Barings BDC, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Barings BDC is an externally managed business development company (BDC) investing primarily in senior secured private debt. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted.
Financial results and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Investment income | $56.3 | $35.0 | $155.7 | $98.7 |
| Net investment income after taxes | $27.9 | $14.9 | $78.7 | $43.8 |
| Net increase in net assets from operations | $9.9 | $14.4 | $5.9 | $66.2 |
| Net investment income per share | $0.26 | $0.23 | $0.78 | $0.67 |
| Distributions per share | $0.24 | $0.21 | $0.71 | $0.60 |
- Margins and costs: Q3 net investment income was about 49.6% of investment income, versus 42.5% a year earlier. Nine-month operating expenses rose to $77.0 million from $54.9 million; financing costs increased to $40.2 million from $23.4 million, reflecting higher borrowing rates and the November 2026 notes.
- Portfolio and NAV: Investments at fair value were $2.332 billion at September 30, up from $1.801 billion at December 31, 2021. Net assets were $1.228 billion and NAV was $11.28 per share, versus $741.9 million and $11.36 at year-end. The 2022 nine-month operating result included $71.1 million of net realized and unrealized losses on investments, credit support agreements and foreign currency transactions.
- Cash flow: Nine-month operating activities provided $109.7 million and financing activities used $56.6 million. Ending cash and foreign currencies totaled $137.3 million. Operating cash flow included $101.9 million of net cash acquired in the Sierra transaction.
- Debt and liquidity: Borrowings under credit facilities were $651.0 million; notes payable were $718.6 million net of financing fees. The revolving facility had $1.1 billion of commitments, implying approximately $449 million of unused capacity before other conditions. Asset coverage was 190.2%, above the company’s 150% statutory level. Management said cash, available borrowing capacity and expected operating cash flows should meet needs for at least 12 months. The company reported covenant compliance.
- Yield and interest-rate exposure: Weighted average yield on performing debt investments was 8.6%, up from 7.2% at December 2021. The filing estimates an annual net income increase of $11.8 million for a 100-basis-point rate increase and a decrease of $2.9 million for a 25-basis-point decline, based on the stated assumptions and excluding income-based fees.
Material changes versus comparable periods
- Q3 and nine-month investment income increased substantially, mainly due to portfolio growth, Sierra-acquired assets, higher base rates and increased dividends from portfolio companies and joint ventures.
- Despite higher net investment income, nine-month net assets from operations fell sharply year over year, from $66.2 million to $5.9 million, as unrealized results shifted from $24.0 million of appreciation to $67.3 million of depreciation. Q3 operations were $9.9 million versus $14.4 million a year earlier.
- The Sierra acquisition closed February 25, 2022. Barings BDC issued approximately 46.0 million shares; former Sierra holders owned about 41.3% of the combined company at closing. The acquired portfolio and cash expanded the balance sheet and investment base.
- Non-accrual investments increased from two portfolio companies at year-end 2021 to seven at September 30, 2022. Their fair value was $17.1 million, compared with $36.0 million at year-end, and cost was $69.1 million versus $50.9 million.
Outlook, risks and unusual items
- No specific earnings or investment guidance is provided. Management’s liquidity assessment covers at least the next 12 months.
- After quarter-end, the company committed approximately $131.1 million to new investments, of which $103.0 million had closed and funded at a 9.9% weighted average debt yield; it also funded $7.5 million of prior delayed-draw commitments.
- After quarter-end, the $29.6 million fair-value Core Scientific debt investment was placed on non-accrual effective October 31, 2022, stopping GAAP interest recognition. The filing identifies broad market moves and foreign-exchange effects as major contributors to nine-month portfolio depreciation.
- The adviser’s credit support agreements cover acquired MVC and Sierra portfolios up to $23 million and $100 million, respectively, subject to contractual terms. Their combined September 30 fair value was $49.5 million; support is not an unconditional immediate cash payment.
- Unfunded commitments to extend financing totaled $299.2 million, up from $234.7 million at year-end. The company also disclosed a €9.9 million guarantee relating to MVC Automotive Group; it was not recorded as a separate balance-sheet liability.
- Key risks include below-investment-grade borrower credit, recession and inflation, rising or falling rates, foreign exchange, LIBOR transition, and valuation uncertainty. Most middle-market private investments use Level 3 inputs; reported fair values may differ from eventual realizations. Seven portfolio companies were on non-accrual at quarter-end, and Core Scientific was added afterward.
- The Board declared a $0.24-per-share quarterly distribution on November 10, payable December 14, 2022. The filing reports no material pending legal proceedings and no material change to previously disclosed risk factors.
Important facts for investors to verify
- Track non-accrual exposures and recoveries, particularly Core Scientific and the acquired Sierra/MVC positions.
- Assess whether fair-value declines, including market and currency effects, persist or convert into realized losses.
- Verify the sustainability of net investment income and distributions against higher financing costs, PIK income and potential borrower defaults.
- Monitor available facility capacity, asset coverage, debt covenants and the $299.2 million of unfunded commitments.
- Review the contractual conditions and adviser-continuity provisions for MVC and Sierra credit support, and distinguish stated coverage caps from realizable support.
- Check the impact of benchmark-rate changes and LIBOR transition on both floating-rate portfolio income and borrowing costs.