U.S. Markets closed

Edited Transcript of TCAP earnings conference call or presentation 9-Nov-18 2:00pm GMT

Q3 2018 Barings BDC Inc Earnings Call

RALEIGH Dec 18, 2018 (Thomson StreetEvents) -- Edited Transcript of Barings BDC Inc earnings conference call or presentation Friday, November 9, 2018 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Eric J. Lloyd

Barings BDC, Inc. - CEO & Interested Director

* Ian Fowler

Barings BDC, Inc. - President

* Jonathan Gerald Bock

Barings BDC, Inc. - CFO

* Thomas McDonnell

Barings LLC - Director

================================================================================

Conference Call Participants

================================================================================

* Christopher Robert Testa

National Securities Corporation, Research Division - Equity Research Analyst

* Finian Patrick O'Shea

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Mickey Max Schleien

Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst

* Mitchel Stuart Penn

Janney Montgomery Scott LLC, Research Division - MD of BDCs

* Robert James Dodd

Raymond James & Associates, Inc., Research Division - Research Analyst

* Ryan Patrick Lynch

Keefe, Bruyette, & Woods, Inc., Research Division - MD

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

At this time, I would like to welcome everyone to the Barings BDC, Inc. Conference Call for the quarter ended September 30, 2018. (Operator Instructions)

Today's call is being recorded, and a replay will be available approximately 2 hours after the conclusion of the call on the company's website at www.baringsbdc.com under the Investor Relations section.

Please note that this call may contain forward-looking statements that include statements regarding the company's goals, beliefs, strategies, future operating results and cash flows. Although the company believes these statements are reasonable, actual results could differ materially from those projected in forward-looking statements. These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the sections titled Risk Factors and Forward-Looking Statements in the company's annual report on Form 10-K for the fiscal year ended December 31, 2017, and quarterly report on the Form 10-Q for the quarter ended September 30, 2018, each as filed with the Securities and Exchange Commission. Barings BDC undertakes no obligation to update or revise any forward-looking statements unless required by law.

At this time, I would like to turn the call over to Jon Bock, Chief Financial Officer.

--------------------------------------------------------------------------------

Jonathan Gerald Bock, Barings BDC, Inc. - CFO [2]

--------------------------------------------------------------------------------

Thank you, Daniel, and good morning. We appreciate everyone joining us for our first quarterly earnings call at Barings BDC. And please note copies of our third quarter earnings release and investor presentation are available under the Investor Relations section of the website, which is, as was mentioned, www.baringsbdc.com.

Now we'll referencing the presentation during the call, and on the call today, I'm joined by Barings BDC CEO and Head of Global Finance, Eric Lloyd; President and Co-Head of North American Private Finance, Ian Fowler; and Tom McDonnell, Managing Director and Portfolio Manager of Barings Global High Yield. And if you saw in our earnings release and 10-Q filed yesterday, the first 2 months since externalization have been extremely active. So we're going to cover a lot, and we're going to be efficient with your time.

Jump to Slide 3 for a road map of the call. To start, I'm going to give a few summary points on the quarter. Next, Eric Lloyd will discuss the broader Barings platform, the private finance team and the BDC's fit within the Barings franchise. Then Tom McDonnell and Ian Fowler are going to discuss our BSL strategy and our private investment efforts. And finally, Eric and I are going to wrap up the call with a discussion on third quarter financials, investment activity since quarter end and our thoughts on alignment just before we open it up to Q&A.

So jump to Slide 4. As you know, on August 2, we closed our externalization transaction with Triangle Capital, where Barings assumed the investment advisory role over a BDC with an all-cash portfolio. And here's a list of a few summary highlights for that short [sub] period. I'd say there's 2 main points to take away. First, our portfolio ramp's underway. As of September 30, we've closed roughly $1 billion in senior secured loans across liquid BSL and traditional middle market transactions. Now second, that better-than-expected deployment managed by our leading liquid credit team, that gave us the ability to generate a better-than-expected $0.06 a share of net investment income during the period between that closing and September 30. And that exceeded our dividend of $0.03 a share. While we're pleased to see a building ramp, we know that investor trust is really a function of: one, steady and stable operating results; two, best-in-class investor alignment; and three, increased visibility and transparency into the breadth and depth of the platform and how we actually drive long-term investment results.

And to speak of that platform, let me now turn over the call to Eric Lloyd, Barings BDC CEO and Head of Global Private Finance.

--------------------------------------------------------------------------------

Eric J. Lloyd, Barings BDC, Inc. - CEO & Interested Director [3]

--------------------------------------------------------------------------------

Thanks, Jon. And first, again, let me reiterate how excited we are at Barings about the opportunity to manage the BDC. We appreciate the trust shareholders have placed in us to serve as your investment adviser.

Referring to Slide 6. The strong start that Jon referenced for the company following the externalization was enabled by our very experienced high yield team within Barings.

On this slide, we show a high-level overview of Barings, with over 1,900 professionals across 16 countries worldwide. Importantly, Barings is a wholly owned subsidiary of MassMutual, and this relationship provides a level of platform support and long-term stability that's unique within the BDC marketplace.

Also, Barings is a deep and experienced credit manager, with over $310 billion of investments under management worldwide, including over $229 billion invested across various fixed-income markets. It's this strong partnership between our liquid and illiquid credit teams that further differentiates our underwriting and sourcing with a perspective that reaches across all credit classes.

Turning to Slide 7. You'll see numbers from our liquid credit team lead by Martin Horne. They have over $69 billion in AUM.

On Slide 8, you'll see the scope of our private finance group as well as the executive management team of the BDC. Barings BDC is supported by a team of 200 professionals around the world that have been investing in middle market companies in North America since the early 1990s.

Slide 9 outlines the key aspects of our leading franchise. Namely, first, we're global. Our platform finances private equities, sponsor-backed deals worldwide in multiple currencies. Second, we're aligned. You'll hear the word aligned a lot today. Barings and MassMutual remain the single-largest investor in Barings BDC shares and also invest in deals originated by this private credit platform. Three, we're experienced. We've originated sponsored transactions across the senior and mezzanine portions of the capital structure for a very long time. And MassMutual, our parent company, has been a long-term investor in the middle market for over 30 years. Lastly, we're flexible. Our platform is not a one-product business. We're capable of financing up and down the capital stack to meet sponsor needs as we have a wide variety of institutional accounts and mandates.

Now let's move to Slide 10 for a few financial highlights. Our $1 billion investment portfolio was partially supported by $210 million of borrowings under our new $750 million credit facility, resulting in ending debt-to-equity of 0.34x, or 0.69x when adjusted for unsettled transactions. As a reminder, our shareholders approved the reduction in our minimum asset coverage ratio from 200% to 150%. Notably, our private, predominantly first lien floating rate senior secured debt strategy fits well with increased leverage levels. Additionally, we look to manage our leverage prudently over time, balancing the desire to deliver a levered return while also ensuring adequate liquidity to take advantage of market downturns.

Slide 11 outlines our investment deployments or repayments for the third quarter. As you can tell, it was a very active quarter.

Yet to give you more detail on the investment portfolio, I'd ask you to refer to Slide 13. As of September 30, our investment portfolio was invested in approximately $950 million of liquid, broadly syndicated loans and $86 million in private middle market loans. These do include some delayed draw term loans.

Recall, it is our intention for the BDC to invest primarily in private, directly originated senior secured investments over time. However, it takes time to originate these high-quality, attractive risk/return investments. As a result, we are currently in a transition period, during which the company has invested in liquid, broadly syndicated loans. While these investments generate a slightly lower yield, they are associated with largest issuers in resilient industries that we know very well within -- so what I said, these liquid, broadly syndicated loans, they generate a little bit lower yield because -- but they are associated with larger companies in resilient industries that we know very well within our Barings Global High Yield franchise.

Instead of hearing from me on this, I'd actually turn it over to one of our most senior portfolio managers on liquid credit, Tom McDonnell, to discuss the BDC's portfolio ramp and these liquid, broadly syndicated loans.

--------------------------------------------------------------------------------

Thomas McDonnell, Barings LLC - Director [4]

--------------------------------------------------------------------------------

Thank you, Eric. It's a pleasure to join the call today to discuss the Barings BDC portfolio and showcase our liquid credit capabilities, which are central to our middle market portfolio transition. As background, Barings manages over $69 billion in loans and bonds globally and has 72 professionals on our high yield investment team. We adhere to a strict bottom-up fundamental approach to investing and have a 20-year track record of investing in the liquid credit space.

As Barings became the BDC external adviser, I work very closely with both Eric and Jon to formulate the proper risk-return parameters in constructing the company's liquid portfolio during this initial phase.

Looking at the liquid credit, BSL stats in the BDC portfolio on Slide 13, I'll point out that all investments are first lien loans with a weighted average spread of 332 basis points and yield of 5.6%. In addition to our focus on adequate risk per unit of return, we are strong proponents of diversification with 120 issuers in the portfolio.

Our average liquid credit position is 75 basis points of portfolio assets, and our holdings are well diversified by industry. More importantly, these are credits that our liquid team knows very well that we own across the firm and often in sizable amounts.

Taking a closer look at the portfolio, you'll see a relatively modest issuer leverage with blended weighted average senior leverage of 4.9x.

Taking a moment to discuss liquid credit fundamentals. Overall, corporate credit quality remains very strong. We experienced very strong earnings growth in the first and second quarters of this year but a slight moderation in earnings growth thus far in the third quarter.

Importantly, our expectation for defaults remains low as we expect default rates in the 2% range for the next year. From a technical perspective, loan demand remained strong from CLO buyers, institutional investors and retail investors through the third quarter, and we don't expect this to change as we look forward to the fourth quarter and beyond.

Let me now turn it over to Ian, who works -- who leads our private investment efforts for a discussion of the middle market assets.

--------------------------------------------------------------------------------

Ian Fowler, Barings BDC, Inc. - President [5]

--------------------------------------------------------------------------------

Thanks, Tom, and good morning, everyone. Staying on Slide 13 for a moment, I'd like to direct your attention to the middle market column. As of September 30, our BDC had approximately $86 million of middle market assets spread across 6 portfolio companies. 100% of our middle market assets this quarter were in first lien investments, with an average senior leverage profile of 4.6x and an average total leverage profile of 5.1x.

Note that the median EBITDA size of our middle market exposure is approximately $40 million.

Similar to our liquid credit team's focus on capital preservation through meaningful diversification, our average position size in middle market credit is 1% of the total portfolio size, with our top exposure at just 1.7% as outlined in our top 10 exposures on Slide 14.

Jumping to Slide 16, it may be helpful for investors if I walk through a few market slides and put into broader context our narrative and how we look at current trends in yields, leverage, risk-adjusted return and ultimately, portfolio construction.

In terms of evaluating individual credits and how they relate to portfolio construction, let me say that diversification is key and must be achieved through multiple lenses, including position size, origination sources, industry, portfolio company EBITDA and most importantly, risk-adjusted return.

You can't just look at the yield of first lien middle market loans without considering the risk profile and how deep you are in the capital stack.

Third-party data from Reuters on Page 16 illustrates the quarterly middle market yields across the capital structure from first lien to mezzanine. The trend to focus on here is that senior debt yields, on average, have been rising gradually since the beginning of the year. Middle market, institutional term loan yields are currently 7.4%, up from 6.1% at the beginning of the year. Now to be clear, the LIBOR component has risen, but spreads have generally widened slightly as well.

Here at Barings, we do not assign much meaning to the various categories of first lien debt. Terms like unitranche are widely used, but they can mean a multitude of things in reality. So we prefer to look at each issuer and capital structure individually. We focus on if we have true first lien security or not. We focus on the strength of our structural protections. And we focus on other risk factors like the strength of our sponsor.

On Slide 17, you'll see that leverage has been turning up, on average, across the board as well as over the last few years, including 2018.

Slide 18 shows a similar trend in purchase prices for middle market LBOs across various end markets.

In this environment of high purchase prices and leverage, we believe it is important to maintain discipline and deploy capital prudently rather than relaxing standards on leverage returns just for the sake of doing deals.

Lastly, Slide 19 provides support for my statement earlier that there is not one single definition of unitranche. Some deals that are classified as unitranche look like deals classified as all senior and vice versa. So you really can't rely on these definitions to tell you about the true risk return of the underlying loans in a portfolio.

Still, amidst these broader market trends, there remain many high-quality borrowers in the market. And investors should consider the following: If the lender appropriately is incented and designed through its platform to originate the right types of loans to these high-quality companies in a competitive marketplace, investors should consider the DNA of the platform, and we as a principal investor, embedded in a large globally diversified asset manager with the backing of MassMutual, who's been an active investor in this asset class for over 50 years, is appropriately placed to generate strong investor returns, while also continuing to adhere to our core philosophy of fundamental credit selection, diversification and capital preservation.

I'll now turn the call over to Jon to provide additional color on our financial results for the quarter.

--------------------------------------------------------------------------------

Jonathan Gerald Bock, Barings BDC, Inc. - CFO [6]

--------------------------------------------------------------------------------

Thanks, Ian, and if you turn to slide 21, you're going to see the company's net asset value as of September 30 was $11.91 per share, and this is the NAV bridge again.

Three important points to make, right? First, Triangle Capital June 30 NAV of $13.70, that was reduced primarily due to their sale of the investment portfolio at a realized loss as well as employee severance- and transaction-related expenses and debt extinguishment costs, right? Second, once the Barings transaction closed on August 2, we, Barings, as the adviser, took over management of the company at an intra-quarter NAV of roughly $11.72 per share, and that's our starting point. And so third, since we took over as the adviser, NAV increased to $11.91 a share, primally through the BDC's tender offer as well as net investment income in excess of our quarterly dividend.

If you jump to Slide 22, you're going to see our income statement for the third quarter as well as some pro forma income statement for the beginning, on August 3, the first full day of our operations for Barings BDC with Barings as the external adviser. Now on a GAAP basis, including Triangle Capital results, BDC's net investment -- it generated net investment loss per share of roughly $0.60 for the quarter. But once you exclude TCAP's legacy results, you can see BDC earn NII of roughly $0.06 a share. And I also want to draw investors towards our calculation of base management fees for a moment. As you maybe know, that management fee calculation approved by shareholders is really based on an average of gross assets, excluding cash, at the end of the 2 most recently completed calendar quarters.

Now given that Barings BDC's balance sheet was effectively reset intra the third quarter, i.e. it just became all cash after the close into the asset sale, we, Barings, believed it was appropriate to calculate the management fee based on the post-transaction balance sheet, resulting in a fee waiver of roughly $1 million for the quarter.

Now additionally, we generated net realized gains of $575,000 during the post-transaction period, and we sold a portion of our highest-quality, low-risk broadly syndicated loan, and this above our entry level.

Now Slide 23 shows our balance sheet as of September 30. Now we ended the quarter with an investment portfolio of over $1 billion. And note that our investment transactions are booked based on the trade date. And they typically settle 7 or a few more business days after resulting in payables and receivables from those unsettled transactions on our balance sheet. The only third-party debt from the quarter is $210 million of borrowings under our new $750 million credit facility, and that was executed immediately post the closing of the externalization transaction. That given the large number of unsettled transactions and the requirements for readily available liquidity, there are days when we have both cash on hand and borrowings under our credit facility as we expect meaningful settlements to currently come in, and that was actually the case at the end of the third quarter.

Now Slide 24 shows our paid and announced dividends since the closing of the externalization transaction. Our $0.03 dividend paid on September 27, that's affirmation of our desire to align our dividend policy with the true cash earnings power of the investment portfolio. Now in that same vein, we announced on October 11 that our fourth quarter dividend of $0.10 is going to be paid on December 21. Now our objective is not to lock the company into a particular dividend level, but rather simply just pay out our net investment income as we earn it. Now Eric's going to close it out with some thoughts on subsequent investment activity pre-modeling as well as some of our views on investor alignment.

--------------------------------------------------------------------------------

Eric J. Lloyd, Barings BDC, Inc. - CEO & Interested Director [7]

--------------------------------------------------------------------------------

Thank you, Jon. Slide 26 shows our investment activity since September 30, which includes new middle market commitments of $80 million, with a weighted average yield of 8.9% and net new broadly syndicated loans of approximately $60 million.

Slide 27 shows our North America private finance investment pipeline of roughly $859 million. Importantly, this represents the pipeline available to all vehicles managed by the Barings Global Private Finance platform, including the BDC. But there could be no assurances that all these deals actually close.

Finally, I'd like to conclude with a few comments and views on investor alignment and how important that is to our investment philosophy. As many of you know, Jonathan Bock as a sell-side analyst was a very strong proponent of BDC shareholders.

Importantly, both I, Mike Freno, Tom Finke and Barings share in these long-held beliefs of alignment, and because of that I want you to turn to Slide 29.

To focus on long-term alignment post transaction, we made a $100 million investment in Barings BDC at NAV at close of the transaction. In short, we feel it is important to be aligned with shareholders from Day 1. To further outline our level of commitment to shareholders, Barings BDC repurchased in its tender offer of $50 million of stock at $10.20 a share. Through that, we generated $0.13 in NAV accretion for our shareholders.

Beyond our original investment and the tender offer, we remain active in our 10b5-1 purchase plan with purchases of $19 million in BDC stock as of November 7. Barings is the single-largest shareholder in the company, owning approximately 20% of the outstanding shares of Barings BDC. Expect the percentage to grow as we fulfill our commitment to purchase $50 million of Barings BDC stock pursuant to this plan.

Barings also has a firmly grounded belief that BDC's fee structures influence the type of assets that BDCs choose to originate. As a result, we felt it important to design a long-term fee structure that allows for a strong risk-adjusted ROE to shareholders but also complements our ability to originate first lien senior secured investments. Once ramped, this fee structure fully aligns our incentive fee with the actual credit performance of the assets.

Also, our decision to establish a 8% hurdle rate is an important factor, as we believe it is important to not collect an incentive fee until we've generated strong, long-term shareholder returns of 8% on senior secured collateral.

Let me close by saying this: This is just the start. Long-term success in lending is a marathon that requires strong credit discipline, a focus on asset liability management, a leading investment platform and a deep commitment to long-term investor alignment. It is my sincere hope, over the next several quarters and years, we'll be able to demonstrate all these attributes to you. And we thank you for your trust and time you spent with us this morning.

With that, operator, we'll open the line for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from Ryan Lynch with KBW.

--------------------------------------------------------------------------------

Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [2]

--------------------------------------------------------------------------------

Congrats on officially closing the transaction, getting off to a fast start. Jon, I would say, given -- you've punished so many on calls for so long, I'm looking forward to asking you a question on this call. I understand that you like math and you like fee structures, and you've written a little bit about these topics in the past. So do you believe that the fee structure that BBDC has put into place with assuming 1:1 leverage is now appropriate, given that now you guys can go to 2:1 leverage once you're fully ramped in the middle market assets?

--------------------------------------------------------------------------------

Jonathan Gerald Bock, Barings BDC, Inc. - CFO [3]

--------------------------------------------------------------------------------

Well, first, Ryan, I thank you for actually reading those extremely boring reports. Maybe what I'll do is I'll take a step back, and I'll go to an overall theme that we're trying to get across on the -- on this call, and that's one of alignment. And if you look at it, some of the analysis that we've done in fee structures over time, right, if you're very focused on aligning your credit results, that's extremely important. Two, I want to outline how important the hurdle rate actually is. So if you realize, as we see, moving from a 1:1 to 2:1 environment, hurdle rates matter a lot. And importantly, at Barings, what we've chosen to institute was a hurdle rate that is exactly aligned with what we would expect our long-term dividend yield payout to be, 8%, which basically means this, right, we won't earn a penny in incentive until we've delivered what we've promised to investors. And so that doesn't really change, whether it's 1:1 or a 2:1 environment. But then I'll give you kind of 2 second points to go along with that. If you realize the hurdle rate is the -- one of the primary drivers of fee take as well as a driver of net return to investors, because remember, it's so important that once you exceed that hurdle, 100% of that income is subject to a full catch-up with the manager. If you get that right, you'll find that both base and incentive fee gets a little less impactful relative to where you choose that hurdle rate. So what we'll say on a go-forward basis: Alignment absolutely matters, number one; and number two, you start with the hurdle rate, and you'd say that today is the fee structure appropriate? Aren't you to do what we do? The answer is absolutely yes. Thankfully, over time, we'll have more opportunity to keep delivering on alignment across a number of different categories, but I'd say it starts first looking at where you set that hurdle and where you set your incentive. But I'd also say it's more important for me to also have Eric outline our view on incentives as well.

--------------------------------------------------------------------------------

Eric J. Lloyd, Barings BDC, Inc. - CEO & Interested Director [4]

--------------------------------------------------------------------------------

Yes, I mean, it's really consistent with what Jon said. I think it's a package of fee structures, not one piece in isolation. And I think importantly, that just a few months ago, we got approval by shareholders for the IMA in totality. Obviously, we talk about alignment a lot. And I think you'll see over time whether it'd be through share repurchases, whether it'd be through our investment in the BDC, whether it'd be through other attributes, we hope then taken in totality, people will view us as a best-in-class alignment with shareholders.

--------------------------------------------------------------------------------

Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [5]

--------------------------------------------------------------------------------

That's helpful, and I think that makes sense. You guys just quickly built a diversified BSL portfolio and really ramped to a nice leverage level at the end of the quarter. It appears so far from the activity in the fourth quarter that the BSL activity slowed down in the fourth quarter. So is this the size of the portfolio and the leverage level that you intend to operate at during the time period where you're rotating from BSLs into the private credit process? Or should we expect additional BSLs or larger portfolio and a little bit more leverage over the coming months or quarters? Basically, how does that shake out? What leverage levels you guys plan on operating at a portfolio size during this rotation process?

--------------------------------------------------------------------------------

Eric J. Lloyd, Barings BDC, Inc. - CEO & Interested Director [6]

--------------------------------------------------------------------------------

Yes. So Ryan, I'll make sure I answer your questions. If I don't, please you keep making sure I get it directly. As we look at the current return and broadly syndicated loan assets that are appropriate for the liquidity profile and risk profile for the BDC, we don't see a material increase to net dividend yield to shareholders by increasing the size of the AUM. And so the way we would increase the size of the AUM would obviously by -- be by taking leverage up. So under the current risk return environment we're seeing on the broadly syndicated loan side, we don't see a benefit to shareholders to take AUM up because the net return to them is not any higher. And yet the inherent risk to NAV is higher, right, by taking leverage up. If we were to see a benefit of having the market condition such that there was a benefit to dividend yield to shareholders, we may consider then taking leverage up in order to broaden the size of the portfolio. But for us, this is not ramping AUM up to some maximum level to collect fees and the like. It's really about making sure we're doing a prudent liquid portfolio that allows us to get into and out of those assets at the best way that also benefits shareholders in the best way. And as I said, today's yields just don't generate an incremental dividend. Therefore, it's just not prudent to take the leverage up.

--------------------------------------------------------------------------------

Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [7]

--------------------------------------------------------------------------------

That makes sense, and that's a really thoughtful response considering shareholders trying to make sure that they get the benefits from higher AUM, if there is any. Kind of a -- maybe a broader-term question. You guys have executed a nice credit facility right away, which has given you guys some runway as you guys have ramped the portfolio. But maybe longer term, sure you all know, and I know Jon knows, having a diverse liability structure is very prudent. We saw that during the last downturn. So longer term, what is kind of your philosophy regarding building out your liability structure?

--------------------------------------------------------------------------------

Jonathan Gerald Bock, Barings BDC, Inc. - CFO [8]

--------------------------------------------------------------------------------

And so I'd argue -- Ryan, this is Bock. What I'd say is we absolutely share in your views on diversified liabilities. And a couple of points, because over time you'll make sure that you're going to structure a partnership with your credit stakeholders. It's going to be beneficial to your shareholders, beneficial to your cap holders as well as beneficial to the operator, which is ourselves as the manager. And I'd say that you probably will see over time a line of progression of trying to close one item as it relates to revolver financing and then on a go-forward basis, additional layers of liabilities that go in apart of that. And maybe more importantly than that, Barings has a significant amount of experience structuring and managing a number of levered facilities across the platform. So whether it's middle market CLO financing, whether it's revolver FPVs, et cetera, the breadth and depth of the platform is already in place. So you can imagine too, with Chris Cary, who arguably, he's the one individual that's touched and influenced all BDC liability structures, having him as a part of management in this process in our long-term liability strategy is a key competitive advantage. And you'll see us execute that on the coming quarters. Couldn't agree with you more.

--------------------------------------------------------------------------------

Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [9]

--------------------------------------------------------------------------------

Okay. And then -- that's helpful. And then just one last one, if I can. Just because you guys are so new into the space, just wanted to hear a little bit more on your investment philosophy. I mean, I know you guys want to focus on senior secured, given where we are in the credit cycle and the risk/reward dynamics there. But can you just give us a flavor of kind of your target market where you guys are going to focus from a -- from an EBITDA standpoint, from middle market, private -- how do you define that? Because that's really defined differently by every BDC. And then can you maybe speak to the hold size that you guys would ideally like to hold on the balance sheet as well as -- I know you have exemptive relief to invest across the Barings platform. So how much you guys could actually hold across the flat -- across the platform? Trying to get a sense of what sort of solution size you guys could provide to borrowers.

--------------------------------------------------------------------------------

Ian Fowler, Barings BDC, Inc. - President [10]

--------------------------------------------------------------------------------

Thanks, Ryan, it's Ian Fowler. I'll start and then maybe throw it over to Eric if he wants to add anything. So in terms of the target market that we're focused on, it's really companies from $10 million of EBITDA up to $50 million-ish. Now the reality is -- and what we've seen over the last 5 to 7 years is a lot of these sponsors are buying platforms, growing the platforms through add-on acquisitions. And so what we like and is -- what is very attractive to us is actually supporting these companies as they grow in size. So we do end up with some companies that have EBITDA as high as -- we've had deals as high as $100 million, if we're to go broadly syndicated. And so that's the targeted market that we're focused on. And I would say as part of that, as we look at the market, we're very focused on, we call it, the 3 legs of the stool. So we focus on the company's fundamentals, we focus on the equity ownership, and then we also focus on the structure. And one of the issues as you move into a larger market is you start losing some of the structural protection that we have. And so the other thing, in terms of hold size, I guess, the way to answer that is if you look at our platform in terms of our focus, we're looking for, obviously, attractive credits. And as we think about competing in the marketplace, I would say that a number of things are important, including the hold size. So as you look at the marketplace today, sponsors want lenders that can eliminate the execution risk on their deals. And so the key criteria that you need, competitive advantage that you need in this marketplace, number one is hold size. So that target range that I talked about, $10 million to $50 million, we can basically, as a platform, if we like the attracts -- if we like the deal, we can effectively hold that whole deal or speak for that whole deal. The reality is that most sponsors want to diversify their funding sources. And so they're going to bring in partners that are going to take part of that away. If we really like the credit, we're going to try to get as much as we can. But it's fungible. It's going to move around. And I guess, the other point I would make is along with that, being a capital solution provider in this market is really critical because -- for a couple of reasons: one, it makes you more relevant to the sponsors; and also, deals can move around. They can start off traditional first lien, second lien, and then they can move into a unitranche. And if you can't do the other, then you kind of lose that opportunity. So if you're kind of a one-trick pony or a one-product pusher in this market, then you're kind of dealing with adverse deal selection.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

And our next question comes from Fin O'Shea with Wells Fargo Securities.

--------------------------------------------------------------------------------

Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [12]

--------------------------------------------------------------------------------

I want to start just to kind to continue that dialogue Ryan and Ian were just having on the platform's value proposition. You did give us a lot of color on the opening remarks and then in that dialogue, but as to the competitive edge of the Barings platform, you principally outlined your hold size. And as we know, there are many lenders who can offer $100 million, $200 million, $300 million. So can you go a little bit more into what brings you into the fold to get good first looks for sponsored transactions?

--------------------------------------------------------------------------------

Ian Fowler, Barings BDC, Inc. - President [13]

--------------------------------------------------------------------------------

Yes, so again, Ian Fowler speaking. So I think you have to break it down a couple of ways. And let me just start off by saying I'll talk about from the marketplace and how we compete in the marketplace as an originator. But I also think just to back up a little bit and make it a little broader, I think we should talk about it also from an investor perspective. So -- but -- and I think that's important because, and I alluded to this in the comments, the DNA of the platform as an asset manager really does influence your credit selection and your strategy. So as you think about us as a platform, Barings as a platform, our DNA is in asset management, but we are -- also are a principal investor embedded in that asset manager. So that means that we're investing our own dollars. So we're in alignment with our investors. We have real dollars at risk, and we're focused on capital preservation. And also, we have a lot of resources. So we work with Tom's group a lot in terms of looking at broadly syndicated loans, looking at comps so that we can focus on that illiquidity premium. We have over 40 high yield industry experts that we can dial into. So in terms of the credit selection, we're leveraging those resources that the firm brings to the table. On the origination side, you're right. And I would say, historically, if you go back pre-crisis when the industry was much smaller, it was basically all relationship. So as you spoke to managers, they would tell you that, "I get deals because I have a better relationship than someone else." And really what's happened since the crisis is you've had a fragmentation of managers in the marketplace, and those relationships have been diluted. So relationships are spread around, and you can't rely on that relationship anymore for -- in entirely for winning that transaction. But if you don't have that relationship, it's really hard to get in the door. And so from a sponsor perspective, if you have relationships with multiple lenders, you're getting multiple calls. So if I'm the sponsor and I have an opportunity, and I'm getting calls from 20 people, I don't want to spend time talking to 20 people. I want to spend time talking to a handful of people. So the things these sponsors are looking at are the following. First of all, hold size, like I mentioned. Can you speak for the whole transaction? If the structure changes, can you move with that change in the structure? Another area where we differentiate ourselves is on our international capabilities. Not only just on cross-border deals, but also, if you think about these sponsors, a lot of them are doing add-on acquisitions overseas. And we can actually provide financing for those sponsors as they look at acquisitions overseas. We have one facility that's got 6 different currencies that we're funding. I would say that your portfolio -- so if you are a new player in this space, it's really tough to compete. We have a portfolio that's well over 200 companies that basically becomes a source of origination for us where we're the incumbents. Team experience. So think about team -- the team having diverse skill sets, reputation, relationship, we've been in this asset class for a long time, that's important. And finally, I would say sponsors do care that we have our own capital and that we really are committed to the space. So I -- the analogy I use to bring it to a head is it's like you're deep sea fishing, you got 8 lines in the water. All these are different advantages that we bring to the table. If you're a lender that only has one line, we have a better chance of catching the fish.

--------------------------------------------------------------------------------

Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [14]

--------------------------------------------------------------------------------

That's very much appreciated. I'll move on to Eric on the subject of alignment. This one could be a bit long winded, but I'll start by saying that the series of commitments from the sponsor level, buying in at NAV, the accretive tender offer, in parts and as a whole, this was truly a first for the industry. And I think we're all hopeful that it's -- it moves the bar going forward. Now that said, you're at a discount, about 0.85x as of yesterday's close, I believe, which is moderate, but still surely worthy of consideration to put more capital there. Also, we understand BDCs trade at discounts for different reasons. For some, it's alignment credibility; for some, it's credit. Neither of those are the case for you, I'd assume. But rather today, for Barings, it's an earnings ramp issue. And another part of your commentary touched on a slow, measured ramp of the portfolio, which means that this discount might persist even though it's -- even though it may be transient. So with those points in context, and as your 10b5-1 runs its course, how do you look at share repurchases during this earnings ramp period as it may keep a discount in the market over that time?

--------------------------------------------------------------------------------

Eric J. Lloyd, Barings BDC, Inc. - CEO & Interested Director [15]

--------------------------------------------------------------------------------

Yes. Thanks, Fin. And -- so first the ramp, because I think that's an important thing for us to address. We are not going to be beholden to some 8 quarter, 6 quarter or 7 quarter, 10 quarter ramp, right? As Ian said, we originate and underwrite assets that we think are prudent risk-adjusted returns for our capital and our clients' capital. The reason we put the pipeline in here was our intention is to do that every quarter so that people can see exactly how we have ramped and what the go-forward pipeline looks like. So that gives a sense as to what that -- the time to get transition from liquid or illiquid credit will look like. So that being said, to your point, I think at the heart of your question is, basically, BDC shareholder tender versus the outside capital that we purchased. And I guess what I'd ask, to take a step back and just to your point, look at things in totality at this stage, right? The fact that we put $100 million in it now. We could -- we did put in at market knowing that it could -- it was likely to trade down. We did the $50 million tender at the time. We've been to BDC. We're investing another $50 million. I guess, what I really hope it does to shareholders is allow them to see that we're putting our own capital rate there and trying to make good, prudent long-term shareholder decisions, and if they could give us some time to see what we can do and to prove out our strategy. I think that as we hopefully have shown good stewardship of capital and a good alignment of interest, I mean, I think that -- hope if we do that, we'll have time to prove out our strategy. We think that people who stick with us over time, long term that gap will narrow and the deal will increase. That being said, right, we have to be good stewards of allocators of capital. So we'll always evaluate what we should do with your capital because ultimately, it's the shareholders' capital, of which we're the largest shareholder. So we're going to be there doing what's in the best interest of that. But I think it's a balance of that with time right now and I hope that what we've done is shown how important it is to have that alignment going.

--------------------------------------------------------------------------------

Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [16]

--------------------------------------------------------------------------------

And one more, and I'll involve Jonathan Bock here. You spent the better part of your career, Jon, digging deep to learn the mysteries of BDC collateral. Or actually, really, you would just usually have me do it. But if you were to leave us with one thought for the industry with how underwriting is done in today's market, I would appreciate that.

--------------------------------------------------------------------------------

Jonathan Gerald Bock, Barings BDC, Inc. - CFO [17]

--------------------------------------------------------------------------------

Thank you, Fin. And there's no doubt we both have worked a lot on the BDC collateral piece. So to be clear, Ian really dug deep into the collateral itself. And particularly, sometimes the misnomers and more importantly kind of how things can get mispriced. What I'd probably say is something that, Fin, as you and I've probably -- we've worked together on a lot, you continue, and as well as the sell side continue to kind of put forth, it's more of an incentive perspective. And so if I was going to give one thing on the collateral, my point is, is that collateral at times is the output and sometimes not the input. Most folks look to come and say, look at our assets, and then if we put these assets in then you're going to generate us that return. Unfortunately, the BDC space, you start by promising a yield, applying a fee, applying leverage, right? And you'll see that over time, the tail at times can wag the dog. Meaning that assets get originated in order to fit the fee structure as well as the set dividend yield, and not necessarily tied to the exact risk-adjusted return of the credit. So if there is one point that matters a lot to me, coming from public to private, is that you always want to make sure that you catch not only the platform to have success rate. People work with sponsors because of the nice haircut they have or whatever the case may be. But it's also a function of the incentives that go into what creates that risk-adjusted return. At Barings, we talk about the hurdle rate, you can look at our set fee structure and you know the deeply embedded beliefs that we all share, particularly through alignment. I'd argue that flexibility on the management fee and a focus on alignment can give us an opportunity to finance the right type of assets at this point in the cycle, which is extremely important when -- among a number of folks who will be looking for higher spread collateral and may not be pricing that risk appropriately. Does that help?

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

And our next question comes from Mitchel Penn with Janney.

--------------------------------------------------------------------------------

Mitchel Stuart Penn, Janney Montgomery Scott LLC, Research Division - MD of BDCs [19]

--------------------------------------------------------------------------------

Just you guys manage a lot of assets in your platform. Where do you think we are in the economic cycle? And can you talk about how it's impacting your investment strategy? And yes, that'd be great.

--------------------------------------------------------------------------------

Eric J. Lloyd, Barings BDC, Inc. - CEO & Interested Director [20]

--------------------------------------------------------------------------------

Yes. This is Eric. I think a couple of fundamental premises of Barings, whether it be our liquid team, as you heard Tom reference or refer to some of the investments today, who is partnering with us, or our illiquid team. We are really all about capital preservation in our debt investments, right. We are not the firm who is looking to kind of shoot for the moon on things. It really starts with capital preservation. That's our philosophy. Second, we're a committee-based structure across all of our investment classes. So we don't have kind of the star PN model. Those are a couple of our fundamental thoughts. But getting specifically to your question as to where we are and what we're seeing in the economy. I'll really focus on, given those 2 fundamental premises, right, of capital preservation. On the illiquid side, we invest -- we underwrite every asset assuming there's a credit or an economic cycle during the life of that asset. So that was true 5 years ago, 4 years, 3 years ago, 2 years ago, today. Because what we don't know is when that cycle is going to happen. So we always underwrite assuming that cycle's going to happen. Obviously, we're closer to that next downturn than where we were a year or 2 ago. So what does that mean? First of all, it means, in our opinion, more highly diverse portfolios are critical. It would -- it usually, when you look at a debt portfolio, it's that diversification that protects you from the unknown. Diversification, we referenced it here earlier today, asset-level diversification, industry-level diversification. On our origination side, sponsor diversification. All those are key elements, and then also the correlation of those assets or industries are important when you think of the diversification. So we're running more diversified portfolios today on the illiquid side than we were even a couple of years ago. That's one way we protect around it. Then two, there just are, obviously, certain industries that have more cyclicality that you probably avoid in all markets, but you just have a heightened level of avoiding them today. Does that answer your question?

--------------------------------------------------------------------------------

Mitchel Stuart Penn, Janney Montgomery Scott LLC, Research Division - MD of BDCs [21]

--------------------------------------------------------------------------------

Yes, no, that's great. Just one last one, you guys are affiliated with MassMutual. Did you guys -- do they have any -- they have a lot of resources. Can you talk about the impact that the relationships had on the BDC?

--------------------------------------------------------------------------------

Eric J. Lloyd, Barings BDC, Inc. - CEO & Interested Director [22]

--------------------------------------------------------------------------------

I want to -- the relationship with the BDC is much as just kind of Barings, right. Barings -- so we're a wholly owned by MassMutual. They're our parent company and they are also our client. And so it's an arm's length relationship, where we manage money on their behalf and are held to performance on their behalf. And I believe that, that ownership by Mass is a positive for our shareholders, given the capital and the resources around it. But to be really clear, Barings is an independent entity that operates with our employees and our business as an asset manager, on behalf of them and the capital we've made for them and on behalf of all of our third-party clients.

--------------------------------------------------------------------------------

Operator [23]

--------------------------------------------------------------------------------

Our next question comes from Mickey Schleien with Ladenburg.

--------------------------------------------------------------------------------

Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [24]

--------------------------------------------------------------------------------

Congratulations on your first earnings call. I wanted to ask about the co-investment policy. When we see BDC as this part of large platforms, that tends to be very beneficial. I just want to understand whether it's purely based on available liquidity and investment objective? Or is the BDC receiving some sort of preferential treatment to help it ramp up?

--------------------------------------------------------------------------------

Eric J. Lloyd, Barings BDC, Inc. - CEO & Interested Director [25]

--------------------------------------------------------------------------------

Okay. This is Eric, and I'll take that one. To be specific with your -- the second part of your question, the BDC does not get any form of preferential treatment for it to ramp up. We treat all third-party clients the same. And so here's how that operates from a co-investment perspective. We generate an asset of a certain return profile, certain leverage characteristics and all the other attributes that would come to play. We then look at our third-party accounts as well as our -- including in that is MassMutual as a third-party account, what the investment guidelines for each account are and whether they match the asset that we've underwritten and originated. And if it's eligible for that particular portfolio, that creates, think of it as the pool of capital or resources that could invest in that asset. Let's just say for sake of argument, that adds up to $125 million, and to get a deal, we look across all of our various accounts. Then what is to happen is, assume that we get -- we invest $100 million, to Ian's point, there's sometimes the sponsors today want to diversify their investment base. Instead of having $125 million, we get $100 million of that asset. All the vehicles get their pro rata share of that investment. We don't pick winners or losers or rotate around allocations. Everybody gets their pro rata share. Now to your point, some vehicles may be at the end of the life of their liquidity, right. What we do on that, just so you know, is we look at the aggregate amount size of the fund; we don't look at the remaining liquidity within that fund.

--------------------------------------------------------------------------------

Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [26]

--------------------------------------------------------------------------------

All right, that's very helpful. For those of us that are maybe newer to the story, it might be helpful if you could just describe the scope of your middle market origination team. And their go-to-market strategy, because that tends to differentiate one beast from another.

--------------------------------------------------------------------------------

Ian Fowler, Barings BDC, Inc. - President [27]

--------------------------------------------------------------------------------

Yes. So this is Ian. I'll take that question. So our middle market -- North American middle market team is close to 40 people. We have both -- everyone on the team is focused on relationships with the sponsor. But I would say that to become efficient and effective, we do break up the team into risk and origination. And what's really important on the origination side is having diverse skill sets. So we have people that have senior secured experience. We have people that have maybe lien experience, and we actually have brought on a number of folks from the private equity world, which has really been helpful because they bring with them relationships with investment banks, and we've been able to leverage our relationships with the investment banks and the sponsor in auctions to win transactions. And also, they sat on the other side of the table. So they really understand what's critical and important for the private equity firm. So -- and the one thing I'll say about all originators is they all have an investment background. Really important, because a, you need credibility when you're out there talking to sponsors about transactions, so what you can do and how to look at companies and whether they're financeable or not. And b, internally, to make us more efficient, we can't have people throwing deals at the wall. So we really require our origination team to desk kill deals that just aren't appropriate and will gum up the system. On the risk side, we've got a deep bench of folks that have a lot of experience. I can tell you, in today's market, documentation is extremely challenging and complicated, and we've got folks that have decades of experience negotiating contracts or documents and credit agreements. We have people that -- we have one person on our team that was a chief restructuring officer during the last downturn. And so again, at the end of the day, everyone is rowing in the same direction. Everyone is focused on the customer. But there is -- and they work as one team from beginning to end on deals. Even if we have a deal that's a focused credit, the originator is right there with the risk team, but it's all about diversity of skill set.

--------------------------------------------------------------------------------

Eric J. Lloyd, Barings BDC, Inc. - CEO & Interested Director [28]

--------------------------------------------------------------------------------

And I'll just add 2 things to what Ian said: First, on the 40 people he referenced, that's on our investment team side. It's a much broader team, when you include compliance, risk, finance, all the partners that we work with, which was an important part of what the Barings platform brings to shareholders. The second one, as Ian was talking about, origination and risk, it's an integrated deal team and they all own the performance of that asset from origination through resolution of that asset. And so it is a one-team philosophy that everybody is part of the origination and part of risk, but they have primary responsibilities within those 2.

--------------------------------------------------------------------------------

Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [29]

--------------------------------------------------------------------------------

That's great. And one last question, sort of a follow-up. I think in your prepared remarks, you mentioned 40 industry analysts, if I recall correctly? My question is the following. Everybody is seeking late-cycle deals. So software is very popular or health care with low reimbursement risks, things of that nature. So what I'd like to understand is how -- that the person responsible for covering that sector is going to be a very popular person right now within your platform or any platform. So how does that person's time get allocated amongst all of these various platforms in terms of analyzing deal flow?

--------------------------------------------------------------------------------

Eric J. Lloyd, Barings BDC, Inc. - CEO & Interested Director [30]

--------------------------------------------------------------------------------

So this is Eric, and I'll take a crack at it and then see if Tom wants to supplement what I've said. These are public side research analysts who primarily have responsibility to support our liquid, broadly syndicated loan and high-yield teams. That's their primary responsibility. What Ian was referencing is, at times we'll get deals in the middle market that have an industry angle or the importance of industry knowledge is more enhanced than certain other industries. We have a process internally that allows us in a compliance-appropriate way to work with that research analyst to get their perspective on how that company [fits] within that industry or the subsector of that industry and maybe some areas to focus on due diligence within that. We do not have that industry analyst supplement the underwriting and like, join the team. It's really a resource that provides industry expertise to our underwriting team as a resource. So their primary responsibility is on the liquid side, but I -- one of the things I hope we show over time is, really the -- it's a hard thing to quantify for people, but the way we work our -- with lines of businesses and our resources internally, we all come at the business knowing our job is to make the best investment decisions on behalf of our clients. And whether that means the resource is sitting in private finance or liquid credit or structured credit, right, we need to make sure we bring in those resources to bear. And I think Tom and Mike and others have created a culture by which we work well once a client is appropriate across those lines of business to make sure we're sharing information that help us make the best decisions that we can make on behalf of our capital and others' capital.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

And our next question comes from Robert Dodd with Raymond James.

--------------------------------------------------------------------------------

Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [32]

--------------------------------------------------------------------------------

Getting back to one on the dividend policy. Obviously, you declared a $0.03 for third quarter, $0.10 for the fourth. Jon, you made a comment about not wanting to lock in a particular dividend level, but also targets to payout NII as it's earned. So as a long-term policy, is that an indication that we should expect the dividend to vary quarter-to-quarter depending on earnings, or is that just a transitional issue? And what I -- just kind of what's the right framework to think about the dividend policy going forward?

--------------------------------------------------------------------------------

Jonathan Gerald Bock, Barings BDC, Inc. - CFO [33]

--------------------------------------------------------------------------------

Well, thanks, Robert, and to be clear, I mean, the work that you and [Leslie] have done that effectively outlines that a $1 -- or $0.01 of NAV is effectively worth $0.02 a share and stock price really ties into this. In terms of variability, you can look at it this way: The dividend is set to a conservative level to mimic our earnings power and it's always just going to have a, what we'll call it, a lag to the effective return of the portfolio. Because what you don't want to do is effectively give investors their -- a return of capital, particularly when you're paid to manage it. So the way I'd outline it is, expect the dividend yield to go towards where we guided our target return of 8% over time. But also, realize that in the event the markets choose to show us that it is a poorer idea to be originating in a set part of the stack that you do not want to originate given your yield profile, we fundamentally believe that massive credit mistakes are made when folks choose to strictly adhere to a set dividend, not taking into account the industry changes, right? And what matters to us is preservation of your capital as well as the return. And so the idea is to target exactly what we've stated on the call, the transaction call in April. See no changes to that. But are also smart enough to realize that if the market does change dramatically, we want to make sure we adapt to it to preserve folks in NAV over time because NAV is really easy to lose. It's really hard to get -- to build and to get back. Does that answer it?

--------------------------------------------------------------------------------

Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [34]

--------------------------------------------------------------------------------

Yes, absolutely. That answers it. Perfect. And then on the buyback question, obviously, the manager, the parent, is buying back stock, which I think is a positive and the lines, obviously, this -- the manager interest and the shareholder interest. But going back to a point that you made that right now I mean, obviously, BDC has available capital. Adjusted 69 leverage with a max at 2, and you've drawn $210 million of the $750 credit facility. Right, so you have available capital. But to the point that Jon's been making about fee alignment, and Eric you said, incremental growth in the BSL side of the business, right now just doesn't make sense because it doesn't generate incremental earnings to shareholders. It just generates fees to the manager, so I respect that and I think that's a very important point to make. The second point being though, obviously, you have available capital. The other way to utilize that would be to buy back stock, which does generate an incremental return to shareholders through growing NAV. And I realize, you talked about patience, et cetera, where in the market we've got impatient people when it comes to analysis. And you showed an awareness of the importance of that at the beginning of this transaction with the tender, which grew NAV $0.20 roughly from when you took over to where we are today. So can you explain to us why you wouldn't use the incremental capital you have available right now to generate economic return to shareholders, when you constantly and deliberately don't want to use it in the BSL market for appropriate reasons? But you have the opportunity; why not do it?

--------------------------------------------------------------------------------

Eric J. Lloyd, Barings BDC, Inc. - CEO & Interested Director [35]

--------------------------------------------------------------------------------

Yes, so I apologize if I wasn't clear earlier. I'll try and continue to refine my answer on this. But I am going to take a step back and say, yes, the math today would generate that type of return. And I'm respectful of that and understand that as stewards of capital we need to be good allocators of capital. But I am going to ask to -- everybody to take a step back and look in the totality, right. $100 million at NAV, $50 million tender worth at the BDC, the -- there was a 1.3% increase to NAV. $50 million of incremental 10b5s that were -- -1 plan we're purchasing today. I think we need to get through those stages of equity purchases, allow shareholders to see our investment strategy play out. We will always evaluate, right, what's prudent and beneficial to our capital as the single largest shareholder as well as other shareholders. But as we sit here today, we believe in a short period of time of just a couple of months, we believe we've shown a number of actions that are consistent with shareholders, and I believe if they stay with us over a long period of time they'll be rewarded. We will evaluate this like we will everything all the time. But as we sit here today, I think we are kind of focusing on getting through the 10b5-1 plan and then we'll look forward to looking at everything in totality.

--------------------------------------------------------------------------------

Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [36]

--------------------------------------------------------------------------------

I appreciate that, and I do believe you deserve a lot of credit for having structured things and the work you've done. The only side part of that, to say, when I get into a car and somebody else is driving, I hope they're looking through the front and not watching the rear view mirror all the time. Moving on to the next question. On the credit facility, you partially emphasized, Jon, I mean, obviously, I presume the $210 million outstanding is the Class A ones, which have a maturity in 2020. Obviously, historically, BDC is having a liability, an asset liability. Mismatch in durations haven't done so well. You do today. That's obviously not a long-term point. Can you give us a little more color on time frame before investors won't have that shorter liability duration and asset duration to weigh with that?

--------------------------------------------------------------------------------

Jonathan Gerald Bock, Barings BDC, Inc. - CFO [37]

--------------------------------------------------------------------------------

Yes, absolutely. And given a focus on asset liability mismatching, you kind of see it go a couple of ways. First is, a, you establish the revolver, and you establish the revolver on market terms that are going to be beneficial for both the lender as well as us, the borrower. But two, after -- once that's structured, you could imagine we will take a very hard look at the liability side on our BSL. And to that point, I'll make one comment is, there's a couple of ways to effectively deal with that mismatch over time. And more importantly, our strong partners on the lending side, we've been able to go over that in grave detail. You want to set up your revolver first and then effectively at the same time, come in and fix what we'll argue is really temporary. But to be clear, let's outline this. When you think of liquidity, you do want to measure kind of what's owned against that facility. And so we at Barings took a very hard look at what our liquid credit team was originating, where they were focused and paid particular attention to make sure that the assets met both a high liquidity profile as well as a high credit profile as well. So we absolutely understand that's the part of our liability strategy as we move on. This was just a temporary ramp. And we also made sure that what's pledged against that facility is of a high degree of liquidity over time and it will allow us to manage that asset liability match well in the future. But the point is still made, and you'll see the liability strategy come forth in the next quarter or 2.

--------------------------------------------------------------------------------

Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [38]

--------------------------------------------------------------------------------

Okay, I appreciate that. One more, if I can. Kind of a -- you gave a lot of color on the market, and maybe this question is more for Ian. But how should investors view the credit risk in the portfolio? And you gave a lot of color on that. Given that the relative -- and at least going forward on the middle market, I mean, the BSL market, they're not all as convinced obviously because you could file them in the liquid market. But going forward on the middle market side, there's going to be a lot of [released] concentration in '18's and '19's entities, presumably. Given -- looking at Page 17 and through 19 at the presentation, you've got record high attachment points, we got record low structural protections, we've got record uncertainty on what [the first thing] really is on whether it's a stretch [transfer], et cetera. But how should investors view that credit risk, given the trends and the fact and the trends in the slides that you show us and the fact that a lot of this portfolio is going to be built on the far right of those sides of those business class?

--------------------------------------------------------------------------------

Ian Fowler, Barings BDC, Inc. - President [39]

--------------------------------------------------------------------------------

Yes, so Robert, there's a couple of things here to think about. One which we've discussed and mentioned multiple times is just it's -- a large part of it is portfolio construction, right? And so -- and diversification. And as I mentioned, probably one of the most important things is just diversification of risk return profile. So think about a portfolio where you have a foundation of sleep-at-night loans that low volatility, low leverage, yes, maybe you're getting a little less return on those, but it creates stability in the portfolio. And then the job of the manager is to opportunistically find situations where you can generate a little more return. So that might be proprietary deals. It might be an industry where we have an edge. We have a lot of expertise and we can leverage that, and we're willing to go deeper in the capital stack. It might be a company that we financed in the past, that we see an opportunity to finance again. We've gone through a cycle. So it's all of those things from a portfolio standpoint that are really critical and that we focus on as we think about this portfolio construction. To me, portfolio construction is the key and if you're just one-dimensional and you're just focused on that return, as you go deeper in the credit cycle, you're going to have more risk in that portfolio because the correlation of that risk is 100%. So you need to have diversification of that risk return. So the other thing -- sorry, the other thing I would say is, we look at very closely at some pretty key metrics as we evaluate portfolios. So we focus on the fact today our senior leverage, our first lien investments are at 4.6% -- or 4.6x. So that tells you where we're invested from an attachment point. Look at the total leverage of the companies that we're invested in. It's just over 5%. It's not 4.6% in companies that are invested, that are leveraged 7x. And so we look at the senior leverage attachment point, we look at the total leverage attachment point. Yes, enterprise value is -- and purchase price multiples are up today. But I would argue that the increase in the purchase price multiples have far exceeded the increase in the leverage that's provided to those companies. And I'll use software as an example. I mean, you have deals out there that are 20x EBITDA. We're not chasing the market. Like Eric said, we're not swinging for the fence in providing a 7 or 7.5x unitranche because we feel like from an LTV perspective that's comfortable. So we're not going to chase deals, and we're going to focus on structural protection. We can -- we're focused on the right things in terms of structural protection, and we can find deals that we're very comfortable with from a structural protection standpoint.

--------------------------------------------------------------------------------

Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [40]

--------------------------------------------------------------------------------

Got it, got it. And for this -- on -- the topic on Slide 19, one of the things you talk about is senior loans with embedded junior risk or -- embedded junior risk. How are your shareholders and investors going to be able to see that in your metrics? I mean, as you said, you're at 4.6x attachment point right now. What should we look for, so to speak, to call you out? If that goes up too much, what is too much, where it becomes embedded to the risk, embedded in the portfolio? Yes, what should we look for on that front?

--------------------------------------------------------------------------------

Jonathan Gerald Bock, Barings BDC, Inc. - CFO [41]

--------------------------------------------------------------------------------

Well, what I'd argue I'd be looking at would be, Robert, start with the flexibility that's offered to originate loans. And I say, yield is an important component, right? So at times, you'll find if we're dictating that we want to operate in a conservative leverage profile, particularly for the industry, that we want to be really, really boring in our portfolio construction and our diversification, you could arguably understand that there's not going to be a significant amount of movement over time, particularly in those average points. So I'd probably say that it's a difficult item to easily look on the other side, just given the fact that nobody usually provides every individual portfolio company EBITDA with the name and their sponsor, et cetera. But you can understand that given how we're incented and how we choose to -- and who our backer is and how we choose to look at the market -- because that is arguably going to get you 95% of the way there, right? If you realize that incentives drive results, a study of the incentives will probably over time show you where folks are going to be willing to take risk-adjusted return. And our focus on incentive and alignment is arguably going to be putting us right in the case where capital preservation's the goal. So appreciate the question, Robert. But also understand that we'll happily take your questions on this every quarter. But it'd really be more philosophical than something that's easily identified from the data that gets provided by any BDC, for that matter.

--------------------------------------------------------------------------------

Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [42]

--------------------------------------------------------------------------------

And that's a very fair point in terms of the average. To your point, Jonathan, I mean, credit issues don't come from the 95% core though, right? They're sort of the average in the median. They come from the edges, usually. So that's -- one thing though, if you look at Page 34 in your Q, in your -- first in your BSL portfolio, the higher TAM is [0.85.] That's significantly higher. It's almost double the attachment point of -- on your average attachment point in the middle market. So I mean, is there, given the displays you've [given], is there more embedded risk in the edge of that portfolio than the averages make it seem?

--------------------------------------------------------------------------------

Eric J. Lloyd, Barings BDC, Inc. - CEO & Interested Director [43]

--------------------------------------------------------------------------------

Yes, no, I like -- you see 8.1x on it, illiquid loan, right? Now -- where there's always structural-related free factors. That's one thing. What we've outlined too is, when you look at the BSL portfolio overall and kind of its barbell approach, there's always going to be a name that, maybe you take a higher, more profitable software company, et cetera. But that has a high degree of liquidity that offsets what you'd argue is, presumably higher -- on the face of it, higher credit risk. I'll let Tom speak to that. But the point generally is that, even if you think of the 5% loan basket, which is not -- right? The point of alignment, and more importantly, when you think of the long-term fee structure that effectively outlines our performance fee versus your results that effectively subordinate that incentive fee to the credit performance of this BDC, I'll argue that anything that goes into this portfolio is arguably going to have a high degree of focus on capital preservation over time. So there is no strategy to take high risk or low risk. Risk has always been the same. But I'll have Tom actually outline kind of a view as it relates to leverage in that liquid market and that trade-off.

--------------------------------------------------------------------------------

Thomas McDonnell, Barings LLC - Director [44]

--------------------------------------------------------------------------------

Yes, thanks. So in certain names like the one where we have higher attachment points, we look at -- first of all, usually there's a little bit of credit story there. But the reality is, we have a lot of subordinated capital still behind that. And for every investment that we've put into this portfolio, we own it elsewhere on our platform. So a couple of the names in the platform have higher leverage. But it's an improving credit story. So when using our team, using our analysts, looking at forward-looking for a year to 24 months, we expect a deleveraging profile there. So that would probably be some of what you're seeing. And those though, again, the outliers that you refer to, will be some of our higher-conviction names across our platform where we see some real upside and would like to take advantage of it in this framework.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from Christopher Testa with National Securities Corporation.

--------------------------------------------------------------------------------

Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [46]

--------------------------------------------------------------------------------

Just wanted to discuss a little bit on the difference between the broadly syndicated and middle market. When you guys are assessing both of these at the time of underwriting, obviously, the former has less protections but more staying power at larger borrowers. How do you look at this and the difference in how you stress-test both of these with the -- of a credit cycle?

--------------------------------------------------------------------------------

Thomas McDonnell, Barings LLC - Director [47]

--------------------------------------------------------------------------------

Yes, I'll start with -- on the broadly syndicated side. So as mentioned, we have the largest team when you look at globally. Our research analyst portfolio managers, we have the largest team that's out there that underwrites credit on the broadly syndicated side. So by doing that, we have roughly 40 to 45 credits per analyst. So we can do -- we do take that very deep dive into our view of it, and ultimately, what we require analysts to do is to have a forward look at what we think these companies will do. For an industry where it's cyclical, we'll look at how will this company perform in a downside scenario and how much cushion do we have, what does liquidity look like, where can leverage go. And from there, we make a judgment call on where we think this thing may trade. So there's a lot of work that goes into it on the front end that ultimately gets us comfortable about holding that position on the broadly syndicated side of things, and we have a long history of doing -- over 20 years of doing that through multiple cycles.

--------------------------------------------------------------------------------

Ian Fowler, Barings BDC, Inc. - President [48]

--------------------------------------------------------------------------------

Yes, and I would just say, on the middle market side -- and again, the big difference between the 2, right, is liquidity. So on the middle market side, you don't have liquidity, so we focus on things like structural protection, does it have covenants, is there any leakage, definition of EBITDA, things like that. Capital structure, we like simplified capital structures so that if there is an issue, all the lenders are in alignment and you can work through any issue. And critically, I think the sponsor is really important. We underwrite every sponsor that we do business with. And so if you have a problem, we're working with sponsors that are -- have a history of supporting their companies either operationally or with capital to get that company through an issue or overequitize an acquisition. They just do the right thing. So those would be kind of the key things that we focus on in the middle market.

--------------------------------------------------------------------------------

Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [49]

--------------------------------------------------------------------------------

Okay. That's helpful. And are all the broadly syndicated loans that were on the balance sheet in the quarter, are all of those held by Barings in either the CLO or a different account?

--------------------------------------------------------------------------------

Thomas McDonnell, Barings LLC - Director [50]

--------------------------------------------------------------------------------

Yes, they are on our platform. Most of what we did is we ramped in the secondary. So they are all existing positions that come off of our investment committee approved by a list.

--------------------------------------------------------------------------------

Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [51]

--------------------------------------------------------------------------------

Got it. Okay, that's helpful. And obviously, the target for the BDC is to be mostly middle market, and I know that these are largely placeholder assets. But what do you guys anticipate being the pace of you kind of getting the middle market to be at least over 50% of the portfolio as you kind of look ahead at the pipeline, and the ability to sell off some of the broadly syndicated products?

--------------------------------------------------------------------------------

Eric J. Lloyd, Barings BDC, Inc. - CEO & Interested Director [52]

--------------------------------------------------------------------------------

Yes, that's one I -- we talk about a lot, right? Which is, what's the pace of that transition, and the frank answer is, we don't know, right, what it will be. Because we don't know what the market environment will be and whether our sponsors win and the like. The reality of it is our broad origination network, though, and our current pipeline would say that kind of $100 million-ish a quarter is a very achievable goal on an average basis. We're going to have some quarters less than that, we're going to have some quarters more than that. But history is a good guidepost. We'd say that the BDC, taking this back to the question we had earlier about the co-investments, the BDC's portion of the origination, using around $100 million per quarter is -- probably is a good proxy for what it would look like going forward. So that dives into leverage, right, as to what you have on the leverage, given the equity. I originally talked about it in our transaction description when we first announced the deal, a 8-quarter ramp. We had a 1:1 leverage then. As I said earlier, we're not going to beholden to 8 quarters or 6 quarters or 9 quarters. It will be what makes sense. But if you look at for kind of 50% plus, I'd kind of model out that $100 million per quarter is the best guess. And we'll just update you every quarter on exactly where that stands, and we're going to update you with our pipeline. And through that, hopefully the transparency we provide would give you a good ability to model this out going forward.

--------------------------------------------------------------------------------

Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [53]

--------------------------------------------------------------------------------

Got it. Okay. No, that's very helpful. And just touching a little bit on the co-investment AUM. I know Barings, obviously, is a really large platform. What's the exact AUM that the BDC is able to co-invest across?

--------------------------------------------------------------------------------

Eric J. Lloyd, Barings BDC, Inc. - CEO & Interested Director [54]

--------------------------------------------------------------------------------

Oh, the exact AUM, I wouldn't want to give you a specific number. In reality, it could move, right. As you've seen here today, right, we have liquid assets, as Tom referenced earlier, that on a blended basis have about a 330 over spread. So as we're originating middle market deals, deals that have a 400 or 425 spread that we have, to Ian's point, high conviction of their foundational part of a portfolio, economically makes sense to trade out of that liquid asset and into this L 400 or 425 asset. I could fast forward 40 years from now, and the market could look materially different. We could have a portfolio that's all, let just use, on average, L plus 525, and that single 400 or 425 asset that today makes sense from a portfolio perspective, may not make sense at that point in time. And then also the reality is that number moves, right, as private commingled funds we have ramp, and then they pay down as separately managed accounts, become more or less active. So that the hard number is not one that I could provide a tangible. I think to Ian's question around hold size is probably the best proxy, which is our average leveragee is referenced at 4.6x and this portfolio is consistent with our platform. The average EBITDA size on the median in that $30 million to $40 million range is consistent with our platform. And so our ability to speak for $100 million plus of those deals and really drive the lead is what's critical. What percentage of those deals we get is just, frankly, as much up to the sponsor as anything else.

--------------------------------------------------------------------------------

Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [55]

--------------------------------------------------------------------------------

Got it. Okay. And last one for me, just philosophically, just obviously, Barings is a large group and has been around for quite some time, and you guys now have a public vehicle with the BBDC product. Just curious kind of what the thinking was on having a public vehicle and what your thoughts are there.

--------------------------------------------------------------------------------

Eric J. Lloyd, Barings BDC, Inc. - CEO & Interested Director [56]

--------------------------------------------------------------------------------

This is Eric, again, and I'll take a step back. So we do believe having diversity of capital for our platform is important. And that comes in a couple of different ways. First, it really comes in the diversification of the risk return within our capital providers. So on one end, let's think of a middle market CLO, right, that could take a L 400 asset, right, at a very low OID. And in a diversified pool, that could make a lot of sense. All the way ranging out to a mezzanine strategy that we've been doing for over 25 years in the U.S. and have strong returns on that. And so having the diversity of capital, back to Ian's point, really gives us the flexibility to speak across the capital structure, across multiple deals with our private equity clients. So I think that's kind of the first thing I would say. Second, within the diversity of capital, we operate third-party commingled funds that are private funds. We operate separately managed accounts on behalf of clients and those clients also would come from LPs or separately managed accounts from across the globe, from our distribution network and our relationships there. So really the part that we didn't have was a listed public vehicle to complement our private third-party funds in our separately managed accounts. And so strategically, we made the decision prior to this transaction, Tom Finke, our CEO; Mike Freno who runs Global Markets; and myself, to look at a permanent capital vehicle as a proactive, strategic effort. This was not a reaction to the fact that Triangle put itself up for strategic review. It was something that we had intended to do and wanted to look at it -- look at a BDC. Then it really came down to an unlisted private one versus the purchase of one, and we felt like this was attractive to get a listed vehicle where we were able to have a third party purchase the portfolio, and frankly, start from scratch. One of the things I love about this transaction is typically when you buy a portfolio, all the good deals are your deals and all the problems were the prior person's, right? The good news on this is it's going to be really clear how we perform to ourselves and to our shareholders. And that transparency and that clarity is something we're very comfortable with.

--------------------------------------------------------------------------------

Operator [57]

--------------------------------------------------------------------------------

And our last question comes as a follow-up from Fin O'Shea from Wells Fargo Securities.

--------------------------------------------------------------------------------

Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [58]

--------------------------------------------------------------------------------

I just want to circle back to both Jon and Eric on the issue of buybacks again before you go home for the weekend. So just putting everything together we heard today, I'm again agreeing with you that the totality perspective is impressive on your behalf and also that at this juncture, it is appropriate for you to have your shot at portfolio construction, to ramp your return and bring to discount in that way. That may be even the best value proposition to shareholders at the 0.85x of NAV context. Shareholders, of course, accepted your proposal to manage the BDC and it's reasonable that you should get a shot at expanding before being asked to contract. So that said, please give us some texture on what standard you're setting for yourself in terms of the time line of a ramp to deliver a closing of that discount to shareholders through a higher return before you would then say, hey, we couldn't hack this, we'll buy back more stock.

--------------------------------------------------------------------------------

Eric J. Lloyd, Barings BDC, Inc. - CEO & Interested Director [59]

--------------------------------------------------------------------------------

Fin, it's Eric, and I appreciate how you answered the -- asked the question really very much. And I think it gets to the heart of it, right. Which is, and I said earlier, we're not going to chase a quarterly target or say we're going to generate x amount of directly originated middle market deals and put ourselves in that kind of box. If we wake up in 2020 or some time frame down the road, and we have not proven our ability to ramp the portfolio with illiquid credit at a measured pace and risk return that we believe makes sense, we're still trading at this type of a discount, we have to ask ourselves the question that you just asked us, right. Does it make sense? Is it the best interest of our capital as a shareholder and our other shareholders to do something else other than what we've done? I've not -- I can't tell you that, that's going to be at the end of 2019 or middle of 2019 or beginning of 2020. I -- what I look forward to is every single quarter sharing what that ramp looks like, every single quarter let's look at where the stock is trading and what the go-forward pipeline looks like. And our team collectively internally, I believe, has shown, to what you said, the willingness and the ability to invest our capital, to shrink the corpus of the BDC to benefit shareholders and to make what's in the best decisions of long-term shareholder value. So it's not a hard date for you but that is kind of the philosophy of how I'm coming at it.

--------------------------------------------------------------------------------

Operator [60]

--------------------------------------------------------------------------------

Ladies and gentleman, that concludes our question-and-answer session for today's call. I would now like to turn the call back over to Eric Lloyd for any further remarks.

--------------------------------------------------------------------------------

Eric J. Lloyd, Barings BDC, Inc. - CEO & Interested Director [61]

--------------------------------------------------------------------------------

Thank you, operator. And on behalf of all of my team members at Barings, I want to say thank you to all of you participating in today's call, and all of you who've entrusted your money for us to manage. We look forward to continuing our discussion in the future. Have a wonderful day, and thank you for dialing in.

--------------------------------------------------------------------------------

Operator [62]

--------------------------------------------------------------------------------

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. And you may all disconnect. Everyone, have a wonderful day.