Barings BDC, Inc. Q2 FY2023 Earnings Call

At this time, I would like to welcome everyone to the Barings BDC Inc. Conference Call for the Quarter ended June 30th, 2023. All participants are in a listen-only mode. A question-and-answer session will follow the company's formal remarks. 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 of the website. At this time, I’ll now turn the call over to Jeff Chillag, Head of Investor Relations for Barings BDC. Please proceed.

Thank you, operator and good morning, everyone. Thank you for joining us on the call. Please note that this call may contain 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 the 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 quarterly report on Form 10-Q for the quarter ended June 30th, 2023 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. I’ll now turn the call over to Eric Lloyd, Chief Executive Officer of Barings BDC.

Thanks, Jeff. Good morning, everyone. I also want to apologize if you hear some background noise. We're having quite the thunderstorm here in Charlotte, North Carolina. So if you hear some thunder and noise in the background, I apologize for that, but obviously, it’s not something we can control. I appreciate everybody joining us. Please note that throughout today's call, we'll be referring to our second quarter 2023 earnings presentation that is posted on the Investor Relations section of our website. On the call today, I'm joined by Barings’s Co-Head of Global Private Finance and President of Barings BDC, Ian Fowler; Barings Head of Capital Solutions and Co-Portfolio Manager of the BDC, Bryan High; and the BDC's Chief Financial Officer, Elizabeth Murray. During today's call, Ian, Bryan, and Elizabeth will review details of our portfolio and second quarter results in a moment, but I'll start off with some high-level comments about the quarter. I'd like to start by expressing my enthusiasm for a very strong quarter at BBDC. Really as measured on a number of financial metrics. It's clear that investors remain concerned about rates, inflation, and economic weakness. Even in this challenging environment, BBDC’s portfolio continues to deliver strong results for shareholders. Net asset value per share was $11.34 compared to the prior quarter of $11.17. That's a net increase of 1.5%. Net investment income for the quarter was $0.31 as compared to $0.25 in the prior quarter. Strong NII was fueled by a combination of really elevated yields from rising base rates, favorable dividends flowing from platform investments and JVs, and continued strong credit performance within the portfolio. Our performance is the result of a focus on the top of the capital structure and within more defensive industries. We believe BBDC remains well positioned for any further volatility and uncertainty in the market going forward. Investment activity during the quarter reflected a modest degree of net repayments as returns of capital during the quarter modestly exceeded originations. As our shareholders know, we're actively working to maximize the value in the legacy holdings acquired from MVC Capital and Sierra Income and rotate them into compelling Barings’ originated positions. Our investment portfolio continued to perform well in the second quarter, including the acquired Sierra and MVC assets. Our total nonaccruals are 2% of the portfolio on a cost basis and 1.1% on a fair value basis. That's compared to 3.8% of the portfolio on a cost basis in the first quarter. Three assets were removed from nonaccrual status, and no new nonaccruals were booked during the quarter reflecting the strength of the portfolio. With the exception of one investment, all of our nonaccrual assets were from acquired portfolios and therefore covered by our credit support agreements. BBDC shareholders continue to benefit from the credit support agreements provided by the manager. For the current quarter, the CSA valuation was approximately $60 million on a combined basis for this year and MVC credit support agreements designed to insulate shareholders from realized losses in those portfolios. Today, less than $30 million of net losses have been realized at the acquired portfolios; the remaining mark-to-market losses within the portfolio are spread across a wide number of issuers, and we believe to reflect mark discounts to par rather than anticipated impairments. Recall that a bulk of the Sierra portfolio was comprised of semi-liquid, broadly syndicated loans that trade infrequently. Turning to the earnings power of the portfolio. Increasing base rates continue to lift yields on our predominantly floating rate portfolio, with weighted average yields on floating rate investments increasing to 11.0%. We remain conservative on our base dividend policy, and our board declared a second quarter dividend of $0.26 per share, reflecting a 4% increase relative to the prior quarter’s declared dividend. On an annualized basis, the new dividend level equates to a 9.2% yield on our net asset value of $11.34. Total investment income generated in the quarter was the highest income delivered by BBDC since we began managing the BDC five years ago. With the strong results we have demonstrated this quarter, we wanted to remind investors of the message we communicated when we began managing what was previously Triangle Capital. When we rotated out of broadly syndicated loans in late 2020, Barings stated that we would seek to employ a first lien focused strategy to provide low volatility with a target dividend yield of 8% to 10%. Through the quarter ended June 2023, we have delivered a return inside this range. We will, of course, work to outperform these goals in the months and years to come. The BBDC is committed to alignment with our shareholders. During the second quarter, we repurchased 1.4 million shares of stock at an average price of $7.75. We have consistently maintained a share repurchase plan that allows BBDC the ability to strategically repurchase shares when the price is dislocated from the NAV. We recognize that we can create share price appreciation by investing in quality assets, even when the stock is trading at a discount. For this reason, we work to be judicious when we are repurchasing shares and balance it against leverage considerations and deployment opportunities. Looking at liquidity, net leverage, which has been leveraged net of cash and unsettled transactions, was 1.15x. This is within our target leverage range of 0.9x to 1.25x. We continue to prioritize risk management while balancing the deployment of capital in what has become a very attractive environment for private credit. I'll now turn the call over to Ian.

Thanks, Eric. Recall that BBDC is managed by Barings LLC, a credit-focused asset manager with more than $350 billion of assets under management. The bulk of the portfolio is sourced from the global private finance team, an organization with more than 85 investment professionals located around the globe providing financing solutions to preeminent middle market companies sponsored by private equity firms. BBDC’s portfolio decreased by $70 million on a net basis in the quarter with gross funding of $66 million offset by $135 million of repayments and sales, which included $50 million of sales to Jocassee. Activity during the first half of the year has been tempered as private equity buyers take a pause in this rising rate environment to determine any impact on valuations, regardless of how financial models have changed. Valuations have declined modestly as Casa leverage has increased dramatically. As a rough estimate, reference rates at 0% in 2021, private equity buyers could reasonably leverage companies at 5x to 5.5x, which supported purchase prices in the 13x to 14x range. Today, with the increase in base rates and slightly higher spreads, those same businesses can support leverage in the 4x to 4.5x range, which supports purchase prices in the 10x to 12x range. The reality of the sponsor-backed market is that a significant portion of transaction volume is on a sponsor-to-sponsor deal flow. Sponsors appear reticent to bridge the valuation gap between 2021 purchase price multiples and today's range based on financing costs. However, sponsors continue to execute on portfolio acquisitions, which makes sense as add-on multiples are below original platform purchase prices, enabling sponsors to reduce their cost basis and hedge against any compression in exit multiples. Nevertheless, deployment from the Barings global private finance team is roughly on track with 2019 and currently tracking ahead of 2020. Recall that the impacts of COVID in 2020 significantly hampered activity in the first half of 2020 but ultimately produced one of the most active deployment vintages we've ever seen. All of this to say, the year-to-date trends cannot be a reliable indicator of future activity. The negative net deployment witnessed at BBDC is the result of a conscious managing of BBDC’s leverage via sales to our joint venture and an intentional rotation of acquired assets. The global private finance investment pipeline has picked up significantly over the past few months and on a probability-weighted basis now stands at $1.7 billion. Nearly 75% of the portfolio consists of secured investments, with approximately 70% of investments constituting first lien securities. We track the median interest coverage of our North American global private finance issuers on a quarterly basis. Not surprisingly, we recorded very strong interest coverage ratios in 2021 and in the first quarter of 2022 prior to the rise in interest rates. The median interest coverage in our portfolio at the end of the first quarter of 2022 was 2.9x. As a proxy for the disciplined underwriting that defines our BDC franchise, one year later, after 500 basis points of reference rate impact, the median interest coverage in the portfolio stands at 2.2x. That is to say that with the impact of higher interest rates, reflected for approximately nine months of issuers reporting, global private finance issuers still have considerable cushion before they are unable to make regularly scheduled interest payments. Our avoidance of various industries prone to economic volatility, such as oil and gas, restaurants, retail, and metals, among others, has proven to be a sound strategy against the backdrop of less economic predictability. One of the benefits of a predominantly sponsor-backed strategy has proven out over the past several quarters, combined with what we believe are reasonable going-in leverage multiples. The median gross margin in the North American global private finance portfolio stood at 44%, up from 42% one year earlier and gives us confidence that our issuers are successfully pushing through price increases to combat inflationary pressures in their businesses. Adjusted EBITDA margins for the same sample were 19%, up from a year earlier, believed to be a reflection of the fact that wage gains have consumed some degree of gross margin expansion previously noted. While not a perfectly comparable metric period-to-period, as the volume of transaction activity in the past five quarters will skew these metrics somewhat, we believe we have reason to feel comfortable with the performance in the portfolio. BBDC is focused on investing in middle market companies throughout the economy. The largest portion of our funded assets is sourced from the global private finance team. Recall that this team focuses entirely on sponsor-backed financing and targets issuers with $15 million to $75 million in dollars or euros, where appropriate. The flexibility of the broader Barings capital base and focus on relative value allows the global private finance investment team to deploy capital in predominantly first lien solutions that the team feels are most compelling. We are not a forced buyer of assets in any market environment. The Barings Capital Solutions Investment team accounts for the majority of the remaining assets within the portfolio, having led the underwriting for uncorrelated platform investments, such as Eclipse and Rocade, in addition to making other middle market investments. The majority of assets originated by the Capital Solutions team are conforming middle market loans, but they vary from the private global finance strategy in that these transactions may be non-sponsored and/or have more flexible capital structures. We remain confident in the credit quality of the underlying portfolio, but we do see increased volatility heading into the second half of 2023. The uncorrelated nature and associated value of investments in Eclipse and Rocade should bolster the portfolio in the event the economy does enter into a long-expected recession. BBDC is committed to delivering an attractive risk-adjusted return to shareholders over a long time horizon; we are investors in credit and middle market companies. Our global reach and significant scale across asset classes gives BBDC a unique ability to select risks and returns compared to other managers. But at our core, middle market credit is what we do. Turning to our stress credits, one Barings-originated asset, one MVC asset, and four Sierra assets remain nonaccrual. The MVC and Sierra assets are covered by the capital support agreements with our manager. As Eric previously mentioned, investments on nonaccrual decreased to six from nine in the previous quarter. I'll turn the call over to Elizabeth.

Thanks, Ian. Turning to slide 14, you can see the full bridge of the NAV per share business in the second quarter. Our net investment income exceeded the $0.25 per share dividend by 24%, even with this quarter’s higher incentive fees. Net unrealized appreciation from investments to CSAs and FX lifted NAV per share by $0.51, which was partially offset by net realized losses on the portfolio of $0.45 per share. The $0.45 per share realized loss was predominantly due to the exit of our debt investments in custom outlay, which was already reclassified from unrealized depreciation. We are very pleased with our portfolio's performance amid a backdrop of economic uncertainty, and this highlights our conservative approach to underwriting and portfolio construction. Additional details on the net unrealized appreciation are shown on slide 15. Near the bottom of the slide, you can see the credit support agreements increased approximately $2 million, which is driven by the acceleration of the expected timeline of exiting the MVC investments. Slide 16 and 17 show our income statement and balance sheet for the last five quarters. Our net investment income per share was $0.31 for the quarter driven by a 12% quarter-over-quarter increase in total investment income, with some of the revenue lift offset by higher incentive fees due to unrealized gains in the quarter and the incentive fee lookback calculation. From a balance sheet perspective on slide 17, total debt to equity was 1.24x at June 30. Our net leverage ratio was 1.15x, down from 1.19x. We view this measure as more reflective of the true leveraged position of the vehicle, which currently sits within our long-term target of 0.9x to 1.25x. In addition, as previously disclosed in May, we were pleased to extend the maturity of our senior secured revolving credit facility after February 2026. With all of our existing lending partners being included in the extension, we will continue to manage the capital structure in a manner that is consistent with our investment-grade rating profile. Turning to slide 18, you can see how our funding mix ties to our asset mix both in terms of seniority and asset class, including the significant level of support provided by the $720 million of unsecured debt in our capital structure. Details on each of our borrowings are included on slide 19, which is the evolution of our debt profile over the last year. As of the end of the first quarter, roughly half of our funding was comprised of fixed-rate, unsecured debt with a weighted average coupon of 3.799%. We have over two years until the next bond maturity in August 2025. Turning to slide 20, you can see the impact on our net leverage of using our available liquidity to fund our unused capital commitment. Barings BDC currently has $338 million of unfunded commitments to our portfolio companies, as well as $65 million of outstanding commitments to our joint venture investments. We have available cushion against our leverage limit to meet the entirety of these commitments if called upon. Slide 21 updates are paid and announced dividends since Barings took over as the advisor to the BDC. As Eric mentioned earlier, the board declared a third quarter dividend of $0.26 per share, a 9.2% distribution on net asset value. Given the higher level of earnings and the fact base rates have remained higher for longer, shareholders should benefit, and we have increased our quarterly dividend from $0.25 per share to $0.26 per share. We believe our portfolio will continue to earn above the high hurdle in a normalized rate environment. We expect that our platform investments Eclipse and Rocade, as well as our Jocassee joint venture, will continue to generate significant dividend income. These investments highlight the importance of less correlated assets and the benefits of a diverse portfolio. We are, of course, aligned with our shareholders in the way we approach this business, and we continue to believe that share repurchases at significant discounts to book value can play an important role in our long-term capital allocation policy. I'll wrap up our prepared remarks with a note on our investment pipeline. Thus far in Q3, we have made $36 million of new commitments, of which $24 million have closed and funded. The weighted average origination margin, or DM-3, of those new commitments was 7.4%, which also funded $8 million of previously committed debt and equity facilities. The current Barings Global Private Finance investment pipeline is approximately $1.7 billion on a probability-weighted basis, and it's predominantly first lien senior secured investments. As a reminder, this pipeline is estimated based on our expected closing rights for all deals in our investment pipeline. With that, operator, we'll open the line for questions.

Our first question comes from Kyle Joseph with Jefferies.

Hey, good morning, guys. And thanks for taking my questions. Appreciate all the color you gave on the deal environment, but just trying to get a sense for the outlook for repayment, particularly if we're on the cusp of a potential Fed pause.

So, hey, Kyle, It's Ian. Morning, I'll start with that and then let anyone jump in. So look, it's been rather anemic in terms of volume this year. I think the reason for that is M&A activities have just been soft as private equity firms are taking a pause to see in this rising rate environment what happens to multiples and enterprise values. As we get through to the end of this rising rate cycle, with only a modest decline in purchase prices, I think we're going to see a thaw in the second half of the year. I’m not going to hold my breath, but we have investment banks saying there are a lot of books that are going to come out. So I expect that to occur. As we look at the remainder of the year, it's also time everyone starts thinking about year-end and putting money to work. So I think there's going to be a lot of pressure to do deals. So being highly cautious is prudent. We're also cautious about the remainder of the year in terms of putting deals to work.

And part of the net number, Kyle, it’s Eric, is really us managing leverage, given the share repurchases we did. We were balancing deployment with leverage and share repurchases given where things were. It's never a perfect science, but that's part of what impacted our net number from repayments versus deployments.

Yes, and the other thing I would just throw out there to Kyle is look, we mentioned this, right, we're not going to chase deals, we're not forced to do deals. We have a portfolio that's been very active, and I think any manager that has a large, mature portfolio will see activity from that portfolio as add-on acquisitions have been a main source of adding and creating value as part of the investment thesis. About 70% of our volume is coming from our portfolio. These are less risky deals because they involve companies we know and understand and help those companies become bigger, better, stronger, more diverse credits. So I think we might be out of the woods in terms of a recession, but even economists are wrong, and I'm not going to bet one way or the other. But is it really the time to back up the truck and just kind of do anything that comes to market right now? Our decision was not to do that.

Yes, very helpful. Thanks for that. And then a follow-up regarding everything that's gone on with regional banks. Just wanted to get your take on how that impacts Barings, but also the industry more broadly. Is it just kind of a continuation of the theme of banks pulling back? Where do you think it’s kind of a more material catalyst? Thanks.

Hey, Kyle, it's Bryan. I would just say that clearly, some of the ratings actions that Moody's have taken with smaller regional banks have created a pullback across various markets, not necessarily markets that would benefit BDCs. But private credit in general, I think, in alternative capital has become a broader theme across what we've seen in the Barings pipeline. That said, I don't know that what we've seen so far would be a great fit for a vehicle like Barings BDC.

I just want to highlight from a liability perspective that as Elizabeth referenced, we extended our bank group with 100% of our partners, and our bank group extended with us. So from an exposure perspective, on the liability side, we don't face that. We're in this environment where banks are challenged from a financing perspective to have 100% of them continue to support us and see what we're doing. We view this as a real testament to what we have done and how we've done it.

Our next question comes from Finian O'Shea with Wells Fargo.

Hey, everyone, good morning. Question on the joint ventures. It sounded like Eclipse, Rocade, and Jocassee were highlighted as part of the key future game plan as at least more central to future differentiation. On all the other ones, it looks like Thompson Rivers is winding down. Can you clarify the sort of game plan for Thompson, Waccamaw, and the SLP? If you're running those down, how long that would take? Thank you.

Thanks, Fin. Part of what we committed to when we did a bit of a reboot from a management team perspective is to remove some of the complexity in the BDC and simplify things the best we could. So, yes, we are running down some of those JVs. That's intentional, just to lessen complexity within the vehicle. We believe that Eclipse and Rocade, in addition to Jocassee, have generated really attractive returns for the BDC for a number of years. So I wouldn’t say they’re central or core to what we do; I’d say they are very complementary to our strategy. Eclipse, for example, will likely see an increase in opportunities for that type of business when cash flow lending could be challenged in a certain economic environment. The core focus is going to be first lien senior secured deals generated and underwritten by Ian's team on the global private finance side. The other areas will be complementary, and I would like to communicate that there will be a managed decrease of some JVs over time. As for how long that takes, it’s hard to predict, but you should continue to see a decrease in each of those JVs over time as it makes sense for shareholders.

No, I think that was well said. The only thing I would add is if you think about Eclipse and Rocade, those underlying loans in those portfolios are middle market secured first lien facilities, and Jocassee provides liquidity to our strategy by allowing us to sell down loans. Those debt portfolios look very similar to what would be in Barings BDC and the strategy that Eric just outlined. So regarding Thompson Rivers and Waccamaw, those don’t align with the overall BDC portfolio, and we would look to wind those down over time.

Our next question comes from the line of Robert Dodd with Raymond James.

Hello, everybody. Good morning. So just a follow-up to that. Could you provide any kind of base level return to the BDC? Not necessarily the internal distribution of dividends. For something like Eclipse, it's been a bit more volatile, from a smaller distribution in the fourth quarter of last year to quite a large one this quarter with a 12% ROE right now. I mean, is that 12% kind of the go-forward level for that, or is it going to continue to bounce around a little bit more than some of the others, which have been a little bit more stable, like Jocassee?

Yes, hey, Robert, it’s Bryan. As it relates to Eclipse, we’ve attempted to align the dividend with what we’re receiving from plain middle market first lien loans, so at 12%, we felt that was in line with what we’ve been getting from the rest of the portfolio. The reality is it could potentially dividend out a lot more, but it’s performed incredibly well. We want to continue to grow that platform and diversify its portfolio. So our goal would be to try to keep the dividend yield from that platform consistent with the rest of the portfolio. As base rates change, that may vary, but it shouldn’t be volatile relative to the rest of the portfolio if that makes sense.

Yes. So Robert, the way we think about it is that the CSA flips either at the last investment exit or for 10 years; we are now down to four assets. One of which we should exit close to the end of the year; it's a PE fund and is in wind-down mode. We have just hired someone to help us exit the MVC Auto, and that should be done over the next couple of years. What's left at that point is security holding, and we believe we will exit that sooner than that 10-year mark, likely selling within the next say five to seven years. That’s really where that acceleration and timeline came from.

Got it. Thank you. And then if I can, on the overall credit quality of your portfolio, nonaccruals went down, etc. But maybe for Ian, I appreciate the comment on the interest coverage, etc. But I mean, what's the go-forward interest coverage? If we can like mean SOFR the last 12 months, they’ve been paying higher interest, but obviously, SOFR has been on a pretty steep climb over that duration. So if you look forward, what's your expected interest coverage? And also kind of tied into that I've been asking people, what proportion of your portfolio today has interest coverage below one?

Yes. So great question, because obviously, we are looking backwards, right? The reality is the majority of our borrowers provide monthly reporting, while there are probably 20% that are quarterly. So we're looking, and we haven’t received all the quarterly second quarter reporting packages yet. We're stress-testing the portfolio for rates increasing to 5%, but we haven't received all the first-quarter numbers for those that are quarterly reporters. So just a couple of things that I'd highlight in terms of the portfolio performance. Number one is the portfolio for the second quarter, and I referenced this, and it's important to note that a vast majority have been minimally impacted by inflation. Most of our borrowers have been able to pass through price increases, which is linked to the composition of the portfolio. We previously noted that over 75% of our portfolio consists of service businesses as opposed to manufacturing, which is critical because we don't have companies with a lot of CapEx. Over 50% of our portfolio is generating EBITDA growth. In terms of those in GPF, that have less than one, there are under five issuers—it's a minority of being under one to one. I do think that as we look at the full year impact of rate increases, which is, as of right now, we may have another 25 basis points coming around the quarter. We'll probably see, a bit more volatility in the second half of the year, where some companies will likely experience liquidity needs. At the end of the day, Robert, I've been doing this for a long time; if you have strong businesses with strong sponsors, and lenders and management teams aligned, these companies will get through a cycle. We expect our sponsors would inject equity and we will consider taking some of our interests at a premium to get that company through to the other end.

Robert, to build on what Ian said, if you look at today, what we know is nonaccruals were almost cut in half from the prior quarter. If you consider that the only one nonaccrual that is from something we didn’t acquire within the portfolio. So the Barings, we talked about rotating out of MVC and Sierra assets into Barings assets. If you evaluate the portfolio, if you look from Barings' perspective, those assets continue to perform extremely well. If you look at the average leverage in the portfolio, it’s around 5x to 5.5x. When you consider the interest coverage within that type of portfolio is still around 2x interest coverage. Additionally, with our service businesses, they typically have a lot less CapEx. Free cash flow coverage remains very attractive relative to the interest on the company.

Our next question comes from Casey Alexander with Compass Point.

Yes. Good morning. Let me warn you I'm sitting in the same storm here in Charlotte, so if you hear background noise, you'll have to forgive me. Secondly, I want to acknowledge and hope shareholders appreciate the material execution on the share repurchase program. That was excellent follow-through. I want to ask Bryan; it sounds to me like what you're saying about the JVs is that setting the dividend at what you believe loans are earning in the portfolio. Does that mean that—are you still earning a higher ROE on those JVs? And building NAV through retention of income in those JVs.

Yes, thanks for the question, Casey. As it relates to Eclipse and Rocade, that is correct. Yes, think high teens type ROE. And we're retaining that and trying to build NAV within the portfolio with that capital.

And so Jocassee would be sort of at the mark, then.

Correct.

Yes. Okay. Secondly, you gave sort of a cumulative review of it, but I was wondering if you could be more specific; what's the mark-to-market loss on MVC to date, SIC to date? What are the—each CSA currently marked at what are the caps to the CSAs on each of those individual blocks of business?

Yes, so for MVC, it's currently marked at 15.6, and that CSA is 23. With the losses right now at MVC are 21. So, again, fully covered, the mark on Sierra is around 45, and the losses are around 36. That is up to $100 million.

The losses are not 30. These losses are like actual realized losses are like $5 million.

Oh, I'm sorry. These losses are almost all unrealized. And so, that total, if you take the full mark-to-market, and you apply that, the 36 will be relative to the 100, as Elizabeth said, so you'd be more than covered on any of that. We feel good about the long-term recovery of those, but from a mark-to-market basis, again, think of it was 36 relative to 100 and at or 5 relative to 100.

We have a follow-up question from Finian O'Shea with Wells Fargo.

Hi, thanks so much. Just one more on the JVs. I understand you mentioned building retained earnings on Eclipse and Rocade. Just I guess to what extent are you thinking size-wise before starting to distribute the earnings? Is it about the scale opportunity and the return opportunity today? And within that, what's the path you see to getting those right-sized and distributing returns? Thank you.

Yes. Fin, I think as long as we can continue to generate those types of ROEs, we're going to certainly distribute more. We can be tactical around that to the extent we want to from a portfolio perspective. Those platforms have momentum, and we want to create NAV for the overall portfolio over time. I don’t think there’s a change in strategy or timeline to get to that point, as long as they’re earning that ROE, we will continue to let them retain. To the extent we want to take special dividends to bolster the income of BBDC, we can certainly do that. So we can use it to help out if there are other issues in the portfolio.

Yes, I mean I just want to build on that, Fin. Think of a high teens ROE as something we want to distribute where it's prudent. Retaining some investment within that to continue to support the growth is also attractive for the BDC, as it’s consistently offering that high teens type of return. Again, we believe it's very complementary to our core portfolio, which consists of cash flow first lien senior secured assets. Any other questions?

We have one more question from David Miyazaki with Confluence Investment Management.

Hi, good morning. I just wanted to share some appreciation for the CSAs that you have in place. I think that was very helpful, given that the losses, especially at MVC, are higher than what I'd expected. I'm curious as you're moving through the wind-down of both MVC and Sierra, what has surprised you versus your underwriting? And how does that shape your view going forward toward potential consolidation or acquisitions?

Hey, David, thanks for the question. We're glad that we're providing more transparency around the CSA, and appreciate your recognition that it's Barings that bears that risk and the losses are not to shareholders. I would say on MVC, as you said, we had three large assets we underwrote at MVC. We referenced two of them that we still hold which are equity positions. We had one that was a debt position, and we went into that debt position. The customer was the one that experienced realized losses that were significant, which is part of what Elizabeth referenced regarding the CSA. When we underwrote it, we didn't expect the loss severity on that to be to the extent that it was. Obviously, when you underwrite a portfolio that you didn’t originate, you have some information, but not the full extent to which we typically undertake. The two equity positions, as Elizabeth mentioned, one of them we're in the process of beginning to look at exit on, and the timeline for that is still TBA. We believe we can hold onto the second one a little longer and we think some macro factors will support that more positive recovery in that space. So, overall, I would say that the surprise regarding MVC, if you think of it that way, is the loss severity on one asset was higher than we anticipated upon defaulting. The other two equity positions are performing in line or above expectations, and we look at it from a net perspective; the total should be covered by the CSA. As for Sierra, it was a more diversified portfolio. In looking at that, I would say overall performance aligned with what was underwritten. To summarize, I think the overall impact of the rising base rates took us by surprise during the underwriting period, but we still feel confident about the portfolio and will continue to focus on reducing complexities within the BDC.

Yes, I think overall, we’ve felt aligned with our expectations. On both of MVC and Sierra, the realization on the mark-to-market has really been impacted by rising rates, and as we think of the future, we’ll focus on simplifying things.

I just want to say, we provide transparency around the CSA, as Barings and MVC’s losses fall on the management side, not impacting shareholders. Between the two CSAs, we’re looking at over $120 million of Barings risk, which insulates shareholders. Ultimately, our strategy is focusing on delivering strong returns to the shareholders as we integrate the existing portfolios and develop over the long term.

Thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time.