Barings(US:BBDC)2024-02-22 21:19Part I Business 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 purposes7 - 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, Inc910 - Completed the acquisition of MVC Capital, Inc. on December 23, 2020, and Sierra Income Corporation on February 25, 2022, significantly expanding the investment portfolio1116 - 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 million2232 - 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 Management Agreements 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 losses8791 - 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 quarterly99100 Regulation and Taxation 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. companies111113 - 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 tests135138 - 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 year136 - 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 test104106140 Risk Factors 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 leverage167180193 - 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 debt173264265 - 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 capital209213221 - 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 results320325 - Cybersecurity Risks: Cyber incidents could disrupt operations, compromise confidential information, and damage business relationships, leading to financial losses and regulatory scrutiny256257 Cybersecurity 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 monitoring378379 - The Board of Directors provides oversight of cybersecurity matters and receives regular updates from the CCO and the Adviser's CISO381 - 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 condition384 Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 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 income393 - 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 share249497251 Management's Discussion and Analysis of Financial Condition and Results of Operations 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 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 payments437 - 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 2022442 - 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, 2022434 Results of Operations 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 rates452 - 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 fees454457 Liquidity and Capital Resources 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 billion468416 - 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 2025469474 - 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, 2024546547 - As of December 31, 2023, the company had $305.9 million in total unused commitments to extend financing to its portfolio companies536542 Quantitative and Qualitative Disclosures About Market Risk 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 liabilities527528 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 currencies535 Controls and Procedures 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, 2023552 - 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 concurred554 - 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 controls554 Other Information 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, 2024557 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 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 Statement571572573574575 Part IV Exhibits and Financial Statement Schedules 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, 2023596 - 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 multiples607