Barings(BBDC) - 2023 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements 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 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 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 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] Consolidated Statements of Cash Flows 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 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 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 Management discusses business overview, portfolio, investment activity, and financial results, including liquidity and critical accounting policies Overview of Our Business 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] - 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] Portfolio Composition and Investment Activity 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] - 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] Results of Operations 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] - 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] Liquidity and Capital Resources 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][344] - The company has $725.0 million in aggregate principal of senior unsecured notes with maturities ranging from 2025 to 2028[343] - 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] - On November 9, 2023, the Board declared a quarterly distribution of $0.26 per share[512] Critical Accounting Policies and Use of Estimates 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] - 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] - 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] Item 3. Quantitative and Qualitative Disclosures About Market Risk 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] 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] Item 4. Controls and Procedures 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] - No material changes to internal control over financial reporting occurred during the third quarter of 2023[561] PART II – OTHER INFORMATION Item 1. Legal Proceedings 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] Item 1A. Risk Factors 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] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 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] Item 5. Other Information 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]