Barings BDC: A Solidly Covered 11.7% Yield And Re-Rating Potential

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]