Barings BDC, Inc. (NYSE:BBDC) Q4 2023 Earnings Conference Call February 23, 2024 9:00 AM ET Company Participants Joe Mazzoli - Head of Investor Relations Eric Lloyd - Chief Executive Officer Ian Fowler - Co-Head of Global Private Finance and President Elizabeth Murray - Chief Financial Officer Matt Freund - Co-Portfolio Manager Bryan High - Co-Portfolio Managers Conference Call Participants Finian O’Shea - Wells Fargo Securities Kyle Joseph - Jefferies Robert Dodd - Raymond James Casey Alexander - Compass P ...

Barings BDC (BBDC) came out with quarterly earnings of $0.31 per share, beating the Zacks Consensus Estimate of $0.30 per share. This compares to earnings of $0.34 per share a year ago. These figures are adjusted for non-recurring items.This quarterly report represents an earnings surprise of 3.33%. A quarter ago, it was expected that this business development company would post earnings of $0.31 per share when it actually produced earnings of $0.31, delivering no surprise.Over the last four quarters, the c ...

Part I [Business](index=4&type=section&id=Item%201.%20Business) Barings BDC is an externally managed BDC investing in senior secured private debt of U.S. middle-market companies, expanding its portfolio and operating with a 150% asset coverage ratio - The company operates as a closed-end, non-diversified investment company, electing to be treated as a Business Development Company (BDC) and a Regulated Investment Company (RIC) for tax purposes[7](index=7&type=chunk) - In 2018, the company transitioned to an externally managed model with Barings LLC as its investment adviser, changing its name from Triangle Capital Corporation to Barings BDC, Inc[9](index=9&type=chunk)[10](index=10&type=chunk) - Completed the acquisition of MVC Capital, Inc. on December 23, 2020, and Sierra Income Corporation on February 25, 2022, significantly expanding the investment portfolio[11](index=11&type=chunk)[16](index=16&type=chunk) - The company's investment objective is to generate current income by investing primarily in senior secured private debt in privately-held middle-market companies, targeting businesses with Adjusted EBITDA of **$10.0 million to $75.0 million**[22](index=22&type=chunk)[32](index=32&type=chunk) - Stockholders approved a reduced asset coverage ratio of **150%** in July 2018, allowing for increased leverage. As of December 31, 2023, the asset coverage ratio was **183.6%**[28](index=28&type=chunk) [Management Agreements](index=17&type=section&id=Management%20Agreements) Barings BDC is managed by Barings LLC, paying a 1.25% base management fee on gross assets and a two-part incentive fee, including an income-based portion with an 8.25% hurdle and a capital gains portion Advisory Fee Structure | Fee Type | Rate/Calculation | | :--- | :--- | | **Base Management Fee** | 1.25% annually on the average value of gross assets (excluding cash and cash equivalents) | | **Incentive Fee (Part 1: Income-Based)** | 20% of pre-incentive fee net investment income over a rolling 12-quarter period, subject to an 8.25% annualized hurdle rate on net assets and an incentive fee cap | | **Incentive Fee (Part 2: Capital Gains)** | 20% of cumulative aggregate realized capital gains over cumulative losses and unrealized depreciation since August 2, 2018, paid annually | - The income-based incentive fee is calculated based on performance over the current and preceding eleven calendar quarters (the "Trailing Twelve Quarters") and is subject to a total return cap based on net capital losses[87](index=87&type=chunk)[91](index=91&type=chunk) - Under the Administration Agreement, Barings provides necessary administrative services, and the company reimburses Barings for the costs and expenses incurred, which are negotiated and agreed upon quarterly[99](index=99&type=chunk)[100](index=100&type=chunk) [Regulation and Taxation](index=21&type=section&id=Regulation%20and%20Taxation) As a BDC, the company must invest 70% in qualifying assets and, as a RIC, distribute 90% of taxable income annually, using taxable subsidiaries for compliance - To qualify as a BDC, at least **70%** of total assets must be "qualifying assets," which are typically securities of private or small public U.S. companies[111](index=111&type=chunk)[113](index=113&type=chunk) - To maintain RIC tax status, the company must distribute at least **90%** of its investment company taxable income annually and meet specific income source and asset diversification tests[135](index=135&type=chunk)[138](index=138&type=chunk) - The company is subject to a **4%** nondeductible U.S. federal excise tax on certain undistributed income unless it distributes at least **98.0%** of its ordinary income and **98.2%** of its capital gain net income for the calendar year[136](index=136&type=chunk) - The company utilizes wholly-owned taxable subsidiaries to hold certain portfolio investments, such as those organized as pass-through entities, to ensure compliance with the RIC **90%** qualifying income test[104](index=104&type=chunk)[106](index=106&type=chunk)[140](index=140&type=chunk) [Risk Factors](index=33&type=section&id=Item%201A.%20Risk%20Factors) The company faces risks from management dependence, conflicts of interest, valuation uncertainty, market competition, fee structure incentives, regulatory compliance, economic downturns, and stock price volatility - **Business & Structural Risks:** The company is highly dependent on Barings' key personnel and their relationships. Potential conflicts of interest exist as Barings manages other funds. The advisory fee structure may incentivize riskier investments and increased leverage[167](index=167&type=chunk)[180](index=180&type=chunk)[193](index=193&type=chunk) - **Investment & Portfolio Risks:** A significant portion of the portfolio is in illiquid, privately held securities whose valuation is subjective and uncertain. Investments are risky and could result in losses. Economic downturns and inflation could adversely affect portfolio companies' ability to repay debt[173](index=173&type=chunk)[264](index=264&type=chunk)[265](index=265&type=chunk) - **Leverage & Financing Risks:** The company's financing agreements contain covenants that, if breached, could accelerate repayment. Increased leverage magnifies risk, and changes in interest rates could adversely affect profitability and the cost of capital[209](index=209&type=chunk)[213](index=213&type=chunk)[221](index=221&type=chunk) - **Securities Risks:** Shares of BDCs frequently trade at a discount to their NAV. The market price of the company's securities may be volatile due to various factors, including market conditions and operating results[320](index=320&type=chunk)[325](index=325&type=chunk) - **Cybersecurity Risks:** Cyber incidents could disrupt operations, compromise confidential information, and damage business relationships, leading to financial losses and regulatory scrutiny[256](index=256&type=chunk)[257](index=257&type=chunk) [Cybersecurity](index=67&type=section&id=Item%201C.%20Cybersecurity) Cybersecurity risk management is handled by Barings' comprehensive program with Board oversight, and no material threats have been identified - The company relies on the cybersecurity program of its adviser, Barings, to manage risks from cyber threats. This program includes risk assessments, security measures, and ongoing monitoring[378](index=378&type=chunk)[379](index=379&type=chunk) - The Board of Directors provides oversight of cybersecurity matters and receives regular updates from the CCO and the Adviser's CISO[381](index=381&type=chunk) - As of the reporting period, the company has not identified any cybersecurity risks that it believes have materially affected or are reasonably likely to materially affect its business, operations, or financial condition[384](index=384&type=chunk) Part II [Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities](index=70&type=section&id=Item%205.%20Market%20for%20Registrant's%20Common%20Equity,%20Related%20Stockholder%20Matters%20and%20Issuer%20Purchases%20of%20Equity%20Securities) BBDC stock traded at a discount to NAV in 2022-2023, with **$1.02** per share distributions in 2023 and a **$30.0 million** share repurchase program authorized NAV and Stock Price Performance (2023) | Quarter | NAV per Share | High Closing Price | Low Closing Price | Discount at High | Discount at Low | | :--- | :--- | :--- | :--- | :--- | :--- | | Q1 2023 | $11.17 | $8.95 | $7.47 | (19.9)% | (33.1)% | | Q2 2023 | $11.34 | $8.01 | $7.19 | (29.4)% | (36.6)% | | Q3 2023 | $11.25 | $9.34 | $7.65 | (17.0)% | (32.0)% | | Q4 2023 | $11.28 | $9.39 | $8.58 | (16.8)% | (23.9)% | - For the fiscal year 2023, total distributions were **$1.02** per share, reported as **100%** ordinary income. For 2022, distributions were **$0.95** per share, also **100%** ordinary income[393](index=393&type=chunk) - A 12-month share repurchase program was authorized on February 23, 2023, allowing for the repurchase of up to **$30.0 million** of common stock at prices below NAV. During 2023, **1,849,096** shares were repurchased at an average price of **$7.99** per share[249](index=249&type=chunk)[497](index=497&type=chunk)[251](index=251&type=chunk) [Management's Discussion and Analysis of Financial Condition and Results of Operations](index=77&type=section&id=Item%207.%20Management's%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Net investment income increased to **$127.8 million** in 2023, driven by higher interest income, with a significant net increase in net assets due to unrealized appreciation and portfolio growth [Portfolio and Investment Activity](index=79&type=section&id=Portfolio%20and%20Investment%20Activity) The investment portfolio grew to **$2.49 billion** in 2023, primarily senior debt, with **$470.5 million** in new investments and a slight increase in non-accrual assets Portfolio Composition by Fair Value | Investment Type | Dec 31, 2023 (%) | Dec 31, 2022 (%) | | :--- | :--- | :--- | | Senior debt and 1st lien notes | 67% | 69% | | Subordinated debt and 2nd lien notes | 10% | 11% | | Structured products | 4% | 3% | | Equity shares | 15% | 12% | | Investments in joint ventures/PE fund | 4% | 5% | | **Total Fair Value** | **$2,488.7M** | **$2,448.9M** | - In 2023, investment activity included **$264.6 million** in **39** new investments and **$205.9 million** in existing portfolio companies. The company also experienced **$141.1 million** in loan repayments and **$106.2 million** in principal payments[437](index=437&type=chunk) - As of December 31, 2023, investments in four portfolio companies were on non-accrual status, representing **1.5%** of the portfolio's total fair value, compared to seven companies representing **1.0%** at the end of 2022[442](index=442&type=chunk) - The weighted average yield on outstanding debt investments (excluding non-accruals) increased to **10.5%** as of December 31, 2023, from **9.7%** as of December 31, 2022[434](index=434&type=chunk) [Results of Operations](index=82&type=section&id=Results%20of%20Operations) Total investment income rose to **$289.2 million** in 2023, with net investment income at **$127.8 million**, and a **$128.0 million** net increase in net assets driven by unrealized appreciation Comparison of Operating Results (Years ended Dec 31) | ($ in thousands) | 2023 | 2022 | | :--- | :--- | :--- | | **Total investment income** | **$289,201** | **$219,129** | | Total interest income | $219,789 | $161,488 | | Total dividend income | $36,917 | $30,204 | | **Total operating expenses** | **$159,390** | **$102,862** | | Interest and financing fees | $84,711 | $56,865 | | Base management fee | $32,649 | $29,501 | | Incentive management fees | $32,046 | $6,579 | | **Net investment income after taxes** | **$127,804** | **$115,656** | | Net realized (losses) gains | ($62,750) | $12,861 | | Net unrealized appreciation (depreciation) | $62,624 | ($123,041) | | **Net increase in net assets** | **$127,999** | **$4,681** | - The increase in investment income was primarily due to a higher weighted average yield on the portfolio resulting from higher base rates[452](index=452&type=chunk) - The rise in operating expenses was mainly attributable to increased interest and financing fees from higher rates on the credit facility and a significant increase in performance-based incentive fees[454](index=454&type=chunk)[457](index=457&type=chunk) [Liquidity and Capital Resources](index=85&type=section&id=Liquidity%20and%20Capital%20Resources) The company maintained strong liquidity with **$70.5 million** cash and **$1.1 billion** credit facility, issuing **$300.0 million** in notes and authorizing a new **$30.0 million** share repurchase program - As of December 31, 2023, the company had **$70.5 million** in cash and foreign currencies. Total debt outstanding was approximately **$1.44 billion**[468](index=468&type=chunk)[416](index=416&type=chunk) - The primary source of liquidity is the **$1.1 billion** February 2019 Credit Facility, which had **$719.9 million** outstanding as of year-end 2023. The facility's revolving period was extended to February 2025[469](index=469&type=chunk)[474](index=474&type=chunk) - Subsequent to year-end, the company issued **$300.0 million** of **7.000%** senior unsecured notes due 2029 and authorized a new 12-month, **$30.0 million** share repurchase program commencing March 1, 2024[546](index=546&type=chunk)[547](index=547&type=chunk) - As of December 31, 2023, the company had **$305.9 million** in total unused commitments to extend financing to its portfolio companies[536](index=536&type=chunk)[542](index=542&type=chunk) [Quantitative and Qualitative Disclosures About Market Risk](index=102&type=section&id=Item%207A.%20Quantitative%20and%20Qualitative%20Disclosures%20about%20Market%20Risk) The company's primary market risk is interest rate sensitivity, with a **100 bps** rate increase impacting net income by **$11.6 million**, and foreign currency risk managed through local currency borrowing - The company's main market risk exposure is to interest rate volatility, which affects the income from its variable-rate assets and the cost of its variable-rate liabilities[527](index=527&type=chunk)[528](index=528&type=chunk) Interest Rate Sensitivity Analysis (as of Dec 31, 2023) | Basis Point Change | Annual Impact on Net Income (in thousands) | | :--- | :--- | | Up 300 bps | $34,880 | | Up 200 bps | $23,253 | | Up 100 bps | $11,627 | | Down 25 bps | ($2,906) | | Down 50 bps | ($5,813) | - The company manages foreign currency risk by borrowing in local currencies (Swedish krona, British pounds sterling, Euros) to fund investments denominated in those same currencies[535](index=535&type=chunk) [Controls and Procedures](index=103&type=section&id=Item%209A.%20Controls%20and%20Procedures) Management and KPMG LLP affirmed the effectiveness of disclosure controls and internal control over financial reporting as of December 31, 2023, with no material changes - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of December 31, 2023[552](index=552&type=chunk) - Based on the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2023. This assessment was audited by KPMG LLP, which concurred[554](index=554&type=chunk) - There were no changes in internal control over financial reporting during the fourth quarter of 2023 that materially affected, or are reasonably likely to materially affect, these controls[554](index=554&type=chunk) [Other Information](index=104&type=section&id=Item%209B.%20Other%20Information) The Board authorized a new **$30.0 million** share repurchase program for 2024, with estimated annual expenses totaling **12.9%** of net assets - On February 22, 2024, the Board authorized a new 12-month share repurchase program for up to **$30.0 million** of its outstanding common stock, effective March 1, 2024[557](index=557&type=chunk) Estimated Annual Expenses (as a % of Net Assets) | Expense Category | Percentage | | :--- | :--- | | Base management fee | 2.7% | | Incentive fees | 2.7% | | Interest payments on borrowed funds | 6.7% | | Other expenses | 0.8% | | **Total annual expenses** | **12.9%** | Part III [Directors, Executive Officers, Corporate Governance, Compensation, and Principal Accountant Fees](index=108&type=section&id=Items%2010-14) Information on directors, executive officers, governance, compensation, and principal accountant fees is incorporated by reference from the 2024 Proxy Statement - Detailed information for Items 10 through 14 is incorporated by reference from the company's forthcoming 2024 Annual Meeting of Stockholders Proxy Statement[571](index=571&type=chunk)[572](index=572&type=chunk)[573](index=573&type=chunk)[574](index=574&type=chunk)[575](index=575&type=chunk) Part IV [Exhibits and Financial Statement Schedules](index=109&type=section&id=Item%2015.%20Exhibits%20and%20Financial%20Statement%20Schedules) This section lists financial statements and exhibits, including KPMG's unqualified opinion on financials and internal controls, highlighting Level 3 investment valuation as a critical audit matter - The company's independent registered public accounting firm, KPMG LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2023[596](index=596&type=chunk) - KPMG identified the assessment of the fair value of Level 3 investments as a critical audit matter due to the high degree of subjective judgment and specialized skills required to evaluate assumptions like market yields and comparable company multiples[607](index=607&type=chunk)

Core Viewpoint - The article emphasizes the potential of generating passive income through investments in business development companies (BDCs) that offer substantial dividends, highlighting six specific BDC stocks that can collectively yield over $2,000 annually from a $15,000 investment [2][21]. Summary by Company - **Barings BDC Inc. (NYSE: BBDC)** - Investment of $2,500 yields an annual passive income of $295.00 with a dividend yield of 11.8% - Focuses on private middle-market companies across various industries including manufacturing, technology, and consumer services [4]. - **BlackRock TCP Capital Corp. (NASDAQ: TCPC)** - Investment of $2,500 yields an annual passive income of $385.00 with a dividend yield of 15.4% - Invests in diverse sectors such as communication services, healthcare, and biotechnology [7]. - **Fidus Investment Corp. (NASDAQ: FDUS)** - Investment of $2,500 yields an annual passive income of $385.00 with a dividend yield of 15.4% - Specializes in sectors like aerospace, healthcare, and IT services, with a consistent increase in dividends since September 2022 [10]. - **Runway Growth Finance Corp. (NASDAQ: RWAY)** - Investment of $2,500 yields an annual passive income of $335.00 with a dividend yield of 13.4% - Primarily invests in technology and life sciences sectors, maintaining dividends since its IPO in 2021 [13]. - **Saratoga Investment Corp. (NYSE: SAR)** - Investment of $2,500 yields an annual passive income of $312.50 with a dividend yield of 12.5% - Focuses on leveraged buyouts and growth financings across various industries, with dividends increasing since summer 2022 [16]. - **Trinity Capital Inc. (NASDAQ: TRIN)** - Investment of $2,500 yields an annual passive income of $360.00 with a dividend yield of 13.4% - Specializes in venture debt for growth-stage companies and has seen variable dividends since its IPO [19]. Total Investment Summary - A total investment of $15,000 across these six BDC stocks can generate an annual passive income of $2,072.50 [22].

Core Viewpoint - Barings BDC Inc. is currently undervalued with a 22% discount to net asset value, which is considered excessive given its strong dividend coverage and potential for future dividend increases [2][19] Group 1: Financial Performance - Barings BDC's net investment income increased by 21% year-over-year in Q3 2023, driven by rising interest rates [10] - The company raised its dividend twice in 2023, with a current quarterly payout of $0.26 per share, and has a payout ratio of 83% based on earnings of $1.21 per share [12][19] - Preliminary figures for Q4 2023 suggest a net investment income per share between $0.30 and $0.32, indicating a well-covered dividend payout ratio of 81-87% [14] Group 2: Portfolio Composition - At the end of Q3 2023, 67% of Barings BDC's investments were in First Liens, 7% in Second Liens, and 14% in Equity, with a total portfolio value of $2.52 billion [3] - The portfolio primarily includes investments in the Finance, Business, and Services industries, along with other sectors such as Healthcare and Aerospace [7] Group 3: Non-Accruals and Market Sentiment - Barings BDC's non-accrual ratio rose to 1.6% in Q3 2023 from 1.1% in Q4 2022, which has contributed to a negative market sentiment despite the overall good performance [8][16] - The increase in non-accruals has led to a perception of risk, but the actual performance metrics suggest that the situation is manageable and presents a potential buying opportunity [17][19] Group 4: Future Outlook - The company's floating-rate exposure means that its net investment income is closely tied to the central bank's interest rate decisions, with expectations of three rate cuts in 2024 [18] - Given the current discount to net asset value and the potential for dividend increases, Barings BDC is positioned for a positive re-rating if credit quality improves [19]

Core Viewpoint - Barings BDC, Inc. will report its financial results for the fourth quarter and fiscal year ended December 31, 2023, on February 22, 2024, with a conference call scheduled for February 23, 2024, at 9:00 a.m. ET [1][2] Company Overview - Barings BDC, Inc. is a publicly traded, externally managed investment company that operates as a business development company under the Investment Company Act of 1940 [3] - The company primarily invests in senior secured loans in middle-market companies across various industries [3] - Barings BDC's investment activities are managed by Barings LLC, which has over $381 billion in assets under management (AUM) as of December 31, 2023 [3][4] Conference Call Details - The conference call to discuss financial results will be accessible via phone and a live webcast on the investor relations section of Barings BDC's website [1][2] - A taped replay of the call will be available approximately two hours after its conclusion and will remain accessible until March 1, 2024 [1][2]

Barings BDC Inc (NYSE:BBDC) Q3 2023 Earnings Conference Call November 10, 2023 9:00 AM ET Company Participants Eric Lloyd - Executive Chairman and Chief Executive Officer Ian Fowler - Co-Head, Global Private Finance and President Elizabeth Murray - Chief Financial Officer Matt Freund - Co-Portfolio Manager Bryan High - Co-Portfolio Manager Conference Call Participants Kyle Joseph - Jefferies Robert Dodd - Raymond James Casey Alexander - Compass Point Operator Greetings. At this time, I would like to welcome ...

Financial Performance - Barings BDC's net asset value (NAV) decreased to $11.25 per share as of September 30, 2023, compared to $11.34 as of June 30, 2023[12] - The company's net investment income for the third quarter of 2023 was $0.31 per share[12] - A fourth quarter dividend of $0.26 per share was approved, matching the third quarter dividend[12] - Total investment income was $70.8 million for 3Q 2023, compared to $75.3 million for 2Q 2023[13] - Net investment income after taxes was $33.309 million for 3Q 2023, compared to $33.624 million for 2Q 2023[40] Portfolio & Investment Activity - Total originations during the quarter were $138 million, while sales and repayments totaled $104 million, resulting in net deployments of $34 million[12] - The weighted-average portfolio yield as of September 30, 2023, was 11.2%[12] - The investment portfolio's fair value was $2,521.6 million as of 3Q 2023[13] - Non-accruals represented 1.6% of the total portfolio at fair value[12] - Sponsored and Non-Sponsored corporate issuers accounted for 83% of the BBDC portfolio as of September 30, 2023[20] Debt & Leverage - Total debt outstanding (principal) was $1,521.1 million as of 3Q 2023[13] - The debt-to-equity ratio was 1.27x, and the net debt-to-equity ratio was 1.18x as of September 30, 2023[13]

PART I – FINANCIAL INFORMATION [Item 1. Financial Statements](index=3&type=section&id=Item%201.%20Financial%20Statements) This section presents the company's unaudited consolidated financial statements for the period ended September 30, 2023, covering key financial positions and performance [Consolidated Balance Sheets](index=3&type=section&id=Consolidated%20Balance%20Sheets) Total assets increased to **$2.74 billion** and net assets to **$1.20 billion** as of September 30, 2023, with NAV per share rising to **$11.25** Consolidated Balance Sheet Summary (in thousands) | Metric | September 30, 2023 (Unaudited) | December 31, 2022 | | :--- | :--- | :--- | | Total investments at fair value | $2,521,635 | $2,448,935 | | Total assets | $2,741,710 | $2,709,957 | | Total liabilities | $1,543,486 | $1,517,628 | | Total net assets | $1,198,224 | $1,192,329 | | Net asset value per share | $11.25 | $11.05 | [Consolidated Statements of Operations](index=4&type=section&id=Consolidated%20Statements%20of%20Operations) Total investment income rose to **$70.8 million** in Q3 2023, driving net investment income to **$33.3 million** (**$0.31 per share**) Statements of Operations Summary (in thousands, except per share data) | Metric | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Total investment income | $70,846 | $56,306 | $213,352 | $155,656 | | Total operating expenses | $37,125 | $28,394 | $118,113 | $76,955 | | Net investment income after taxes | $33,309 | $27,912 | $94,432 | $78,695 | | Net increase in net assets from operations | $18,321 | $9,893 | $98,089 | $5,932 | | Net investment income per share | $0.31 | $0.26 | $0.88 | $0.78 | | Net increase in net assets per share | $0.17 | $0.09 | $0.91 | $0.06 | [Consolidated Statements of Changes in Net Assets](index=6&type=section&id=Consolidated%20Statements%20of%20Changes%20in%20Net%20Assets) Net assets increased to **$1.20 billion**, driven by **$98.1 million** in net income, offset by distributions and share repurchases - For the nine months ended September 30, 2023, net assets increased by **$5.9 million**, resulting from **$98.1 million** in net income from operations, offset by **$81.3 million** in distributions and **$10.9 million** in share repurchases[19](index=19&type=chunk) [Consolidated Statements of Cash Flows](index=8&type=section&id=Consolidated%20Statements%20of%20Cash%20Flows) Net cash decreased by **$89.7 million** due to operating activities and financing activities, including investment purchases and dividends Cash Flow Summary for Nine Months Ended Sep 30 (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash (used in) provided by operating activities | $(62,060) | $109,681 | | Net cash (used in) financing activities | $(27,597) | $(56,611) | | Net (decrease) increase in cash | $(89,657) | $53,070 | | Cash and foreign currencies, end of period | $49,758 | $137,323 | [Consolidated Schedule of Investments](index=9&type=section&id=Consolidated%20Schedule%20of%20Investments) Portfolio fair value reached **$2.52 billion** across 335 companies, with **67%** in senior secured debt, categorized by control status Portfolio Composition by Investment Type (Fair Value, in thousands) | Investment Type | September 30, 2023 | % of Total | December 31, 2022 | % of Total | | :--- | :--- | :--- | :--- | :--- | | 1st Senior debt and 1st lien notes | $1,700,689 | 67% | $1,696,192 | 69% | | Subordinated debt and 2nd lien notes | $257,633 | 10% | $263,139 | 11% | | Structured products | $89,731 | 4% | $73,550 | 3% | | Equity shares | $355,690 | 14% | $284,570 | 12% | | Equity warrants | $1,246 | 0% | $1,057 | 0% | | Investment in joint ventures / PE fund | $116,646 | 5% | $130,427 | 5% | | **Total** | **$2,521,635** | **100%** | **$2,448,935** | **100%** | Portfolio Breakdown by Control Status (Fair Value, in thousands) | Investment Category | September 30, 2023 | % of Total | | :--- | :--- | :--- | | Non–Control / Non–Affiliate Investments | $2,044,426 | 81.1% | | Affiliate Investments | $382,346 | 15.2% | | Control Investments | $94,863 | 3.7% | | **Total Investments** | **$2,521,635** | **100.0%** | [Notes to Unaudited Consolidated Financial Statements](index=70&type=section&id=Notes%20to%20Unaudited%20Consolidated%20Financial%20Statements) This section details accounting policies, investment valuation, borrowings, and the financial impact of the Sierra Merger [Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations](index=115&type=section&id=Item%202.%20Management%27s%20Discussion%20and%20Analysis%20of%20Financial%20Condition%20and%20Results%20of%20Operations) Management discusses business overview, portfolio, investment activity, and financial results, including liquidity and critical accounting policies [Overview of Our Business](index=115&type=section&id=Overview%20of%20Our%20Business) Barings BDC invests in **senior secured private debt**, with a **weighted average yield** of **10.1%** on its debt portfolio - The company's investment focus is on **senior secured private debt** in well-established middle-market businesses, leveraging Barings' co-investment exemptive relief[431](index=431&type=chunk) - The **weighted average yield** on all outstanding debt investments increased to **10.1%** as of September 30, 2023, from **9.1%** as of December 31, 2022[434](index=434&type=chunk) [Portfolio Composition and Investment Activity](index=118&type=section&id=Portfolio%20Composition%20and%20Investment%20Activity) Portfolio fair value reached **$2.52 billion**, with **$346.0 million** in new investments and **1.6%** on **non-accrual status** - During the nine months ended September 30, 2023, the company made **$346.0 million** in total investments, including **25 new investments** totaling **$156.8 million**[447](index=447&type=chunk) - As of September 30, 2023, investments in **seven portfolio companies** were on **non-accrual status**, representing **1.6%** of the portfolio's total fair value (**$40.1 million**)[450](index=450&type=chunk) [Results of Operations](index=121&type=section&id=Results%20of%20Operations) Q3 2023 saw increased investment income and net investment income, with a reversal to net unrealized appreciation Investment Income Comparison (in thousands) | Income Source | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Total interest income | $55,405 | $40,639 | $162,719 | $113,492 | | Total dividend income | $8,515 | $7,905 | $26,639 | $22,844 | | Total fee and other income | $2,650 | $4,321 | $10,250 | $10,589 | | **Total investment income** | **$70,846** | **$56,306** | **$213,352** | **$155,656** | Operating Expenses Comparison (in thousands) | Expense Category | Q3 2023 | Q3 2022 | Nine Months 2023 | Nine Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Interest and other financing fees | $21,829 | $15,341 | $61,956 | $40,170 | | Base management fees | $8,315 | $8,267 | $24,302 | $21,520 | | Incentive management fees | $4,618 | $1,825 | $24,309 | $6,579 | | General and administrative expenses | $2,363 | $2,961 | $7,546 | $8,686 | | **Total operating expenses** | **$37,125** | **$28,394** | **$118,113** | **$76,955** | - The increase in interest expense was primarily due to a higher weighted average interest rate on the February 2019 Credit Facility, which rose to **7.1%** as of Sep 30, 2023, from **4.1%** as of Sep 30, 2022[461](index=461&type=chunk) - For the nine months ended Sep 30, 2023, the company recognized a net realized loss of **$75.5 million**, primarily from a **$62.1 million** loss on its investment portfolio and a **$17.1 million** loss on forward currency contracts[465](index=465&type=chunk) [Liquidity and Capital Resources](index=125&type=section&id=Liquidity%20and%20Capital%20Resources) Liquidity is from cash and borrowing capacity, with **$1.52 billion** in debt outstanding and active share repurchases - As of September 30, 2023, the company had **$796.1 million** outstanding under its **$1.1 billion** senior secured credit facility, which matures in February 2026[343](index=343&type=chunk)[344](index=344&type=chunk) - The company has **$725.0 million** in aggregate principal of senior unsecured notes with maturities ranging from 2025 to 2028[343](index=343&type=chunk) - Under its current share repurchase program, the company repurchased **1.4 million shares** for an average price of **$7.75 per share** during the nine months ended September 30, 2023[506](index=506&type=chunk) - On November 9, 2023, the Board declared a quarterly distribution of **$0.26 per share**[512](index=512&type=chunk) [Critical Accounting Policies and Use of Estimates](index=130&type=section&id=Critical%20Accounting%20Policies%20and%20Use%20of%20Estimates) **Investment valuation** and **revenue recognition** are critical policies, with **Level 3 investments** comprising **$2.24 billion** of investments - The company's most critical accounting policies are **investment valuation** and **revenue recognition**[513](index=513&type=chunk) - As of September 30, 2023, **Level 3 investments**, valued using significant unobservable inputs, constituted **$2.24 billion** of the **$2.40 billion** of investments subject to leveling[301](index=301&type=chunk) - The fair value of investments in joint ventures like Jocassee and Thompson Rivers is estimated using the **Net Asset Value (NAV)** of each entity as a practical expedient[530](index=530&type=chunk) [Item 3. Quantitative and Qualitative Disclosures About Market Risk](index=139&type=section&id=Item%203.%20Quantitative%20and%20Qualitative%20Disclosures%20About%20Market%20Risk) The company faces interest rate and foreign currency risks, with a **100 basis point** rate increase impacting net income by **$11.5 million** - As of September 30, 2023, approximately **$1.94 billion** of the company's debt portfolio consisted of **variable-rate investments**, primarily based on SOFR or equivalent rates[556](index=556&type=chunk) Interest Rate Sensitivity Analysis (Annual Impact, in thousands) | Basis Point Change | Impact on Interest Income | Impact on Interest Expense | Impact on Net Income | | :--- | :--- | :--- | :--- | | Up 100 basis points | $19,439 | $7,961 | $11,478 | | Down 50 basis points | $(9,719) | $(3,981) | $(5,738) | - The company mitigates foreign currency risk by borrowing in **local currencies**, including Swedish krona, British pounds sterling, and Euros, under its credit facility[559](index=559&type=chunk) [Item 4. Controls and Procedures](index=141&type=section&id=Item%204.%20Controls%20and%20Procedures) **Disclosure controls and procedures were effective** as of September 30, 2023, with **no material changes** to internal control over financial reporting - The CEO and CFO concluded that the company's **disclosure controls and procedures were effective** as of September 30, 2023[560](index=560&type=chunk) - **No material changes** to internal control over financial reporting occurred during the third quarter of 2023[561](index=561&type=chunk) PART II – OTHER INFORMATION [Item 1. Legal Proceedings](index=142&type=section&id=Item%201.%20Legal%20Proceedings) The company is **not currently subject to any material pending legal proceedings** outside of routine litigation - The company is **not currently subject to any material pending legal proceedings**[564](index=564&type=chunk) [Item 1A. Risk Factors](index=142&type=section&id=Item%201A.%20Risk%20Factors) **No material changes** to risk factors were reported since the 2022 Annual Report on Form 10-K - **No material changes** to risk factors were reported for the three months ended September 30, 2023[566](index=566&type=chunk) [Item 2. Unregistered Sales of Equity Securities and Use of Proceeds](index=142&type=section&id=Item%202.%20Unregistered%20Sales%20of%20Equity%20Securities%20and%20Use%20of%20Proceeds) No unregistered sales occurred, and **no shares were repurchased** under the program in Q3 2023 - **No shares were repurchased** under the company's share repurchase program during the three months ended September 30, 2023[569](index=569&type=chunk) [Item 5. Other Information](index=142&type=section&id=Item%205.%20Other%20Information) **Michael A. DeSieno** was appointed as **Chief Accounting Officer** on November 9, 2023 - **Michael A. DeSieno** was appointed as **Chief Accounting Officer** on November 9, 2023[573](index=573&type=chunk)

Financial Data and Key Metrics Changes - Net asset value per share increased to $11.34 from $11.17, a net increase of 1.5% [8] - Net investment income for the quarter was $0.31, up from $0.25 in the prior quarter, driven by elevated yields and strong credit performance [8][21] - Total investment income generated was the highest since the company began managing the BDC five years ago [11] Business Line Data and Key Metrics Changes - The investment portfolio decreased by $70 million on a net basis, with gross funding of $66 million offset by $135 million of repayments and sales [13] - Nonaccruals decreased to 2% on a cost basis and 1.1% on a fair value basis, down from 3.8% in the previous quarter [9] - Weighted average yields on floating rate investments increased to 11.0% [11] Market Data and Key Metrics Changes - The investment pipeline is approximately $1.7 billion on a probability-weighted basis, predominantly consisting of first lien senior secured investments [26] - The median interest coverage ratio in the portfolio stands at 2.2x, indicating a cushion for issuers to make interest payments despite rising rates [16] Company Strategy and Development Direction - The company is focused on simplifying its structure by managing down certain joint ventures while emphasizing first lien senior secured deals [37][62] - The strategy includes rotating out of acquired assets from MVC and Sierra into Barings originated positions to enhance portfolio quality [8][62] - The company aims to deliver attractive risk-adjusted returns to shareholders over a long time horizon, focusing on middle market companies [18] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the portfolio's performance despite economic challenges, indicating a strong position for future volatility [8] - The company anticipates a thaw in M&A activity in the second half of the year as private equity firms reassess valuations [28] - Management remains cautious about deploying capital aggressively, focusing instead on managing leverage and share repurchases [30][31] Other Important Information - The board declared a second quarter dividend of $0.26 per share, reflecting a 4% increase from the prior quarter [11][24] - The company repurchased 1.4 million shares at an average price of $7.75, indicating a commitment to shareholder value [11] Q&A Session Summary Question: Outlook for repayment in light of potential Fed pause - Management noted that M&A activity has been soft, but expects a thaw in the second half of the year as firms reassess valuations [28][29] Question: Impact of regional banks on Barings and the industry - Management indicated that while there has been a pullback in various markets, Barings has not been significantly affected due to strong relationships with lending partners [34][35] Question: Future plans for joint ventures and their impact on returns - Management confirmed that they are intentionally winding down certain joint ventures to simplify operations while retaining high-return platforms like Eclipse and Rocade [37][39] Question: Credit quality and interest coverage expectations - Management stated that the majority of borrowers have been minimally impacted by inflation, with a small percentage having interest coverage below one [46][48] Question: Mark-to-market losses and CSA valuations - Management provided details on the current marks for MVC and Sierra, indicating that losses are covered by credit support agreements [52][60]