interest income ($9.55 million vs. $0.58 million), and higher dividend income ($3.33 million vs. $0.00 million).
- Expense Increase: Total operating expenses rose to $54.93 million for the nine months ended September 30, 2021, from $29.37 million in 2020. This increase is primarily due to higher interest and financing fees ($23.38 million vs. $14.37 million) resulting from new note issuances and increased borrowings, as well as the recognition of incentive management fees ($10.67 million) which were $0 in the prior year.
- Realized Gains/Losses: The company reported a net realized loss of $1.58 million for the nine months ended September 30, 2021, a significant improvement from a net realized loss of $37.32 million in the same period in 2020. The 2020 loss was driven by significant losses on loan sales, whereas 2021 saw net gains on the loan portfolio offset by foreign currency transaction losses.
- Unrealized Appreciation: Net unrealized appreciation for the nine months ended September 30, 2021, was $24.00 million, compared to $1.59 million in 2020. This was largely driven by broad market moves and foreign currency transactions.
Guidance, Outlook, and Material Events
- Pending Merger: On September 21, 2021, the company entered into a merger agreement to acquire Sierra Income Corporation. The transaction is expected to close in the first quarter of fiscal year 2022. The merger consideration includes cash and shares of Barings BDC common stock. Following the merger, the company will enter into a new credit support agreement with Barings LLC covering up to $100.0 million of losses on the acquired Sierra portfolio.
- Dividend Declaration: On November 9, 2021, the Board declared a quarterly distribution of $0.22 per share, payable on December 1, 2021.
- Capital Markets Activity: Subsequent to September 30, 2021, the company made approximately $238.5 million in new commitments, of which $164.4 million closed and funded. Additionally, the company increased its aggregate commitments under its February 2019 Credit Facility to $875.0 million from $800.0 million.
- Non-Accrual Assets: As of September 30, 2021, the company had one asset on non-accrual status (Legal Solutions Holdings) with a fair value of $11.0 million (0.7% of the portfolio).
- Risks: The company highlights risks related to the pending Sierra merger, including potential dilution, integration challenges, and the possibility of the merger not closing. General market risks include interest rate volatility, LIBOR transition, and the ongoing impact of the COVID-19 pandemic on portfolio companies.
Investor Verification Checklist
- Merger Approval: Verify the status of stockholder approvals required for the Sierra Income Corporation merger and the potential dilution impact on current shareholders.
- Debt Covenants: Confirm continued compliance with financial covenants under the February 2019 Credit Facility and various note indentures, particularly the asset coverage ratio and net debt to equity ratio.
- Portfolio Yield: Monitor the weighted average yield of the portfolio, which was 6.1% as of September 30, 2021, and the impact of the low interest rate environment on net investment income.
- Foreign Currency Exposure: Assess the impact of foreign currency fluctuations on the portfolio, given the significant unrealized gains/losses reported in this area and the company's hedging activities.
- PIK Interest: Review the level of Payment-in-Kind (PIK) interest income ($9.55 million for the nine months), as this is non-cash income that still requires distribution to maintain RIC tax status.