Barings(BBDC) - 2023 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements This section presents the company's core unaudited consolidated financial statements for the period ended June 30, 2023, highlighting an increase in total net assets to $1.21 billion and a rise in Net Asset Value (NAV) per share to $11.34 Unaudited Consolidated Balance Sheet As of June 30, 2023, total assets were $2.73 billion, total liabilities $1.52 billion, and total net assets $1.21 billion, with NAV per share increasing to $11.34 Consolidated Balance Sheet Summary (in thousands) | Metric | June 30, 2023 (Unaudited) | December 31, 2022 | | :--- | :--- | :--- | | Total Investments at Fair Value | $2,505,992 | $2,448,935 | | Total Assets | $2,730,413 | $2,709,957 | | Total Liabilities | $1,522,816 | $1,517,628 | | Total Net Assets | $1,207,597 | $1,192,329 | | Net Asset Value Per Share | $11.34 | $11.05 | Unaudited Consolidated Statements of Operations For Q2 2023, total investment income was $75.3 million, net investment income $33.6 million, and net assets increased by $40.1 million, a significant improvement from Q2 2022 Statement of Operations Highlights (in thousands) | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Investment Income | $75,302 | $55,592 | $142,506 | $99,350 | | Total Operating Expenses | $41,478 | $23,818 | $80,988 | $48,563 | | Net Investment Income After Taxes | $33,624 | $31,774 | $61,123 | $50,781 | | Net Increase (Decrease) in Net Assets | $40,117 | $(24,993) | $79,768 | $(3,962) | Per Share Data | Metric | Three Months Ended June 30, 2023 | Three Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | Six Months Ended June 30, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net Investment Income Per Share | $0.31 | $0.29 | $0.57 | $0.52 | | Net Increase (Decrease) in Net Assets Per Share | $0.37 | $(0.23) | $0.74 | $(0.04) | Unaudited Consolidated Statements of Changes in Net Assets Net assets increased from $1.205 billion to $1.208 billion in Q2 2023, driven by a $40.1 million net increase from operations, partially offset by distributions and share repurchases Reconciliation of Net Assets - Q2 2023 (in thousands) | Description | Amount | | :--- | :--- | | Balance, March 31, 2023 | $1,205,001 | | Net Increase from Operations | $40,117 | | Distributions of Net Investment Income | $(26,667) | | Purchases of Shares in Repurchase Plan | $(10,854) | | Balance, June 30, 2023 | $1,207,597 | Reconciliation of Net Assets - H1 2023 (in thousands) | Description | Amount | | :--- | :--- | | Balance, December 31, 2022 | $1,192,329 | | Net Increase from Operations | $79,768 | | Distributions of Net Investment Income | $(53,646) | | Purchases of Shares in Repurchase Plan | $(10,854) | | Balance, June 30, 2023 | $1,207,597 | Unaudited Consolidated Statements of Cash Flows For H1 2023, cash and foreign currencies decreased by $59.1 million, due to $27.2 million used in operating activities and $31.9 million in financing activities Cash Flow Summary - Six Months Ended June 30 (in thousands) | Cash Flow Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net Cash Provided by (Used in) Operating Activities | $(27,196) | $(12,670) | | Net Cash Provided by (Used in) Financing Activities | $(31,889) | $126,187 | | Net Increase (Decrease) in Cash and Foreign Currencies | $(59,085) | $113,517 | Consolidated Schedule of Investments The investment portfolio's fair value reached $2.51 billion as of June 30, 2023, diversified across non-control, affiliate, and control investments, primarily in senior secured term loans Total Investments by Category (June 30, 2023, in thousands) | Investment Category | Cost | Fair Value | | :--- | :--- | :--- | | Non-Control / Non-Affiliate | $2,138,921 | $2,053,044 | | Affiliate Investments | $317,916 | $345,990 | | Control Investments | $97,868 | $106,958 | | Total Investments | $2,554,705 | $2,505,992 | - The company holds derivative instruments, including two Credit Support Agreements with its adviser, Barings LLC, with a total notional amount of $123 million and a fair value of $60.65 million as of June 30, 2023[83] Notes to Unaudited Consolidated Financial Statements This section details accounting policies, related party agreements, investment valuation, borrowings, derivative instruments, and the 2022 Sierra Merger - The company is externally managed by Barings LLC under the New Barings BDC Advisory Agreement, amended and restated on June 24, 2023, to update its term[165][175] - A 12-month share repurchase program for up to $30.0 million was authorized on February 23, 2023, with 1,400,000 shares repurchased for approximately $10.9 million during the three and six months ended June 30, 2023[173] - The company utilizes several joint ventures, including Jocassee Partners LLC, Thompson Rivers LLC, Waccamaw River LLC, and Sierra Senior Loan Strategy JV I LLC, which are accounted for as equity investments and not consolidated[218][233][240][248] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management analyzes the company's financial condition and operating results, covering business overview, portfolio, investment activity, and a comparison of results, highlighting increased investment income and a positive shift in net unrealized appreciation Overview of Our Business Barings BDC, an externally-managed BDC advised by Barings LLC, primarily invests in senior secured private debt in middle-market businesses, with a weighted average yield of 10.4% on its debt portfolio as of June 30, 2023 - The company's investment strategy, managed by Barings GPFG, focuses on senior secured private debt in well-established, middle-market businesses with low cyclicality and operating risk[410][411] Weighted Average Yield on Debt Investments | Date | Yield (Excluding Non-Accrual) | Yield (Including Non-Accrual) | | :--- | :--- | :--- | | June 30, 2023 | 10.4% | 10.0% | | Dec 31, 2022 | 9.7% | 9.1% | Portfolio Composition and Investment Activity The investment portfolio's fair value increased to $2.51 billion across 328 companies, with $153.0 million in new and follow-on investments and six companies on non-accrual status as of June 30, 2023 Portfolio Composition by Investment Type (Fair Value, in thousands) | Investment Type | June 30, 2023 | December 31, 2022 | | :--- | :--- | :--- | | Senior debt and 1st lien notes | $1,700,975 | $1,696,192 | | Subordinated debt and 2nd lien notes | $246,997 | $263,139 | | Structured products | $81,068 | $73,550 | | Equity shares | $356,201 | $284,570 | | Equity warrants | $1,144 | $1,057 | | Investment in joint ventures / PE fund | $119,607 | $130,427 | | Total | $2,505,992 | $2,448,935 | - During the six months ended June 30, 2023, the company made 15 new investments totaling $81.4 million and follow-on investments in existing portfolio companies of $71.6 million[427] - As of June 30, 2023, six portfolio companies were on non-accrual status, with a total fair value of $26.6 million, representing 1.1% of the total portfolio fair value[433] Results of Operations Q2 2023 total investment income rose to $75.3 million, driven by higher base rates and portfolio size, resulting in $33.6 million net investment income and a $40.1 million net increase in net assets from operations due to positive unrealized appreciation Comparison of Operating Results (in thousands) | Metric | Q2 2023 | Q2 2022 | H1 2023 | H1 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Investment Income | $75,302 | $55,592 | $142,506 | $99,350 | | Net Investment Income After Taxes | $33,624 | $31,774 | $61,123 | $50,781 | | Net Increase (Decrease) in Net Assets | $40,117 | $(24,993) | $79,768 | $(3,962) | - The increase in investment income was driven by a higher weighted average yield on the debt portfolio (10.4% at June 30, 2023 vs. 7.6% at June 30, 2022) and a larger average portfolio size[443] - Incentive fees increased to $10.1 million in Q2 2023 from nil in Q2 2022, primarily due to the Incentive Fee Cap limiting the fee in the prior year and an increase in pre-incentive fee net investment income[447] Liquidity and Capital Resources The company's liquidity is supported by $80.3 million cash, $1.49 billion in borrowings, and an asset coverage ratio of 180.6%, with a $0.26 per share dividend declared post-quarter end - For the six months ended June 30, 2023, cash decreased by $59.1 million, with operating activities using $27.2 million and financing activities using $31.9 million[460] Borrowings Summary (as of June 30, 2023, in millions) | Facility | Amount Outstanding | | :--- | :--- | | Credit Facilities | $772.1 | | Notes Payable (Net) | $719.8 | | Total Borrowings | $1,491.9 | - The company's asset coverage ratio was 180.6% as of June 30, 2023, providing a cushion over the statutory minimum of 150%[424] Critical Accounting Policies and Use of Estimates Investment valuation and revenue recognition are critical accounting policies, with Level 3 inputs requiring significant judgment and independent third-party valuation, and interest income recognized on an accrual basis - The company's investment portfolio, primarily composed of debt and equity instruments of privately held companies, is valued using Level 3 inputs due to the lack of quoted prices or other observable inputs[500] - The Board has designated the Adviser as the valuation designee, which utilizes independent third-party providers to perform valuations on portfolio investments quarterly[502][505] - Revenue recognition for interest income is on an accrual basis, but loans are placed on non-accrual status if collectability is uncertain, and PIK interest is also recognized as income but represents a non-cash source of revenue[508][514] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces interest rate risk from its $1.93 billion variable-rate debt portfolio, with a 100-basis-point rate increase estimated to boost annual net income by $11.5 million, and mitigates foreign currency risk by borrowing in local currencies - As of June 30, 2023, approximately $1.93 billion of the company's debt portfolio investments bore interest at variable rates, primarily tied to LIBOR or SOFR[533] Interest Rate Sensitivity Analysis (Annual Impact on Net Income) | Basis Point Change | Net Income Impact (in thousands) | | :--- | :--- | | Up 300 basis points | $34,592 | | Up 200 basis points | $23,061 | | Up 100 basis points | $11,531 | | Down 50 basis points | $(5,766) | - The company mitigates foreign currency exposure by borrowing in local currencies under its credit facility to finance investments denominated in those currencies[533] Item 4. Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective as of June 30, 2023, with no material changes to internal control over financial reporting during Q2 2023 - Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of June 30, 2023[536] - No material changes in internal control over financial reporting were identified during the second quarter of 2023[537] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company is not currently subject to any material pending legal proceedings, beyond ordinary routine litigation incidental to its business - Neither the company, its Adviser, nor its subsidiaries are currently subject to any material pending legal proceedings[539] Item 1A. Risk Factors No material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for the year ended December 31, 2022, and its Q1 2023 Form 10-Q were reported - No material changes to the previously disclosed risk factors were reported for the three months ended June 30, 2023[541] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities but repurchased 1,400,000 shares for approximately $10.9 million during Q2 2023, with $19.1 million remaining for repurchases Share Repurchases - Q2 2023 | Period | Total Shares Purchased | Average Price Paid | Approx. Value Remaining Under Program (in thousands) | | :--- | :--- | :--- | :--- | | May 2023 | 975,000 | $7.68 | $22,512 | | June 2023 | 425,000 | $7.93 | $19,142 | - The Board authorized a new 12-month, $30.0 million share repurchase program commencing on March 1, 2023, for open market purchases at prices below the then-current NAV per share[542] Item 3. Defaults Upon Senior Securities The company reported no defaults upon its senior securities during the period - None[546] Item 5. Other Information No directors or officers adopted or terminated any Rule 10b5-1 trading plans for the purchase or sale of the company's securities during the fiscal quarter ended June 30, 2023 - No directors or officers adopted or terminated any Rule 10b5-1 trading plans during the quarter[547] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including an amendment to the Senior Secured Revolving Credit Agreement and the Third Amended and Restated Investment Advisory Agreement, along with required certifications - Key exhibits filed include Amendment No. 4 to the Senior Secured Revolving Credit Agreement and the Third Amended and Restated Investment Advisory Agreement, dated June 24, 2023[549]