Barings BDC, Inc. — Q1 2023 Form 10-Q
Business and period. This externally managed business development company invests primarily in senior secured loans to middle-market businesses, alongside subordinated debt, structured products and equity. The unaudited quarter ended March 31, 2023; comparisons are with Q1 2022 unless otherwise noted. The Sierra merger closed in February 2022, so the prior-year quarter included only a partial quarter of income from the acquired portfolio.
Financial performance and position
| Metric | Q1 2023 / March 31, 2023 | Comparable / prior date |
|---|---|---|
| Investment income | $67.2 million | $43.8 million; up 53.6% |
| Operating expenses | $39.5 million | $24.7 million; up 59.7% |
| Net investment income after taxes | $27.5 million; $0.25 per share | $19.0 million; $0.23 per share |
| Net realized and unrealized results | $12.2 million net gain, including a $9.7 million net realized loss and $22.0 million net unrealized appreciation | $2.0 million net gain |
| Net increase in assets from operations | $39.7 million; $0.37 per share | $21.0 million; $0.25 per share |
| Net asset value | $1.205 billion; $11.17 per share | $1.192 billion; $11.05 per share at Dec. 31, 2022 |
| Investments at fair value | $2.556 billion across 331 portfolio companies | $2.449 billion across 322 companies at Dec. 31, 2022 |
| Cash and foreign currencies | $55.4 million | $139.4 million at Dec. 31, 2022 |
| Borrowings | $769.1 million under credit facilities and $719.4 million notes, net of fees; $1.489 billion total carrying value | $729.1 million and $719.0 million, respectively, at Dec. 31, 2022 |
| Asset coverage | 180.8% | Statutory minimum applicable to the company is 150% |
Changes, cash flow and portfolio
- Investment income rose mainly with higher base rates, a larger average portfolio, dividends and PIK interest. Yield on performing debt investments was 10.2% at quarter-end, versus 7.3% at March 31, 2022; including non-accrual debt, yield was 9.5%.
- Financing costs increased to $19.3 million from $11.7 million, principally as the credit facility’s weighted average rate increased. Base and incentive management fees also rose, to $7.9 million and $9.6 million, respectively.
- Operating activities used $92.0 million of cash, primarily reflecting $179.6 million of investment purchases, partly offset by $69.5 million of sales and repayments. Financing activities provided $8.0 million, including $35.0 million of net credit-facility borrowings and $27.0 million of distributions paid. Cash and foreign currencies declined $84.0 million.
- Portfolio fair value rose $107.2 million from year-end. Senior debt and first-lien notes were 69% of portfolio fair value; equity shares were 13%. Banking/finance/insurance/real estate and business services were the largest disclosed industry exposures, at 14.0% and 14.1%.
- Nine portfolio companies were on non-accrual, versus seven at year-end. Their fair value was $28.5 million, compared with cost of $102.3 million. Notable positions include Custom Alloy ($0.9 million fair value on $46.4 million cost), Core Scientific ($15.0 million on $29.6 million cost) and Legal Solutions Holdings ($39,000 on $10.1 million cost).
- Unfunded commitments totaled $371.8 million, up from $308.5 million at year-end. The company stated it believed it had adequate resources to meet them.
Outlook, risks and unusual items
- No numerical earnings or portfolio guidance is provided. Management said available cash, borrowing capacity and expected operating cash flows should meet daily needs for at least the next 12 months; actual results may differ and quarterly results are not necessarily indicative of the full year.
- The Board declared a $0.25-per-share distribution on May 4, payable June 14, 2023 to holders of record June 7. A new program permits up to $30 million of open-market repurchases through March 1, 2024; no shares were repurchased under it during Q1. Separately, 102,326 shares were purchased in the market through the dividend reinvestment plan to satisfy distribution obligations.
- Foreign currency transactions generated a $10.5 million realized loss, partly offset by $5.4 million of unrealized currency appreciation. The filing attributes portfolio unrealized appreciation in part to foreign exchange movements. Forward contracts had a net fair value liability of $1.7 million at quarter-end.
- Adviser credit-support agreements related to acquired MVC and Sierra portfolios had a combined carrying value of $58.7 million, with stated maximum support of $23 million and $100 million, respectively. Their value depends on portfolio outcomes and contractual settlement terms.
- Valuation is a key risk: $2.232 billion of investments subject to the fair-value hierarchy were Level 3 at quarter-end, relying on significant unobservable inputs. Management notes realized outcomes may differ from current estimates.
- Other disclosed risks include portfolio-company credit deterioration, inflation and recession, financial-sector liquidity disruptions, floating-rate exposure and the transition away from LIBOR. The company reported compliance with credit-facility and note covenants and no material pending legal proceedings expected to affect results. No interest-rate hedges were in place at quarter-end.
Investor verification priorities
- Review non-accrual developments, particularly the large cost-to-fair-value gaps, and the effect of further borrower stress on income and NAV.
- Check cash conversion and funding capacity against the $371.8 million of unfunded commitments, distributions, and the credit facility’s borrowing-base and covenant limits.
- Assess the sustainability of investment income as rates change, including higher financing costs, PIK income that is not collected in cash, and the continuing LIBOR transition.
- Examine Level 3 valuation assumptions, foreign-currency exposure and the realization prospects of the adviser credit-support agreements.
- Confirm distribution coverage, the status of the new repurchase authorization, and future asset coverage headroom from the 180.8% reported level.