Barings BDC Inc (NYSE:BBDC) Q3 2019 Earnings Conference Call October 30, 2019 9:00 AM ET Company Participants Eric Lloyd - Chief Executive Officer Ian Fowler - President & Co-Head of Global Private Finance Tom McDonnell - Managing Director & Portfolio Manager of Barings Global High Yield Jonathan Bock - Chief Financial Officer Conference Call Participants Mickey Schleien - Ladenburg Finian O'Shea - Wells Fargo Ryan Lynch - KBW Robert Dodd - Raymond James Kyle Joseph - Jefferies & Company, Inc Bryce Rowe - N ...

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________________________________________________ Form 10-Q __________________________________________________________ (Mark One) ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2019 OR ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to | --- | --- | | ...

Financial Data and Key Metrics Changes - The company's net asset value (NAV) increased from $11.52 per share at March 31 to $11.59 per share on June 30 [9] - Net investment income decreased slightly to $0.15 per share for the second quarter from $0.16 in the first quarter [9][10] - The leverage ratio remained consistent at 1.09x, with net unrealized appreciation on the portfolio of $1.9 million [12][25] Business Line Data and Key Metrics Changes - The middle-market portfolio grew to $352 million, primarily consisting of 28 first lien debt investments and 2 second lien term loans [17] - Seven new middle-market debt investments totaling $67 million were made during the quarter, with total investments of $80 million [10][15] - The average yield for the middle-market portfolio decreased from 7.8% to 7.5% [17] Market Data and Key Metrics Changes - Liquid credit spreads were relatively flat from March 31 to June 30, leading to consistent BDC stock prices [8] - Average spreads for broadly syndicated loans were down slightly to 327 basis points, with yields at 5.8% [16] - The illiquidity premium for middle-market lenders is at all-time lows, affecting competitive dynamics in the market [19] Company Strategy and Development Direction - The company aims to maintain a focus on quality investments and has set a reasonable expectation for average quarterly deployments around $100 million [11] - A joint venture with the State of South Carolina Retirement System is expected to enhance shareholder returns through effective asset management [7][27] - The company emphasizes a disciplined approach to credit and diversification in its investment strategy [19][20] Management's Comments on Operating Environment and Future Outlook - Management noted that the latter half of the second quarter saw slower deal activity but anticipates increased deal flow as summer progresses [15] - The competitive environment has intensified, with more private debt managers entering the market, making it challenging to secure attractive deals [46] - Management remains committed to delivering steady and stable operating results to build investor trust [7] Other Important Information - The share repurchase program aims to buy back up to 2.5% of outstanding shares when trading below NAV, with approximately 1.9% already repurchased [13] - The company announced a third-quarter dividend of $0.14 per share, marking the fourth consecutive increase [26] Q&A Session Summary Question: On portfolio rotation and refinancing pipeline - Management indicated that the market has improved post-quarter end, with fewer outflows from mutual funds and strong CLO demand boosting prices [31] - The improvement in BSL prices will not necessarily lead to enhanced allocations for middle-market investments due to the allocation policy being based on gross commitments [32] Question: On upfront fees for capital structuring services - The advisor does not retain a portion of upfront fees; these fees are passed on to investors as part of the economic consideration [34] Question: On asset yields and competitive behavior - The decrease in total yield is primarily driven by LIBOR movements rather than spread compression [42] - The competitive environment has become more challenging, with an increase in the number of managers competing for deals [46] Question: On joint venture ramp-up and expected ROE - The joint venture is expected to ramp up slowly over 10 quarters, with a focus on generating good returns without rushing [62] Question: On the mix of commitments and yields - The commitments made were primarily due to timing, with expectations for closing within a short timeframe [58] - The yield on new commitments was influenced by a unique capital structure opportunity, not indicative of a broader market shift [60]

Investment Portfolio and Transactions - The company sold its investment portfolio for gross proceeds of $981.2 million in cash as part of the Asset Sale Transaction[192]. - Barings invested $100.0 million in newly issued shares at net asset value, and purchased an additional $50.0 million in shares over a two-year period[192]. - As of June 30, 2019, Barings owned 13,639,681 shares, representing 27.1% of the total shares outstanding[197]. - As of June 30, 2019, the total value of the investment portfolio was $1,200.6 million, an increase from $1,121.9 million as of December 31, 2018[212]. - During the six months ended June 30, 2019, the company made new middle-market debt investments totaling $130.1 million and purchased $3.6 million in syndicated senior secured loans[214]. - The company sold $10.8 million in money market fund investments during the six months ended June 30, 2019[214]. - As of June 30, 2019, the investment portfolio consisted of 142 portfolio companies, with no single investment exceeding 10% of the total fair value[212]. - During the six months ended June 30, 2019, Barings BDC repurchased a total of 969,789 shares of common stock at an average price of $9.95 per share[253]. - Subsequent to June 30, 2019, Barings BDC made approximately $70.1 million of new middle-market private debt commitments, with $33.0 million closed at a weighted average yield of 8.9%[257]. Financial Performance - Total investment income for the six months ended June 30, 2019, was $37.9 million, compared to $51.5 million for the same period in 2018[220]. - Net investment income for the six months ended June 30, 2019, was $15.4 million, down from $22.8 million in the prior year[220]. - The company recognized a net realized loss of $79,751 during the six months ended June 30, 2019, compared to a net realized loss of $44.5 million in the same period of 2018[220]. - Total investment income for the three months ended June 30, 2019, was $19.6 million, a decrease of 23.3% compared to $25.5 million for the same period in 2018[221]. - The weighted average yield on investments decreased to 6.0% as of June 30, 2019, down from 8.7% as of June 30, 2018[221]. - Net realized gains for the three months ended June 30, 2019, were $50,024, compared to net realized losses of $37.2 million for the same period in 2018[228]. - Net unrealized appreciation for the three months ended June 30, 2019, was $1.9 million, compared to $43.0 million for the same period in 2018[232]. Debt and Financing - As of June 30, 2019, Barings BDC had borrowings of $210.5 million outstanding under the August 2018 Credit Facility with an interest rate of 3.612%[240]. - The February 2019 Credit Facility had initial commitments totaling $800.0 million, with an accordion feature allowing for an increase of up to $400.0 million[241]. - As of June 30, 2019, Barings BDC had borrowings of $75.0 million outstanding under the February 2019 Credit Facility with a weighted average interest rate of 4.963%[245]. - The Debt Securitization completed on May 9, 2019, involved approximately $296.8 million of AAA(sf) Class A-1 Senior Secured Floating Rate 2019 Notes[246]. - As of June 30, 2019, Barings BDC had borrowings of $296.8 million under the Class A-1 2019 Notes with an interest rate of 3.544%[249]. - Borrowings under the August 2018 Credit Facility could see an annual interest expense change of up to $4.2 million with a 200 basis point interest rate shift, based on outstanding borrowings as of June 30, 2019[290]. - The February 2019 Credit Facility could result in a maximum annual interest expense change of $1.5 million from a 200 basis point interest rate change, based on outstanding borrowings as of June 30, 2019[291]. - The Class A-1 and Class A-2 2019 Notes have floating rate interest provisions based on three-month LIBOR, with a potential annual interest expense fluctuation of $7.0 million from a 200 basis point change in interest rates[294]. Cash Flow and Liquidity - Cash on hand as of June 30, 2019, was $12.9 million, a significant decrease from $216.5 million as of June 30, 2018[235]. - Operating activities used $32.7 million in cash during the six months ended June 30, 2019, primarily due to portfolio investments of $171.4 million[235]. - Financing activities provided $33.2 million of cash during the six months ended June 30, 2019, mainly from net proceeds of $348.3 million from debt securitization[235]. - The company anticipates that current cash and cash equivalents, along with available borrowing capacity, will be adequate to meet cash needs for daily operations for at least the next twelve months[234]. Valuation and Accounting Estimates - The company has identified investment valuation and revenue recognition as its most critical accounting estimates[260]. - As of June 30, 2019, the total number of senior secured, middle-market investments reviewed by an independent valuation firm was 22, representing 100% of the total investments at fair value[272]. - The company utilizes Level 3 inputs for fair value measurements of certain debt and equity instruments of privately held companies, which may differ significantly from fair values in an active market[265][266]. - The fair value of investments is determined using an Income Approach model, which considers changes in the credit profile of the borrower and the discount margin of the baseline index[277][278]. - The Enterprise Value Waterfall model is used to estimate the fair value of equity securities, relying on transaction multiples and financial performance measures such as Adjusted EBITDA[279][281]. - The company maintains internal controls and procedures for pricing and valuation, with an annual review conducted by the Pricing Committee[268]. - The independent valuation firm concluded that the fair value of investments subjected to their procedures appeared reasonable[273]. - The company’s valuation methodologies are reviewed and updated regularly to adapt to changes in the marketplace[268]. Market Risks - The company's debt portfolio investments, totaling approximately $1,191.2 million, bear interest at variable rates, primarily LIBOR-based, with a potential annual investment income fluctuation of $23.8 million from a hypothetical 200 basis point change in interest rates[289]. - The company is exposed to market risks including interest rate fluctuations, which could materially affect net investment income if not matched by corresponding increases in interest income[295]. - The company may have foreign currency exposure related to certain investments, which are translated into U.S. dollars based on spot rates at each balance sheet date[296].

Financial Data and Key Metrics Changes - The company's NAV increased by 4.9% to $11.52 per share, primarily driven by the recovery in credit spreads, which positively impacted the fair value of the broadly syndicated loan portfolio [9][10][20] - Net investment income was $0.16 per share, consistent with the previous quarter and exceeding the first quarter dividend of $0.12 per share [10][20] - The company reported $25.4 million of net unrealized depreciation, recovering a significant portion of the $52.3 million unrealized depreciation recorded in the fourth quarter [11][20] Business Line Data and Key Metrics Changes - The middle market portfolio increased to $289 million at quarter end, with investments totaling $65 million made during the quarter [10][15] - The broadly syndicated loan (BSL) portfolio consisted of approximately $838 million, with a diversified portfolio of 111 investments across multiple industries [16] - The middle market portfolio was spread across 25 companies, up from 19 at the end of 2018, with a median EBITDA size of approximately $34 million [17] Market Data and Key Metrics Changes - The first quarter saw a modest recovery in BDC stock prices, reflecting the increase in credit spreads, despite a slight market weakening in March [8][9] - Average spreads in the middle market remained stable, with first lien spreads at 501 basis points and yields at 7.8% [17][18] - The overall leverage in the market showed slight increases, with senior leverage for the BSL portfolio remaining consistent at a weighted average of 4.9 times senior debt to EBITDA [16][19] Company Strategy and Development Direction - The company aims to repurchase up to 2.5% of outstanding shares trading below NAV and up to 5% if trading below 0.9 of NAV, reflecting a commitment to shareholder alignment [13] - A joint venture with the State of South Carolina Retirement System was announced, aiming to diversify the asset pool and enhance risk-adjusted returns [24][25] - The focus remains on maintaining a predominantly first lien senior secured strategy while exploring opportunities across various asset classes [17][19] Management's Comments on Operating Environment and Future Outlook - Management noted that the earnings pressure from the new credit facility is expected to be temporary as they leverage the credit line effectively [10][20] - The company remains optimistic about the recovery of unrealized losses and the overall performance of the portfolio, with continued improvements expected in the second quarter [11][45] - Management emphasized the importance of maintaining attractive credit spreads and not chasing yield, even in a fluctuating LIBOR environment [33][34] Other Important Information - The company has experienced a significant increase in operational capacity with the new $800 million corporate credit facility, which is expected to enhance liquidity [12][20] - The share repurchase program has already seen approximately 1.5% of outstanding shares purchased, demonstrating the company's commitment to capital allocation [13] Q&A Session Summary Question: Follow-up on the joint venture and its rationale - Management clarified that the joint venture allows for investments in both non-qualified and qualified assets, enhancing diversification and return potential [30] Question: Managing downside risk with LIBOR trends - Management stated that they continue to implement 1% LIBOR floors in deals and do not focus on fixed-rate deals, maintaining a floating rate approach [33] Question: Funding plans for the attractive pipeline in middle market deals - Management indicated a balanced approach between BSL sales and leveraging existing debt capacity to fund new investments [36] Question: Clarification on unrealized loss recovery - Management explained that they have recovered approximately half of the unrealized loss from the previous quarter, with ongoing improvements noted [45] Question: Static CLO structure and its implications - Management confirmed that the static CLO allows for limited flexibility in asset sales but provides lower financing costs and matches the duration of liabilities with assets [66] Question: Goals for the joint venture and expected returns - Management emphasized that the joint venture is primarily about diversification and risk-adjusted returns rather than simply boosting ROE [58]

Table of Contents UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________________________________________________________ Form 10-Q __________________________________________________________ (Mark One) ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 2019 OR ¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to | --- | --- | |---- ...

Financial Data and Key Metrics Changes - The company's net asset value (NAV) decreased by 7.8% to $10.98 per share, primarily due to unrealized losses from credit spread movements [10][21] - Net investment income for the fourth quarter was $0.16 per share, an increase from $0.06 per share in the third quarter, exceeding the fourth quarter dividend of $0.10 per share [12][21] - The investment portfolio totaled over $1.1 billion, supported by $570 million in borrowings under the broadly syndicated loan portfolio [13][22] Business Line Data and Key Metrics Changes - The middle market portfolio saw significant growth, with 13 new investments totaling $162 million, bringing the total value to over $230 million by year-end [12][14] - The company invested approximately $846 million in liquid, broadly syndicated loans and $249 million in private middle market loans as of December 31 [15][16] - Over 20% of the total portfolio is now comprised of middle market loans, with 19 investments across 12 industries [16][17] Market Data and Key Metrics Changes - The fourth quarter experienced significant volatility, with liquid credit markets and BDC stock prices declining by approximately 4.5% and 15% respectively [7][9] - Senior and unit tranche spreads remained relatively flat, while mezzanine spreads tightened and second lien spreads widened due to market volatility [18] Company Strategy and Development Direction - The company aims to focus on quality investments with appropriate risk-adjusted returns, emphasizing a predominantly first lien, senior secured debt strategy [19][60] - A share repurchase plan was approved, targeting to repurchase 2.5% of outstanding shares when trading below NAV, and 5% if trading below 0.9 NAV [28][29] - The company is exploring a joint venture with an institutional investor, which could provide differentiated returns to shareholders [25] Management's Comments on Operating Environment and Future Outlook - Management noted that the underlying performance of portfolio companies remains strong despite market sell-offs, indicating resilience in fundamentals [9][10] - The company does not attempt to time the market but focuses on underwriting deals assuming economic and credit cycles [42] - Management expressed confidence in the ability to find quality transactions despite current market conditions [19][60] Other Important Information - The company has entered into an $800 million corporate revolving credit facility to support its middle market portfolio expansion [13][22] - Approximately 60% of unrealized losses from the fourth quarter have been recovered in early 2019 [13][21] Q&A Session Summary Question: Insights on new buybacks and market dislocation - Management discussed the mechanics of the buyback program and emphasized a long-term approach to purchasing shares below NAV [35][37] Question: Concerns about tech deals and leverage levels - Management acknowledged the high leverage levels in tech deals but highlighted the strong credit fundamentals of technology companies [39] Question: Economic outlook and underwriting strategy - Management stated that they do not time the market and focus on risk-adjusted returns, evaluating second lien opportunities based on multiple factors [42][43] Question: Portfolio structure and second lien growth - Management confirmed a focus on first lien investments but will opportunistically consider second lien investments if they present attractive risk-adjusted returns [60][61] Question: Impact of LIBOR increases on portfolio yield - Management emphasized the importance of portfolio diversification and maintaining LIBOR floors to manage downside risk [45][47] Question: Future funding sources and potential securitization - Management expressed openness to exploring securitization as a funding source to drive lower costs of liabilities [57]