Barings BDC, Inc. Q1 FY2020 Earnings Call

At this time, I would like to welcome everyone to the Barings BDC Inc Conference Call for the Quarter Ended March 31, 2020. Today's call is being recorded, and a replay will be available approximately two hours after the conclusion of the call on the company's website at www.baringsbdc.com under the investor relations section. Please note this call may contain certain forward-looking statements that include statements regarding the company's goals, beliefs, strategies, future operating results and cash flows. Although the company believes these statements are reasonable, actual results could differ materially from those projected in forward-looking statements. These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks including those disclosed under the sections titled Risk Factors and Forward-looking Statements in the company's annual report on Form 10-K for the fiscal year ended December 31, 2019, and quarterly report on Form 10-Q for the quarter ended March 31, 2020, each as filed with the Securities and Exchange Commission. Barings BDC undertakes no obligation to update or revise any forward-looking statements unless required by law. At this time, I will turn the call over to Eric Lloyd, Chief Executive Officer for Barings BDC.

Thank you, operator, and good morning everyone. I first want to start by just saying I hope everybody is doing physically and mentally well in whatever situation you're currently in and that you and your loved ones are making the best of these unique times. We appreciate everyone joining us for today's call. Please note, throughout this call, we'll be referring to our first-quarter 2020 earnings presentation that's been posted on our investor relations section of our website. Today on the call, I'm joined by Barings BDC's President and Co-Head of Private Finance, Ian Fowler; Tom McDonnell, Managing Director and the Portfolio Manager for our Liquid Credit in Global High Yield; and BDC's Chief Financial Officer, Jonathan Bock. Ian and Jon will review our first-quarter results and provide a portfolio and market update in a few minutes. While I'll begin today with some high-level comments about the first quarter and the market volatility that we saw. Please turn to Slide 5 of the presentation. In the first quarter, the liquid credit markets and BDC stock prices experienced their worst quarter since the 2008 financial crisis, falling roughly 14% and 46%, respectively. The global fear and uncertainty created by COVID-19 really drove selling across the board. In the past, we've discussed the high correlation between liquid credit spreads and BDC stock prices, and this correlation proved true again in the first quarter, regardless of the underlying collateral held by BDCs. Just as the equity markets revalued risk in the BDC space in the first quarter, we believe that increased risk in corresponding price moves should be reflected in our net asset value. On Slide 6, you see our first-quarter highlights. As we would expect, the market volatility caused by COVID-19 had a direct impact on our net asset value as NAV per share declined 20.8% in the quarter to $9.23. Jon will go through our NAV bridge later, but suffice it to say that unrealized depreciation in our portfolio was the driver of this decrease. Each quarter, we value our investments by taking into account market and portfolio company information in our internal valuation process that is consistent across the entire Barings platform and consistent quarter to quarter. Our total investment portfolio was carried at 87.4% of cost at March 31 versus 98.3% of cost at December 31. Overall, we've been pleased with how the sponsors and management teams of our middle-market portfolio companies have handled these challenging market conditions. All but four of our middle-market debt investments are valued above 90% of cost as of March 31, with the remaining four valued above 85% of cost. We continue to have no nonaccrual investments and all portfolio companies made their scheduled interest and principal payments in their first quarter. Additionally, we've seen improved conditions in the liquid markets since quarter end resulting in appreciation in our broadly syndicated loan portfolio. Ultimately however how quickly the country gets back to work will be the critical driver of portfolio performance in the second quarter. While portfolio performance was certainly the story of the first quarter, I do want to point out a couple of other key items. First, our net investment income per share of $0.15 was consistent with the fourth quarter of last year and 1% below our first-quarter dividend of $0.16 per share. While we did see the expected increase in our investment income for the quarter as a result of our middle-market deployments last December, the impact of further LIBOR declines and overall slowdown in middle-market lending in March resulted in a relatively flat investment income and net investment income for the quarter. Second, in terms of our portfolio rotation, we had gross middle-market originations of $93 million during the first quarter which were funded in part by $46 million of net broadly syndicated loan sales. Importantly, when we saw the slowdown in direct lending market in March, the breadth of the Barings platform allowed us to be opportunistic with strategic purchases of $22 million of broadly syndicated loans and $12 million of structured product investments at attractive prices that should generate increased returns in future quarters. It is during these times of market volatility that Barings' wide investment funnel across global markets and multiple asset classes allow the Barings BDC to remain active in these markets and search for the most attractive risk-adjusted returns. On Slide 7, we summarize some additional financial highlights for the first quarter in each quarter of 2019. Despite the NAV decline during the quarter, our net debt-to-equity ratio was 1.2 times, still well below the regulatory threshold of 2.0 times and providing a cushion to withstand additional pressure on asset values, meet our contractual commitments for unfunded capital and support existing and new investments with incremental capital. Ultimately, the decisions we have made since becoming the investment advisor to the BDC in August of 2018 including our fee structure, our focus on high-quality, true first-lien, senior secured investments, as well as Barings' unique ownership by MassMutual, have positioned us to manage through these challenging markets and opportunistically take advantage of market dislocations and that should drive long-term shareholder value. Turning to Slide 8. I'll provide a quick update on our share repurchase program. You will recall that we announced a new share repurchase program for 2020 on our last earnings call, whereby the board has authorized the company to purchase up to 5% of its outstanding shares during the year if shares stay below NAV per share, subject to liquidity and regulatory constraints. This program kicked off in early March and through yesterday, we have repurchased roughly 2% of our total shares outstanding or approximately $7 million. The volatility in our stock price created a strong buying opportunity as our average purchase price per share was $7.21 over the entire period, and the first-quarter NAV accretion of $0.03 per share generated by these repurchases should provide a long-term benefit to shareholders as loan prices reflate. As a reminder, Barings LLC continues to be Barings BDC's largest shareholder, owning 28.4% of the shares outstanding, another example of our commitment to a long-term shareholder alignment. Let me finish by thanking the Barings team for their incredible tremendous efforts during this difficult time of uncertainty. We are focused on the health and well-being of our employees and of our communities, creating a work-from-home environment and flexibility to allow employees to do their job effectively while taking care of their families and loved ones and themselves. I continue to be impressed by the focus of our investors, portfolio companies and other stakeholders, and their tireless efforts I believe will prove to be a driver of long-term success. I'll now turn the call over to Ian to provide an update on our investment portfolio and what we are seeing in the middle market today.

Thanks, Eric, and good morning everyone. I want to echo Eric's comments. I hope all of you and your families are well and safe. On Slide 10, we show a summary of our investment activity for the first quarter. Frankly, from a middle-market investment standpoint, the first quarter consisted primarily of January and February as new investment activity largely came to a standstill in March. New middle-market investments totaled $93 million with sales and repayments of $41 million during the quarter. New investments included 10 new platforms including four European platforms and 10 follow-on investments. Regarding the follow-on investments, $9 million was for the funding of previously committed delayed draw term loans and $6 million was for new commitments to existing portfolio companies. In all instances, the investments were made to fund acquisitions. Other than funding $1.6 million of delayed draw term loans in April to fund add-on acquisitions, Barings BDC has not made any additional investments in portfolio companies to support liquidity needs driven by the current economic environment. It is important to note that Barings BDC does not have any revolver commitments. So there has not been a drain on our liquidity as a result of portfolio company revolver draws. Jon will discuss our liquidity in more detail, but we remain focused on our ability to meet all of our contractual delayed draw term loan commitments to portfolio companies. Given that our DDTLs are generally earmarked for acquisitions and require compliance with incurrence covenants, we would not expect material usage of these DDTLs in the current economic environment. As Eric mentioned, while middle market activity was slow in March, we did opportunistically take advantage of market conditions. Of the $28 million of broadly syndicated loan purchases in the quarter, $22 million was made in March, and we also made $12 million of structured product purchases which include CLOs and private asset-backed securities. Given the prices of these assets, we believe the long-term returns generated by these high-quality liquid investments will generate some of the best risk-adjusted returns available in the current market. On prior calls, I've emphasized the value of choice. And Barings' large investment funnel across high-quality obligors and disparate asset classes has proven to be advantageous in this volatile market. On Slide 11, you can see that at March 31, we were invested in roughly $645 million of private middle-market loans and equity which included $74 million of unfunded commitments and $385 million of liquid broadly syndicated loans. I'll walk through how the portfolio changed during the first quarter in a minute. But first, I'd like to make some high-level observations about our portfolio. The portfolio statistics on Slide 10 regarding leverage, interest coverage and EBITDA are all generally consistent with the statistics we reported last quarter. Given the timing of financial reporting, these metrics are primarily supported by portfolio company financial information as of December 31, 2019. Even after they are updated to reflect first-quarter portfolio company results, the COVID-19 impact in our economy will not be fully reflected. That is why it is important to focus on items like seniority and diversification in this market. Our total portfolio was 96.9% senior secured first-lien assets spread across 29 different industries. The $571 million funded middle-market portfolio was spread across 62 portfolio companies and 18 industries in sponsor-backed transactions. While the $385 million BSL portfolio was spread across 94 portfolio companies and 20 industries. Our top 10 investments are shown on Slide 12 and reflect another aspect of the overall diversity of our portfolio as the top 10 positions represent only 21% of the overall portfolio and no investment exceeds 2.4% of the total portfolio. Thus, no single investment should have a significant impact on the company overall. There are many unknowns heading into the second quarter and beyond which is why a high-quality, diverse portfolio is more important than ever. Slide 13 shows a bridge of our total investment portfolio from the end of 2019 to March 31. We've touched on the key origination and repayment components, but this slide also shows the impact of unrealized depreciation on the portfolio as a whole which totaled $121 million for the quarter. This unrealized depreciation is further broken out on Slide 14. You can see that approximately $83 million or 68% of the unrealized depreciation was attributable to our liquid investments, while $35 million or 29% was attributable to our middle-market portfolio. Within the middle-market portfolio, $26 million was driven by higher spreads in the broader market for middle-market debt investments based on our observations of a combination of high yield and middle-market indices. We've classified $8 million of the middle-market portfolio unrealized depreciation as being attributable to underlying credit or fundamental performance. At this point, the vast majority of this is not driven by reported portfolio company results, but rather our ongoing proactive analysis of the impact of the current situation on our portfolio companies including the effects on revenues and liquidity. Through our discussions with management teams and sponsors, certain investments have been impacted more than others, and our valuations have been adjusted to reflect this. As Eric indicated, all of our portfolio companies made their scheduled interest and principal payments in the first quarter, and we continue to remain in close contact with each company as the COVID-19 situation develops. Switching gears to the broader market, please turn to Slide 16 of the presentation. While average unitranche spreads saw a slight uptick in the first quarter, they remain near historic lows, while spreads for the other nonbank structures generally decreased during the first quarter. It is important to keep in mind however that the majority of this data was driven by market conditions in January and February. So the spread increases as a result of COVID-19 are muted thus far. As you can see from the Crédit Suisse single B leveraged loan index, we would expect spread increases across the board in the second quarter based on current market conditions. Slide 17 gives a graphical depiction of relative value across the BBB, BB and Single B asset classes. Recall Barings' size and scale as a $327 billion asset manager provides our BDC with the unique investment frame of reference in both liquid and illiquid credit. The data here outlines spreads at 3-year highs across the spectrum. But it also shows the relative value opportunities that can exist for investors at different levels of credit risk. For an example, an investor looking to take Single B risk can earn an investment spread of 981 basis points invested in liquid corporate loans relative to approximately 750 basis points in direct lending unitranche. In contrast to the extent, an investor wanted a similar yield provided by that unitranche transaction but improved their risk position, they could consider structured market investments in BBB CLOs at wide spreads. In short, the value of choice across markets provides a meaningful benefit to the BDC investors. In our core direct lending markets, we will continue to be highly selective, focusing on select sponsors and markets across the U.S. and Europe. We will also continue to be opportunistic across the credit spectrum, but always maintaining diversity without an overemphasis on one product, obligor or geography. With that, I'll turn the call over to Jon to provide more color on our financial results.

Thank you, Ian. On Slide 19, you can see the bridge of the company's net asset value per share from December 31, 2019, to March 31, 2020. Now as Eric mentioned, our NAV was down by $2.43 this quarter to $9.23 per share, which is a decline of approximately 20.8%. This decrease was due to net unrealized depreciation of $2.44 which was offset by $0.01 for the net impact of all the other drivers combined, including the $0.03 of NAV accretion from our share repurchase program. You saw that a breakdown of this unrealized depreciation on a NAV per share basis was also shown when Ian discussed Slide 14. Now at a high level, over 90% of the NAV decline was driven by broad market moves caused by spread increases for middle-market loans and price declines for liquid investments. Also reflected on that chart was the fact that foreign currency fluctuations did not have a material impact on our financial results in the quarter, which you'd expect given our hedging strategy. Slides 20 and 21 show our income statements and balance sheets for the last five quarters. From an income statement perspective, we've already touched on some of the key highlights, but I'd like to point out a few high-level trends. On the top line, our consistent portfolio rotation has resulted in an increase in our total portfolio average spread of 84 basis points since March 31, 2019, with the average spread increasing from 373 basis points to 457 basis points. The average yield at par in our total portfolio, however, has decreased from 6.2% to 5.7% over the same time horizon as a result of lower LIBOR resulting in a relatively flat total level of investment income. Now this market dynamic could have made it tempting to pursue higher yields in order to grow the bottom line, but it's during the turbulent markets we are experiencing today that we're happy we remain focused on a primarily first-lien strategy. You can see, on Slide 21, our balance sheet trends. Excluding our short-term investments, total investments at fair value were down approximately $106 million compared to the fourth quarter due to the unrealized depreciation that we've discussed. Excluding this impact, the portfolio would have increased $15 million based on the portfolio rotation. Similar to last quarter, our cash balance and short-term investments balance at March 31 were largely transitory due to the timing of repayment of our BSL credit facility and debt securitizations with the proceeds from our BSL sales. During the fourth quarter, we lowered the commitment on the BSL facility from $150 million to $80 million and further lowered it to $30 million subsequent to quarter end to rightsize the facility relative to our reigning BSL portfolio following a $20 million repayment. Also, during the first quarter, $27 million of the CLO Class A-1 notes were repaid, bringing the total CLO debt principal balance down to $291 million at March 31. An additional $65 million of the CLO Class A-1 notes were repaid in April, bringing the total current CLO debt principal balance down to $226 million. Details on each of our borrowings are shown on Slide 22. Our debt-to-equity ratio at March 31, 2020, was 1.42 times or, most importantly, 1.2 times after adjusting for cash and short-term investments in unsettled transactions. Pro forma for the BSL credit facility and the CLO debt repayments in April, totaling $84 million, our debt-to-equity was 1.23 or roughly in line with our net debt as of March 31. I'd also like to note that our only debt maturity in the next two years is the BSL credit facility that matures in August of 2021, which is now down to its size of roughly $30 million. Now jump to Slide 23. From a liquidity perspective, our primary sources of liquidity continue to be the proceeds from planned rotation out of our liquid BSL as appropriate and depending on those market conditions as well as the borrowing capacity under our $800 million senior secured corporate credit facility. Today's available borrowing capacity under this facility, which is all subject to leverage, borrowing base and other financial covenants, would allow us to borrow amounts up to the approved regulatory limit of two times. We certainly do not plan to increase leverage to that level, but I want to use that to illustrate that we have the available liquidity to support existing portfolio codes and remain active market participants today. The chart on Slide 23 shows the impact on our net leverage of funding our unused capital commitments. While Barings did not have any revolver exposures on our balance sheet, we have $73.5 million of delayed draw term loan commitments to our portfolio company, as Ian mentioned, as well as our remaining $40 million commitments to our joint venture investment. These DDTL commitments are generally in place to support portfolio company acquisitions and also generally have incurrence tests limiting their total leverage. Thus, we'd expect usage in those DDTLs to be limited to those companies generating very strong results and further limited by the depressed level of acquisition activity that you're looking at in today's market. Now while we'd expect limited usage, this table shows that we do have the available capacity to meet the entirety of these commitments, if called upon, while maintaining cushion against our regulatory leverage limit. In addition, our $385 million liquid broadly syndicated loan portfolio also provides additional liquidity if it was needed. While we could sell those investments to reduce leverage while not impacting current NAV, we can also sell those investments in order to redeploy the capital in other investments with improved risk-adjusted returns. Any sale, right of course would likely convert an unrealized loss to a realized loss, but long-term NAV could be improved with the incremental returns on those new investments. One final point regarding our liquidity and capitalization relates to our ability to issue shares of common stock pursuant to board approval at a price below NAV which was approved at our annual meeting of stockholders yesterday. We appreciate the support that we received from our shareholders on this proposal, particularly during a period of such extreme market volatility and uncertainty. It was evidenced to us, stockholders have placed their trust in Barings and the board, and we take that responsibility to act in our shareholders' best interest very seriously.

Slide 24 updates our paid and announced dividends since Barings took over as the investment advisor to the BDC. We announced yesterday that our second-quarter 2020 dividend of $0.16 a share will be paid on June 17, 2020, and this dividend level is consistent with the first quarter and represents two important points. First, the reality of the current market environment is that middle-market originations will be lower than historical levels. The breadth of the Barings platform will allow us to take advantage of opportunities as the market continues to evolve, but we would not expect overall portfolio yields to increase materially in the second quarter. Second, maintaining a consistent dividend level represents our current expectation that our portfolio continues to perform in the second quarter, given how well it was positioned entering into the crisis and how it's managing through the crisis to date. Now Slide 26 summarizes our new investment activity during the second quarter and investment pipeline. Since April 1, we closed and funded one new middle market investment of $10 million of equity and first-lien debt with an origination margin or DM-3 of roughly 9.6%. We've also funded $1.6 million for previously committed DDTLs primarily to one well-performing European portfolio company in order to fund some tuck-in acquisitions. The current Barings global private finance investment pipeline is approximately $110 million on that probability-weighted basis and is predominantly first-lien, senior secured investments. As a reminder, this pipeline is estimated based on expected closing rates for all deals that rest in the pipeline. And lastly, I'd like to provide an update on our joint venture with the State of South Carolina Retirement System. This vehicle allows us to leverage the broader Barings platform and increase the investment diversity within the BDC. At March 31, the cost basis of BBDC's investment remained at $10 million as we continue to ramp the JV using its subscription leverage facility, and over $4 million of investment declined while the fair value of the investment declined to $6.4 million. This quarter's decrease in value is largely driven by the same technical price-driven valuation market impact on Barings BDC as the JV portfolio consists of roughly 70% broadly syndicated loans, 21% middle-market debt investments, and 9% public and private ABS securities. We completely evaluate the opportunities in areas such as European credit, structured credit, and continue to make investments in these areas that all have attractive risk-adjusted return profiles in this environment. And with that, operator, we would love to open the line for questions.

Our first question comes from Robert Dodd with Raymond James. Please go ahead with your question.

I appreciate the detailed information you provided during the presentation. Regarding the NAV mark associated with credit, the $0.17 is relatively small compared to the overall mark due to market conditions. You mentioned that this is primarily based on the financials as of December 31, but there have been discussions with portfolio companies to gather more current information and expectations. Can you share any insights on how the March 31 marks might differ from what you initially expected? It would be helpful to know if you have heard anything since then that might indicate better or worse performance compared to the expectations factored into those marks at that time, especially since a month has passed.

Sure. I can take this one and Eric and Jon, if you want to jump in, go ahead. So just to provide a little bit of color here. I think we have the benefit of being a global platform with businesses in Asia. And so through our parent, MassMutual and Barings, this whole event that was occurring in the healthcare crisis, we were seeing it happen real-time in our markets that we're in globally. And even our direct lending business, we have people on the ground in Hong Kong. So we anticipated that there was going to be potentially impact to our market. Obviously, we would not have been able to anticipate the shelter in place and all those other factors, but we did assume that there could be demand, supply shocks to our portfolio companies and potential operational disruptions. And so like we said in our opening remarks, we did not use the 12/31 financials nor expected first-quarter performance because that didn't really reflect the true impact of COVID which really would have been felt in March, particularly the last half of March. As you pointed out, Robert, we had many discussions with management teams beginning in January progressing through early March as we tried to identify which companies had high, medium and low exposure to COVID and then also had to assume that there was going to be a subsequent economic recession that would follow. And every investment that we make, even before all this, we obviously spend a lot of time on a downside scenario, assuming a cycle. So what we try to do in our discussions was really bridge that downside cycle with the input that we were getting from the management teams through their analysis and their assumptions of this event. And as you point out, it's imprecise. It's not perfect. I think directionally, it's more realistic. It's certainly not appropriate to be using Q1. You really want a Q2 projection because Q2 will really truly reflect the full impact of COVID. And beyond Q2, it's really hard to get a line of sight in terms of what the environment is going to look like. So we're having calls every few weeks. We're adjusting our marks based on those calls. And I would say that in a number of cases, management teams when in mid- to late March when the thing totally happened and people were really concerned about the event, and it was really unknown how this was going to play out. I think some of the analysis that came back was very draconian. And actually, based on conversations, some of those businesses are doing much better than they expected and others are on plan and maybe some others are a little worse. So it's kind of all over the board. The one benefit we had going into this is that when you look at the industries that were the most vulnerable industries with this healthcare crisis, they are industries that we avoid or underweight on an ongoing basis. So through luck and discipline, we were able to avoid a lot of that. And I'll let Eric or Jon chime in.

Well said. Robert, does that answer your question?

Thank you. This leads me to my next point. There are certain industries like gyms, hotels, and hospitality where we anticipate significant challenges. Are there any other sectors you've observed that might be surprising in terms of either a greater negative impact or unexpectedly strong resilience? I understand it's still early, but are there areas doing significantly better than anticipated?

That's a great question. This information comes from our discussions with our management teams, and we haven't seen any concrete numbers yet. In terms of logistics, we have three logistics companies in our portfolio, and they all appear to be performing well, with no noticeable impact. One focuses on food shipment, and another on chemicals and life sciences, which are essential items. What surprises me is the varying impact on these companies based on whether they provide essential or discretionary services. Those in discretionary sectors are struggling significantly, while we have intentionally avoided investing in retail and restaurants due to the risks associated with financing small businesses in those areas. Even larger retail and restaurant operations have been severely affected, despite the expectation that their size and diversity would offer some protection. I've never fully subscribed to the idea that any business is completely recession-resistant, as I believe all are influenced by the overall economy. It's surprising to see healthcare companies, including those offering valuable services like dental management practices, facing challenges in this environment. The situation is quite variable and fluid, and given the current shelter-in-place directives, it's challenging to predict the overall impact.

The only thing I would add to that quickly is that it's similar to what we learned in 2008 and 2009. There are the first order effects, which are the obvious ones. As Ian mentioned, we immediately assessed every portfolio company and categorized them based on the COVID impact—high, medium, and low. It may sound simplistic, but sometimes simplicity works. The first order impacts were straightforward. The real challenge lies in the second and third order effects. You have to analyze the company and recognize that, for instance, 25% of the ultimate end customer is linked to catering or something similar, where you know that business will diminish. I believe the team has done well by looking beyond the surface level and truly understanding each company through our underwriting, engagement with management teams and sponsors, and having discussions about these second and third order effects. Those will be the areas where positive or negative surprises may arise, as the more obvious impacts are clear to everyone.

Thank you. Our next question comes from Finian O'Shea with Wells Fargo. Please proceed with your question.

Hi guys. Good morning. First question for Jon on issuing below NAV. Can you give us some more color on where you would issue below book including do you see this as a tool for defense, where your own capital structure may be stressed or offense, where the market opportunity would merit new equity?

Thank you, Fin. To clarify, we received approval to issue about 25% of shares below NAV, and we discussed the reasons and benefits of this in the proxy. It's important to note that dilutive issuance can sometimes be advantageous, although the history in this area has been mixed. Our ability to issue shares carries a significant responsibility, and we believe it starts with aligning our interests. As the largest shareholder, owning over 28% of the shares, we certainly don’t intend to harm our position. Issuing shares can offer benefits, especially when considering dynamics related to debt capital and credit ratings, but it also comes with a high level of accountability. We are not committed to any fixed approach; our actions will always be in line with the best interests of shareholders, who include us as the largest stakeholder. We are aware of past scenarios where dilution has negatively impacted investors, and we recognize that even rights offerings can be dilutive, affecting different classes of shares. Therefore, we see this capability as a useful tool, but not one we plan to prioritize; it's part of a broader strategy. Looking at our current liquidity, we feel well-equipped to make new investments and support our portfolio. Ultimately, it’s about ensuring alignment with our shareholders, which we are committed to maintaining. We understand the importance of this responsibility and will not misuse it to compromise investor trust. Fin, does that address your question?

That's helpful. Thank you. And a follow-up for...

Fin, this is Eric. I want to clarify that our request for approval was made to manage potential liabilities in the future, and we appreciate the support we received. Our intention was always to submit this request, which we had planned to do six months or three months ago. The timing of our request coinciding with current market volatility is purely coincidental, and I want to emphasize that the two are not related.

That's helpful. Thank you. And then for Ian or Eric, you touched on the opportunity in liquid or structured products. Can you give us any views on expanding your commitment to a joint venture where you can approach this in a more tailored fashion on asset selection, leverage and so forth? And if you agree, would you have the appetite to set up another joint venture where you hold more of an economic interest?

I'll start with a joint venture question, and then I'll lateral it over to Eric kind of talking about the broader platform and how we see opportunities. For us, we're very thankful and appreciative of our joint venture with South Carolina. But remember, what happens here is often joint ventures can, in certain circumstances, become the tail that wags the dog, to where too much of an economic interest in a JV that drives one earnings with high levels of leverage can end up walking people into a situation where that becomes the primary driver of return. For us, it's about diversification. Having that ability, even in our commitment size, we feel very comfortable at that level that we both received diversification into the other asset classes that the BDC can't easily participate in, given Barings' wide investment funnel. But also not creating the situation where tails do wag dogs and you lose that benefit of the diversification overall. And so that's one major point. And then to pass it to Eric on kind of relative value, really, the fact that we've had such a wide funnel and sit across a number of global asset classes that report to Eric, this is the opportunity to look across those to generate returns, and we're finding opportunities both for the BDC and the JV. Oftentimes, they can co-invest together. But I'll lateral that one over to Eric.

We currently have no plans to establish another joint venture or increase our stake in any existing ones. Our main focus is on asset quality and managing our current portfolio to ensure we perform exceptionally well. This quarter, we aimed to demonstrate to our shareholders that the Barings platform offers a unique set of opportunities that differ from others. Initially, we didn't want to delve too deeply into structured products but wanted to highlight the types of opportunities available. As for the possibility of doing more in the future, we will always pursue the best risk-adjusted returns. Our liquid high yield portfolio relative value committee meets frequently to analyze loans versus bonds, and the comparisons between U.S. and European markets, including all structured credit components and our emerging markets business. Our firm is inherently focused on relative value, always seeking the best risk-adjusted returns given the circumstances. As Jon pointed out, we identified opportunities in March where the liquid market offered significantly better risk-adjusted returns compared to the middle market. We will always chase the best relative value available. Did I address your question, Fin?

Thank you. Our next question comes from Kyle Joseph with Jefferies. Please proceed with your question.

Hey. Good morning guys and thanks for everything you provided in the deck. Very helpful. I just wanted to get a sense for, given another drop in rates this quarter, give us a sense for where we are in terms of LIBOR floors on your portfolio and remind us what percentage of your portfolio, both the BSL and the middle-market portfolio, do you have the LIBOR floors?

I'll start.

Okay, go ahead.

Then I'll turn it over to Ian for the middle-market and Tom for the liquid side. I don't have an exact percentage for you on the middle market. I would tell you, the majority, the vast majority of ours have a LIBOR floor. It's typically 1%. We saw some pressure, I'd say, three to six months ago, where people were trying to take those out and maybe just put a floor of 0 in there. So I would say it's the vast majority, but I don't have a specific number that I can give. I don't know, Ian, if you know the exact percentage off the top of your head.

I don't want to give an exact percentage, but I think if you looked at sort of 80% to 90%, that would be kind of directionally in the ballpark. And certainly, I can tell you, today, any document that we open for whatever reason, we're making sure that the floors are in there as well as tightening other items in the documentation. I'll turn it over to Tom on the liquid side.

Yeah. I'd say on the liquid side, it's kind of the exact opposite of that. Almost 90% of the deals have 0% floor. So there's a floor, but it's at 0, and so we don't have the benefit of that 1% floor for the majority of the market in the broadly syndicated side.

That's very helpful. Thanks. Obviously, the majority of the mark at 3/31 was, it sounds like primarily driven by BSL movement. Can you give us a sense of how much of that has come back quarter to date?

Yeah, this is Tom. I'll take that one. We've had about a 4% recovery in prices for broadly syndicated loans. Generally, the CS index is a good measure of that and it's up around 4.2% in April, so we're approximately in line with that.

Got it. Thanks. And then one last one for me. Obviously, this depends on ultimately the duration of this impact and whatnot. But just want to get your initial perspective on how this disruption impacts the competitive environment and any sort of outlook for potential consolidation?

A couple of years ago, I participated in a panel at SuperReturn in Europe, where I was asked about volatility. My perspective was that I was looking forward to it. While I didn't anticipate this level of volatility in this segment, I saw it as an opportunity to distinguish higher-quality managers from others. It’s important to note that everyone will face challenges in their portfolios. As I’ve communicated to our team and investors for years, the key to making money isn’t just about minor differences in origination yields. The real profit comes from managing downside risk effectively and having the experience to navigate it, along with a well-structured portfolio that protects against uncertainties. As Jon mentioned, our portfolio is highly diversified, with our largest investment being around two and a half percent. I believe this volatility will ultimately benefit the industry by creating some differentiation. Regarding consolidation, it's complex due to the structures of these businesses, but there may be opportunities as shareholders evaluate how certain managers performed during this time. Jon, do you have anything to add?

Yes. Eric, I'd echo your comments. And Kyle, I know you're familiar with this, but really the economic challenges come in two parts. The first is a crisis of liquidity, and you've seen that on the part of the industry, there are liquidity issues, right? And then the second is a point on credit, and that usually takes several more quarters and months to bear out. The potential for acquisitions usually comes in on the industry on that credit wave, right which we've yet to see. Always, just like anyone will mention on a call, always open for the opportunity to the extent it's shareholder-accretive. But the goal here for us is to always realize that we've got great opportunities in our core market sets. Any such acquisition would need to be very compelling from a shareholder perspective. It might get there. But right now, you have the credit wave coming first. As you dive into NAVs and others, I think we'll all understand in the future kind of where the chips fall for the entire industry. But Kyle, does that help?

Thank you. Our next question comes from Casey Alexander with Compass. Please proceed with your question.

Hi. Good morning everybody and hope everybody is feeling well during this. And thank you for the granularity of your presentation. I think investors should really appreciate particularly the breakdown of unrealized marks. I think that's extremely revealing. I've got a few quick questions here. One, you've only touched on it lightly in your presentation, but what have your conversations been with the sponsors of your portfolio companies? And how did that contour your bucketing from high, medium to low in terms of kind of risk-rating where your portfolio companies are at?

Ian, do you want to take that?

Yes, I'll take this one. So as I mentioned, we had multiple conversations with management teams. Then the second stage was having conversations with sponsors because part of the analysis and again, what we were trying to bucket initially was exposure to COVID from a high, medium and low perspective and kind of think of that as kind of the first wave and maybe the most disruptive wave with the assumption that we're going to have some kind of recession, the severity of that recession obviously dependent on the duration of the healthcare crisis. As we identified companies with high and medium exposure to COVID, then the conversation was with the sponsor. Okay, you have this company. It has exposure. What's your game plan? How are you going to support it, both in terms of oversight, strategy, and also capital? The reality is, on the capital side, sponsors have a finite amount of capital. Part of our analysis was getting a perspective from them in terms of where does this investment reside which we would know. Is it an older vintage or a newer fund? If it's an older vintage, then therefore, they have less capital available to support that company. So then you get into analysis of what other companies are still active in that portfolio and how much capital do they have. It's kind of game theory about which ones do you think they're going to support and which ones you don't think they're going to support. Obviously, with newer funds, they have more capital to support those companies. So that was the analysis that we went through. It doesn't change the high, medium, low impact of COVID, but it changes our playbook in terms of what our approach is going to be if this company gets into either a liquidity crisis or a big-hour restructuring. The only thing I'll point out, which I didn't mention, is that all the discussions that we had with our management teams and sponsors, we basically took all that information to our high yield team. We have almost 50 high yield industry experts and basically had them validate what we were hearing in terms of the industries and the comments that we're getting around the company's ability in that industry to withstand any kind of liquidity issues or COVID issues and maintaining that value proposition. Does that help, Casey, with your question?

Yes, it does. And in a follow-on, in a situation where a sponsor is at the end of the rope in the fund, and obviously, they have rules about cross investing. Does the sponsor yet still participate with you in sort of game planning for additional forms of capital to that company? I mean, it seems to me that just because they can't do it themselves, does it mean that they're necessarily so will just kind of let it go? And do any of those options include government-sponsored lending programs?

I will take that first, and if anyone else wants to add, feel free. The reality is yes. We hope we've managed the front end well. We assess the sponsors we collaborate with, focusing on those with operational expertise who view us as partners rather than just suppliers. In the past, I’ve worked with sponsors who couldn't inject capital but actively assisted in maximizing recovery for their companies. Ultimately, if more capital enters the scene and the sponsor is suitable, they face a choice: they can risk dilution or potentially lose all equity. Good sponsors will be supportive in devising a comprehensive plan, whether that involves them providing the capital or another party stepping in, all of us collaborating to safeguard the company and enhance recovery. Regarding the government plan, it is a new variable in a shifting landscape. It’s up to the company and the sponsors to decide if they want to engage with that program.

Thank you for that, Ian. Jon, regarding maintenance, could you clarify the debt paydown discussed as a subsequent event after the end of the quarter? Should we consider that as funds coming from short-term investments, or is it more related to utilizing capacity on the credit line to settle those other forms of leverage?

Yeah. No capacity on the credit line. One, it comes from short-term investments in cash. We've been active in sales to the extent that we've generated a few that were still trading at attractive levels to where we bought or if there were some moves in and out. By and large, no. Using your revolver capacity to pay off SPV lenders is a bad idea.

Great. Thank you very much. I appreciate you taking all my questions. And again, I hope everyone is feeling well.

Thank you.

Thank you. Our next question comes from Ryan Lynch with KBW. Please proceed with your question.

Good morning. I hope everyone is doing well. My first question pertains to your securitization CLO. As you were compliant with all your covenants in Q1, I am curious about your outlook. As we move forward, it seems likely that there will be more defaults and rating downgrades for credit investments. How confident are you in maintaining your CCC bucket or your OC cushion for that securitization as time goes on?

Sure. Ryan, this is Bock. That's a great question and one that how folks are financing is extremely important. So very comfortable with the OC cushion, very comfortable with available CCC to the extent that downgrades persist. I just want to outline kind of the timing. That CLO is really a function of just proper financing. It's not designed to over-lever or to generate return, but mostly just protects the tight paydown, that's the form of static CLO. When it was done, it was done around that April timeframe that had a lot of the year-end malaise that occurred in loans in the latter part of 2018, right? So there was a lot of conservatism built into that structure. Very good from a liquidity perspective, and that securitization is built with a high level of cushion to make sure that even into the extent downgrades persist and are heavily elevated that the cash flow NIM actually flows through to the investors. Does that answer your question?

Yes. That's helpful. And then kind of following up on an earlier question from Robert. You'd mentioned earlier that you guys don't have Q1 financials yet really for most of your portfolio companies. I think that would assume that next quarter, you're probably not going to have Q2 financials yet for your portfolio companies which that's going to be kind of the real tell of how these portfolio companies are performing. In your discussions though that you are having, are you guys getting formal forecasts for 2020 from your portfolio companies? Are these just more informal dialogues that are going on? And at this point, even if you guys are giving forecast or just having kind of these informal dialogue calls with portfolio companies, I mean, how reliant can you be on really anybody's ability today to forecast what the economic picture looks like going forward? How is that going to specifically impact specific portfolio of companies that you guys are operating, just given the unprecedented levels of uncertainty that we have going forward?

Yes, I'll address that question. Most of the companies in our portfolio provide us with monthly financial updates. This allows us to align those updates with the baseline projections from their management teams. While this is a discussion, we are actually reviewing and analyzing real projections. It's important to note that the situation is very fluid. There are initial impacts and potential secondary effects to consider, along with the possibility of flare-ups or another wave. At this point, creating an accurate full-year 2020 plan is quite challenging. Our focus right now is on the second quarter, as it should fully capture any COVID-19 impacts in the numbers. As we observe trends, we will gradually extend those projections from the second quarter into the third. However, this will need to be a gradual process. We are engaging in discussions every other week with management teams, reviewing their projections, examining monthly updates, and comparing those monthly figures to their forecasts for any discrepancies. Honestly, that's the only way to effectively navigate such a unique situation since every cycle is different, and this one is particularly distinct. We just cannot predict how it will unfold.

Let me clarify and expand on that a bit. As Ian mentioned, we receive monthly financial updates from several of our portfolio companies. When we said we didn’t have financials, we were actually referring to the March figures, as we typically don’t have the data for March 30 or 31. Specifically, we’re talking about the first month significantly affected by COVID, and the financials for most companies will only be available around this time. However, we had the previous monthly financials. In our discussions with management teams, we focus on what April, May, and June look like, as this is crucial for understanding the company's liquidity, which is essential in challenging times, especially for those significantly affected. I want to connect this to an earlier point we made about taking the insights from these conversations and working with our high yield research analysts, who are specialized in various industries. It’s often difficult for middle-market lenders to possess industry expertise within a diversified portfolio, but we do have that. Our portfolio includes many different industries, allowing us to use the information from management teams about their expectations for the second quarter. We can collaborate with our research analysts to determine whether these expectations align with industry trends and discussions with other management teams. This approach enables us to gain insight into what we anticipate for the second quarter. To your point, we’re not trying to predict the entire year because we can't foresee that environment, but our focus is on the current quarter.

That makes sense. That's good clarification and good color. I think all that makes sense, given these uncertain times. Just one last question. Over the next coming months and coming quarters I think just broadly speaking, there's the expectation for a significant increase in the defaults, non-accruals and workouts across the credit landscape. How comfortable are you all today with across the variance platform of being able to work through those credits? Because it's going to take a significant amount of human resources, professionals to spend a lot of time working through those credits to be able to get the best outcome? So how comfortable are you with the amount of people, the level of people and the skilled professionals, to be able to work through those credits without putting too much strain on the overall platform.

Yes. I'll address that, and Ian can add his thoughts as well. We often emphasize the strength of the Barings platform, and this is another instance where I want to highlight its broad capabilities. Firstly, we should recognize the depth and experience of our current team working on middle-market credits, particularly in illiquid credits. We have a highly experienced team with over a dozen members, each with 20 or more years in the industry. They have navigated through various market cycles, and in these current challenging situations, their expertise is invaluable. However, we don't solely depend on our existing middle-market team. We also have a significant special situations group that typically operates on the liquid side but partners with others like Tom, who specializes in performing credit while this group focuses on more complex situations. They bring extensive experience in managing liquidity issues, bankruptcy scenarios, restructurings, and similar challenges. We collaborate with this group as part of our watch list process for credit evaluation. I am confident in our team's abilities, but it's truly the collective strength of the entire organization that equips us to handle this effectively. Additionally, we have a private equity business, although it is smaller compared to our fixed income operations, that brings knowledge of operating companies. We understand how to structure a board, select the right operating partners, and incentivize management teams. All these elements are resources we utilize to achieve the best possible outcomes for our own capital and our shareholders' capital.

And I would just add two points. One, as Eric mentioned, lots of experience on the team including workout experience and going through cycles. Almost 35% of the team has close to 20 years' experience. The other thing I would say is just, on Eric's point, in terms of the resources within the firm. Hopefully, we don't have a lot of situations where we actually have to take the keys of the company. But if you just think about special sits and our high yield team with all their industry contacts, we just have such a huge network of people that we can bring into situations, whether it's a board member or whether it's a management team or maybe it's a strategic buyer of a business. There's just a lot of resources there that we can lever.

Thank you. Our next question comes from David Miyazaki with Confluence Investment Management. Please proceed with your question.

Hi, good morning. I wanted to echo Casey's comment regarding the detail on your unrealized depreciation. I found Slide 14 very helpful. As we enter earnings season, I’m preparing myself to see various mark-to-market adjustments. Could you provide some details on how you arrived at your valuations? Did you use a combination of quotes and grid pricing, and were some quotes disregarded? Did you notice wider ranges in your valuations? Were you generally on the higher end, lower end, or was it consistent with your usual process?

I'll address the valuation question first. The bottom line is that our valuation process remains unchanged. This is an important point for us. For example, when it comes to syndicated loans, the marks are clear with no significant adjustments required. In the middle market, we strive to perform well because we believe that either one marks their book or the market does it for you. Through our discussions with management teams, we emphasize maintaining a consistent policy across the firm. While the levels will shift as spreads widen, the process itself has not changed. We have also found the input from third parties to be very helpful. There haven't been major disagreements as we attempt to navigate the market based on our discussions. The key themes are consistency and adhering to the same process even amid market changes. This is very important to us, and we are pleased to reflect this in our valuations. Essentially, marking to market simply shifts the economic return to future periods if the credit risk assessment is accurate. As long as we maintain a strong liquidity position, discussing marks is never an issue because we prepare for that and aim to estimate fair value as accurately as possible. Does that clarify things for you, Dave?

That's very helpful. Unfortunately, I don't think we'll see the same process throughout the industry. It's definitely encouraging to see someone early in the reporting season come out with such a clear and transparent process. I appreciate that.

Thank you both for your positive comments on our transparency. In our initial meeting 18 months ago, I committed to three key principles: long-term alignment, communication, and transparency. We're dedicated to upholding those commitments. I also want to emphasize that we have an independent valuation group within Barings. When considering valuations, the investment team has an entirely independently operating valuation group that validates all valuations. This group does not report to me; our connection only occurs at the CEO level. Additionally, it’s important to state that there is one price for each asset. An asset marked in the BDC is also marked the same way on MassMutual's books and our GPLP funds. Whatever the asset price is, it remains the same for everyone; for instance, if it's 93.2%, then it's 93.2% for all. While this may seem obvious, it’s essential to articulate it clearly.

That's very helpful to know. Eric, I'd like to follow up on what you've communicated in the past. I believe it's important to have clarity regarding issuing below NAV, especially when shares have actually been purchased. As investors, it's crucial for us to observe your actions rather than just your words. I appreciate the share repurchases. Shifting the focus a bit to the regulatory front, I know your team is involved in several aspects. One significant issue impacting the middle-market industry is the participation of sponsors in the Paycheck Protection Program. I'm curious if you have any thoughts or observations regarding the assistance available to your portfolio companies. Additionally, I was somewhat surprised but pleased to see the SEC making some mark-to-market adjustments for the industry. This indicates a change compared to the 2008 crisis when BDCs received minimal regulatory attention. The industry has been striving for progress on AFFE, which hasn't occurred, and I believe this contributed to the heavy stock declines in the first quarter. Any insights you can provide on the regulatory front would be greatly appreciated.

I'll start with the SEC and then Ian and Eric can talk about Paycheck Protection. Regarding the SEC leverage rules, I just want to make a quick point. The ability to adjust your asset coverage ratios is beneficial, especially when looking back at the last crisis. However, it's important to remember that the current higher levels of debt for BDCs mean there are additional covenants to consider. While having one less covenant is a positive, those who have heavily leveraged themselves may face challenges if they are experiencing significant payment adjustments or defaults. This situation points to having issues with lenders rather than regulatory ones. Compared to the last crisis, which was more about regulations, today it seems the focus is shifting to lender-related issues. Now, Ian and Eric, please go ahead with Paycheck Protection.

I can start and then, Eric, if you want to add anything. The PPP program allocates 75% for payroll and 25% for occupancy. This means it's important to maintain business operations, and most of it can be forgiven unless some of the 25% isn't used for occupancy. It's still early, and situations are changing. For businesses that have been significantly affected by COVID, where revenue has dropped to zero, there may be considerations regarding the program, but ultimately it's a decision for each company. They need to determine if they qualify and whether it will actually help them. It's really up to them to make that choice, and we don't have further information on that.

Thank you everyone for your questions. If you have additional inquiries, feel free to reach out. Thank you.

Thank you. We have reached the end of our question-and-answer session. So I'd like to pass the floor back over to Mr. Lloyd for additional concluding comments.

No. I just want to thank everybody for dialing in, listening to us. If you have any follow-up questions, you can reach out to Elizabeth or Jonathan or me or Ian or anybody you want to, to make sure you get your questions. Appreciate the comments, the compliments that we got on the transparency and the level of detail that we provided. That's our goal; it's what we strive for to provide, as I say to people all the time, it's your money, it's the shareholders' money. They just entrust us with that. So they deserve to know how it's being handled and all the transparency around it. So appreciate those comments, and everybody stay well and look forward to having a call here in the three months and updating you on the second quarter.

Ladies and gentlemen, this thus concludes today’s teleconference. We thank you for your participation. And you may disconnect your lines at this time.