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Edited Transcript of TCAP earnings conference call or presentation 10-May-19 1:00pm GMT

Q1 2019 Barings BDC Inc Earnings Call

RALEIGH May 24, 2019 (Thomson StreetEvents) -- Edited Transcript of Barings BDC Inc earnings conference call or presentation Friday, May 10, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Eric J. Lloyd

Barings BDC, Inc. - President, CEO & Interested Director

* Ian Fowler

Barings BDC, Inc. - President

* Jonathan Gerald Bock

Barings BDC, Inc. - CFO

* Thomas McDonnell

Barings LLC - MD

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Conference Call Participants

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* Casey Jay Alexander

Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst

* Christopher Robert Testa

National Securities Corporation, Research Division - Equity Research Analyst

* Finian Patrick O'Shea

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Kyle M. Joseph

Jefferies LLC, Research Division - Equity Analyst

* Mickey Max Schleien

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

* Paul Conrad Johnson

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

* Robert James Dodd

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

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Presentation

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Operator [1]

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Greetings. At this time, I would like to welcome everyone to the Barings BDC, Inc. Conference Call for the Quarter Ended March 31, 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, 2018, and quarterly report on Form 10-Q for the quarter ended March 31, 2019. Each is 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 will turn the call over to Eric Lloyd, Chief Executive Officer of Barings BDC.

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Eric J. Lloyd, Barings BDC, Inc. - President, CEO & Interested Director [2]

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Thank you, Donna, and good morning, everyone. We appreciate you joining us for today’s call. And please note that throughout this call, we'll be referring to our first quarter 2019 earnings presentation that is posted on the Investor Relations section of our website.

On the call today, I'm joined by Barings BDC’s President and Barings Co-Head of North America Private Finance, Ian Fowler; Tom McDonnell, Managing Director and Portfolio Manager in Global High Yield; and the BDC’s Chief Financial Officer, Jonathan Bock.

Ian and John will review our first quarter results and market trends in a few moments, but I'd like to begin our call today with a few high-level comments about the quarter.

Please turn to Slide 5 of the presentation. This is an update to a slide we shared last quarter, highlighting the volatility of liquid credit spreads and their correlation to BDC stock prices.

In the fourth quarter, the liquid credit markets experienced their worst quarter since the financial crisis with prices falling roughly 4.5%. Loan spreads recovered by approximately 100 basis points in January and February of 2019, although the market weakened modestly in March.

The first quarter we saw a corresponding increase in BDC stock prices that reflected the increase in spreads with BDC total returns outpacing the broader market. This spread recovery drove improved March for our broadly syndicated loan portfolio as the underlying performance at our portfolio companies has remained strong.

Now turning to Slide 6. Here you'll see our first quarter highlights. You can see our NAV increased 4.9% to $11.52 per share. This was primarily driven by the spread movements I just discussed, resulting in a higher fair value for our broadly syndicated loan portfolio. Once again, this movement in portfolio values is not the result of changes in underlying company fundamentals, but rather was driven by a partial reversal of the technically driven sell-off and global credit trends -- global credit spreads in the fourth quarter of 2018.

Moreover, with continued tightening in liquid credit spreads in the second quarter of 2019, approximately half of the remaining unrealized loss has already been recovered so far in this quarter.

From an operating standpoint, our middle-market portfolio ramp continued, though seasonally down given the deal activities often slowed at the beginning of the year. During the quarter, we made investments totaling $65 million and the total value of our middle-market portfolio increased to $289 million at quarter end.

Net investment income of $0.16 a share was consistent with the fourth quarter and in excess of our first quarter dividend of $0.12 per share. While quarter-over-quarter investment income increased due to the larger investment portfolio, net investment income was flat, due in part to late investment fundings and higher financing costs associated with our new $800 million corporate credit facility that closed in mid-February.

I would also note that we will experience the full quarter effect of unused fees in the second quarter of 2019. However, we expect that earnings pressure to be temporary as we continue to leverage our credit line and we believe the additional liquidity provided by our facility is well worth the cost.

On Slide 7, we summarized some further financial highlights for the first quarter compared to the previous 2 quarters. In the middle of the slide, you can see the $25.4 million of net unrealized appreciation that drove the net income and NAV increases in Q1, recovering a large portion of the $52.3 million of unrealized appreciation recorded in the fourth quarter.

Leverage was up slightly from last quarter and our $1.2 billion investment portfolio was partially supported by $580 million of borrowings under our broadly syndicated loan facility and $40 million of borrowings under our new $800 million corporate revolver.

Subsequent to quarter end, we issued an on-balance sheet CLO structure for a portion of our broadly syndicated loan holdings. This allows for very attractive match-funded financing at an all-in cost that was lower than our broadly syndicated loan facility. I'll let Jonathan further outline these benefits in his remarks.

Before I turn the call over to Ian, I'd like to provide a quick update on our share repurchase program. As our Chairman, Mike Freno, outlined on our earnings call last quarter, we believe share repurchases are an important part of any long-term capital allocation philosophy. The share repurchase plan we announced for 2019 aims to repurchase up to 2.5% of the outstanding shares of Barings BDC stock when it trades at prices below NAV and purchase of the 5% of outstanding shares in the event the stock trades at prices below 0.9% of NAV subject to liquidity and regulatory constraints.

Through a combination of purchases under rule 10b5-1 and rule 10b-18 plans, the company has already purchased approximately 1.5% of its outstanding shares. Overall, the share repurchase program, our underlying capital allocation philosophy and substantial ownership of our parent further differentiate our commitment to market-leading alignment with our shareholders.

With that, Ian will now provide an update on our investment portfolio and trends we're seeing in the middle market.

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Ian Fowler, Barings BDC, Inc. - President [3]

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Thank you, Eric, and good morning, everyone. Jumping to Slide 10, you can see a summary of our new investments and repayments for the last 3 quarters. Following a very active fourth quarter, the first quarter was slower for both Barings BDC and the market as a whole as we had $59 million of net middle-market loan fundings. While quarters will fluctuate, you can see that our average level of middle-market fundings for the last 3 quarters is roughly $100 million, consistent with the expected average level we have previously discussed.

Additionally, we had net sales of BSL portfolio investments of $33 million, continuing our strategy to opportunistically exit certain BSL investments in order to fund middle-market portfolio growth.

Turning to Slide 11, you can see that as of March 31, the BDC was invested in roughly $838 million of liquid broadly syndicated loans and $317 million in private middle market loans, including delayed-draw term loans. Overall, our portfolio consists of 99% senior secured first lien assets. BSLs continue to be a diversified portfolio of 111 investments across multiple industries with a weighted average spread of 329 basis points and a yield at fair value of 6%. Senior leverage for this portfolio remained consistent with last quarter with a weighted average of 4.9x senior debt to EBITDA.

Now shifting to the middle-market portfolio stats on Slide 11. As of March 31, our $317 million middle-market portfolio was spread across 25 portfolio companies as compared to $249 million across 19 portfolio companies at the end of 2018. Underlying portfolio company fundamentals remained strong with weighted average senior leverage of 4.5x and a median EBITDA size of our first lien middle-market exposure of approximately $34 million.

Of the 25 middle-market investments, 22 are first lien investments and 3 are second lien term loans selectively made after considering the leverage levels, structure, credit profiles and absolute returns.

Average spreads and yields are also consistent with last quarter at 501 basis points and 7.8%, respectively. We will always evaluate deal structures for the best risk-adjusted returns, but I also want to be clear that we will continue to focus on a predominantly first lien senior secured strategy.

Our middle-market portfolio remains well diversified as the 25 investments are spread across 13 industries and no investment exceeds 2.1% of the total portfolio. Our top 10 investments are shown on Slide 12.

Now turning to Slide 14. Here you will see the start of the 3 slides that outline middle-market spread and leverage trends with third-party data from Refinitiv. I think it's valuable to use these same slides each quarter in order to consistently highlight trends in the market.

As you can see on Slide 14, which illustrates middle-market spreads from first lien to mezzanine, there was modest spread widening across much of the middle market in the first quarter. The exception was second lien spreads, which decreased slightly after an increase in the fourth quarter, continuing the trend of tracking more closely with the liquid market. Overall, spreads in the middle market have remained relatively stable and are generally slightly above 2018 averages.

Slide 15 shows the slight uptick in leverage during the first quarter for the all senior and traditional first lien, second lien categories, continuing the increasing leverage trend of recent years.

A breakdown of leverage trends by industry is shown on Slide 16. While we have the capability and focus to search for the most attractive relative value in a capital structure, our general preference is to structure very deep first lien senior debt into a bifurcated traditional first lien, second lien structure, where the risk/return profile is more clear. Importantly, this allows us to consider where true value really sits. In this competitive environment, we believe the focus, discipline and capabilities of the Barings platform will lead to high-quality investment portfolio opportunities.

With that, I'll turn the call over to John to provide more color on our first quarter financial results.

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Jonathan Gerald Bock, Barings BDC, Inc. - CFO [4]

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Thanks, Ian. On Slide 18, you'll see a bridge of the company's net asset value per share from December 31 to March 31. And the primary components of NAV increased to $11.52, where unrealized appreciation of our investment portfolio of $0.50 per share due to a meaningful swing in market yields. Our net investment income for the first quarter exceeding our quarterly dividend by $0.04 a share and a $0.02 increase to accretion from the share repurchase plan.

Slide 19 and 20 show our income statement and balance sheets for the last 3 quarters. A couple of key items to remember for the first quarter. First, pursuant to our advisory agreement, the base management fee paid to Barings increased from 1 point last year to 1.125% this quarter, where it will remain for the rest of this calendar year. Second, as Eric mentioned, we incurred higher interest and other financing fees due in part to commitment fees associated with our new $800 million corporate credit facility.

Our $1.2 billion investment portfolio was supported by borrowings of $580 million under the BSL facility and $40 million under the new corporate revolver and that was resulted in quarter end leverage of 1.06x or 0.94x debt to equity after adjusting for cash, short-term investments and net unsettled transactions.

As we discussed on the call last quarter, our BSL funding facility was reduced to a commitment size of $600 million following the closing of the new $800 million senior secured middle-market credit facility in February. Details regarding both credit facilities are shown on Slide 21.

Now subsequent to quarter end, the BSL funding facility was reduced further to a total commitment size of $300 million in conjunction with an on-balance sheet static CLO issuance. This transaction effectively allowed us to shift the financing to more than half of our BSL portfolio from a short-term revolver to a long-term securitized debt offering.

The all-in spread on the CLO is approximately 121 basis points, which is actually lower than the all-in spread of our BSL facility, while simultaneously extending the duration by roughly 7 years. The effective advanced rate of the CLO structure also matches the BSL facility, but reduces the borrowing base risk inherent in these types of facilities due to the daily valuation fluctuation.

Now it's important to note a few high-level concepts regarding the financing. First, it creates additional diversity in our capital structure as we now have a mix of permanent equity, long-term securitization and 2 revolvers. Second point is it matches the duration of our liabilities with assets for a significant portion of our BSL portfolio, while also lowering financing costs. And finally, this is another example of the structuring and management expertise and the Barings platform brings in the adviser to the BDC.

And Slide 22 shows our paid and announced dividend since Barings took over as adviser to the BDC. Now we announced yesterday that our second quarter dividend of $0.13 will be paid on June 19 and that's another increase to also align our dividend with the earnings power of our portfolio.

Now looking ahead, Slide 24 summarizes our investment activity since March 31. In the second quarter, we made $66 million of new middle-market investment commitments with an average 3-year discount margin of 5.8%, of which $55 million have already funded. Now after a relatively slower first quarter, this is a good start to the second quarter and in line with the general historical trend.

Now as I mentioned on our last quarter call, our intention is to drive shareholder returns not just through middle-market investments, but also through the effective use of our nonqualified asset bucket via a joint venture with a very respected institutional partner.

As announced last night, Barings BDC entered into a joint venture with the state of South Carolina retirement system. This joint venture will have approximately $550 million in underlying equity and will be leveraged commensurate with its underlying asset mix. That asset mix will be highly diversified across multiple asset classes, including U.S. and European liquid credit, U.S. and European illiquid credit, structured products and real estate debt.

Now a few benefits to point out here. The first is diversification. This wide investment mandate of the program allows Barings BDC to gain exposure to a diversified pool of investments, asset classes, yield profiles and geographies. The second benefit ties to scale. This JV provides meaningful investment capacity and a wide range of asset classes for both Barings and the private finance platform overall. And finally, there is an element of affirmation of Barings BDC's strong platform and share it will focus. As many of the investment community are aware, South Carolina retirement system remains a leading investor in the private credit and alternatives category, the number of respected managers and we greatly appreciate their partnership with Barings BDC and look forward to deriving attractive risk-adjusted returns to shareholders in the future.

And turning to our probability-weighted pipeline on Slide 25. Investors can see that our North American private finance pipeline or expected closings is approximately $440 million and remains heavily first lien and senior secured focus across a wide variety of diversified industries. Now remember, this pipeline is an estimate just based on expected closing rates for all deals in our investment pipeline and should just be looked at it as such.

And with that, operator, we would like to open the line for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today is coming from Mickey Schleien of Ladenburg Thalmann.

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [2]

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Jonathan, I just want to follow-up on your comments on the JV. As we all know in the past, these JVs were used to form senior loan funds, which would allow BDCs to tap into synthetically higher leverage. That's obviously no longer an issue with the new regulatory regime. So I want to make sure I understand your rationale. Are you saying that you are primarily going to invest in nonqualified assets and therefore, you can gain more scale into those assets by only counting the equity in the JV as nonqualified as opposed to all of those assets?

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

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I'd kind of characterize it differently. So Mickey, I think you've had a chance that you had an opportunity to see the entirety of the Barings platform and the capability of across a number of different asset classes. So Barings in totality manages over $300 billion across liquid credit, illiquid credit, structured products, real estate, et cetera. And so what this joint venture program allows one to do is not only invest in specific asset classes that are nonqualified, which you could in a sense see in the nonqualified bucket. It also allows you to do qualified investments, but do them at different yield profiles to drive return.

So really, the focus is looking at it from a relative value perspective. One thing you always find in the middle market in some cases if all you focus on is one specific sliver of market, you lose a wide frame of reference that could help you price those assets better. And so having an opportunity to benefit from Barings platform and management of all these asset classes allows the BDC to take a diversified point of JV equity to drive return as well as provide some diversification benefits to some assets that may sit on the BDC balance sheet and be shared between the 2. Does that make sense, Mickey?

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Mickey Max Schleien, Ladenburg Thalmann & Co. Inc., Research Division - MD of Equity Research & Supervisory Analyst [4]

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Yes. That's helpful. And just 1 follow-up question, if I may. With the forward LIBOR curve now negatively sloped, I'd like to ask how you're managing the downside risk to the portfolio's yield in terms of the trends you're getting in LIBOR floors. And whether you're starting to think about doing more fixed rate deals if you can or potentially hedging this risk instead?

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Eric J. Lloyd, Barings BDC, Inc. - President, CEO & Interested Director [5]

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So this is Eric, Mickey. You bring up a great point on LIBOR, right? It's uncontrollable in some ways from the yield from our portfolio. I'd say we look at it a couple of ways. One, we continue to put 1% LIBOR floors in our deals, and so that floor, if you want to think of it that way, exists. But obviously, that's 100-ish basis points lower than where we are today. Two, we do not -- we have not focused on fixed rate deals within this portfolio. And really, in general, we still think the floating rate approach is the better approach to go over the long term.

The second point I'd make on that is we haven't done any real hedging of the portfolio to try and play out the interest rate risk. We don't think that ultimately that's a core competency that we think applies to the BDC. And then the third thing I'd say is what we do focus on ever is the credit spread within our assets. And so when we look at transactions, we do believe there is an absolute floor to credit spread, which then ties into yield, but that credit spread is ultimately what we believe people really pay us for. And therefore, we make sure that we achieve attractive credit spread and not just kind of chasing yield. Another way of saying it, if LIBOR would go to 4%, that doesn't mean we're going to start doing LIBOR plus 300 deals just because it makes a 7% return. So we don't want to kind of chase LIBOR up or down.

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Operator [6]

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Our next question is coming from Kyle Joseph of Jefferies.

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Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [7]

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From a modeling perspective, it sounds like you guys have a pretty attractive pipeline in middle market deals to deploy capital into. Just thinking about that, how do you plan on funding that? Is it more BSL sales? Is it -- obviously, you guys have plenty of debt capacity given what you've done on the right side of your balance sheet recently. Or is it going to be more of a balance between those 2?

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Eric J. Lloyd, Barings BDC, Inc. - President, CEO & Interested Director [8]

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So this is Eric. I'd say we really monitor it as kind of what's the best available option at a given time, right? One of the things we want to do is make sure we're protecting NAV in that scenario. So I'll give you the example. If you think back November, December of last quarter, when the broadly syndicated loans were selling off and we had a pipeline then that we needed to fund and leverage it to a certainly level, we may take leverage up a little bit versus selling a loan at a price that we think is unattractive and realize the loss that we think is not justified. So we may take leverage up a little bit there.

As we sit today, as John referenced, from the $50 million or so unrealized markdown in the fourth quarter, about $25 million of that was recovered in the first quarter. It's continued to improve from there. So we sit today, we feel like there's opportunities to sell liquid broadly syndicated loan collateral in order to fund middle market assets and not do so at a loss that would impact NAV.

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Kyle M. Joseph, Jefferies LLC, Research Division - Equity Analyst [9]

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That makes a lot of sense. And just 1 follow-up from me. Given the industry leverage changes, you've seen some of your competitors start to increase leverage as well. And I was just wondering what sort of competitive impact you are seeing in the market? Are there pockets where you're seeing more competition? Are there pockets of the market where you're seeing less competition?

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Eric J. Lloyd, Barings BDC, Inc. - President, CEO & Interested Director [10]

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Yes. It's Eric. And I'll let Ian jump in here too. But I think, in general, I'd say it's pretty consistent. I wouldn't say there's one place where there's more or less competition. The practical reality of where we are today and the stage in the market and within direct lending is, it is really competitive and I'd say just competitive in all places in the market. I wouldn't say the leverage changes -- we haven't seen that really impact any part of the market, but I'll let Ian answer.

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Ian Fowler, Barings BDC, Inc. - President [11]

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And if you look at the market data that Refinitiv is putting out, I mean, essentially, you're seeing leverage fairly stable or you're seeing yields fairly stable. And I would point out in a quarter where volume was low to see that stability is actually a pretty good sign. And so I think as you look at the market today and you look at the players that are out there, we really don't see any changes in the market. The key is really having the ability, I think, to write the big checks if you can and also be that capital solution provider that can move up and down the capital stack looking for the best relative value in every single transaction.

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Operator [12]

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Our next question is coming from Casey Alexander of Compass Point.

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [13]

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Forgive me, my questions won't be as sophisticated as other guys. Eric, you made mention -- and I'm just not quite sure how you'd characterize it that half of the realized loss has been recovered thus far this quarter. And I'm not sure exactly what you meant because you had $25 million unrealized gain in this quarter and a $55 million unrealized loss the previous quarter. Is -- are you saying that you've regained half of the difference between those 2 in the second quarter or you're up to 50% of the original $55 million?

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Eric J. Lloyd, Barings BDC, Inc. - President, CEO & Interested Director [14]

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Yes. Let me make sure I clarify this. And if I don't, keep asking because I want to make sure this is clear. So we obviously believe in marketing our assets true to the absolute price at every quarter like everybody does. The liquid collateral is frankly obviously the easiest on that, right? So if we went to the fourth quarter when the broadly syndicated loan market sold off, we had a $50 million or so unrealized loss on that collateral. I -- we have marked it down from where it was purchased because of the selloff in the market. We recovered in the first quarter about $25 million of that $50 million, so now the unrealized loss was about $25 million. Since the end of the first quarter, that $25 million has been recovered, about half of that here in the second quarter, call it approximately $10 million to $12 million of that $25 million of unrealized loss has been recovered. So as we sit here today, that means we have about a $10 million to $12 million unrealized loss in our broadly syndicated loan portfolio primarily relative to where the purchase price was. Did that clarify?

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [15]

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Yes, it does. That's perfect. And we understand that could always change between now and the end of the quarter, but we certainly appreciate the update on that. So that's very, very helpful. Thank you.

Secondly, the definition of the CLO securitization is that of a static pool and you use broadly syndicated loans to collateralize that. So essentially, I guess, that -- does that mean that there's like -- there's no reinvestment period, so as soon as you either get repaid on a broadly syndicated loan or sell it to fund a traditional middle-market loan that, that will then pay down the balance on the CLO as opposed to some other type of mechanism?

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Eric J. Lloyd, Barings BDC, Inc. - President, CEO & Interested Director [16]

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So I'm going to start with this, Casey, then I'll turn it over to Tom, who really runs that part for us. So importantly, we didn't take all of the broadly syndicated collateral and put it into the static CLO. We just took a portion of it and put it in the static CLO. We kept a portion of it outside of that for exactly the reasons you're picking up on, which is the flexibility to sell that collateral that's not the static CLO whenever we wanted to defer the middle-market originations. As it gets to the static CLO, then I'll let Tom address that part.

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Thomas McDonnell, Barings LLC - MD [17]

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Right. Yes. So we have a 1-year no-follow-up period. We can't sell assets for a year with a small bucket to do so and for credit purposes. But yes, static for a year. And then all pay downs come in and repay the notes on the CLO. That's correct.

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Jonathan Gerald Bock, Barings BDC, Inc. - CFO [18]

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And so one of the trades, Casey -- this is Bock, that you get between a reinvestment period versus static one is that, one, when you bring that to the market you have the ability to drive your cost as interest or spread of interest quite low. And really the reason you did that if you looked that the BDC has a significant amount of available liquidity on its other credit lines, particularly the middle-market revolver, you can always make sure that even though you can protect yourself by lowering your interest cost, but always have the ability to make investments at the right time to the extent spreads widen.

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [19]

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Okay. That's fine. And lastly, on the JV. I've realized it's $50 million you guys, $500 million by South Carolina. But we're obviously not putting that into models. We do have to kind of model something here. Do you have sort of a thought process on potential ramp up in JV?

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Jonathan Gerald Bock, Barings BDC, Inc. - CFO [20]

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Yes, you'd likely see that ramp over a general 10-quarter process depending -- a 10-quarter period depending on where the investment set, whether liquid or illiquid spreads, depending on the market environment, what's giving you more attractive to ramp in one versus the other. But it really needs more slow and steady and methodical will win the race. So expect that just a gradual growth over time.

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Casey Jay Alexander, Compass Point Research & Trading, LLC, Research Division - Senior VP & Research Analyst [21]

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And when you say a 10-quarter process that would include using leverage versus your equity capital right of the bat, right? Because you're going to use a blend of leverage plus your equity capital as you do that ramp through 10 quarters.

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Jonathan Gerald Bock, Barings BDC, Inc. - CFO [22]

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Yes, that'd be a fair assumption. Yes.

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Operator [23]

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Our next question is coming from Robert Dodd of Raymond James.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [24]

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All right, guys, congrats on the quarter. Just 2 questions. One, I'll do the easy one first. Jonathan, on the base management fee, as you noted, right, I mean, it goes up to 1.125% -- it went up to 1.125% at the beginning of the year. I mean when I look at it, maybe I'm doing my math wrong, but it's down sequentially versus Q4 before the waivers. Obviously, the fee should have gone up. Average assets moved around a little bit. But can you reconcile that, for me? It looks like it's lower than it should have been this quarter but...

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Jonathan Gerald Bock, Barings BDC, Inc. - CFO [25]

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Yes. Sure. So Robert, the way you want to think about it from a modeling perspective, the reason we have those waivers in the first 2 quarters, as those were inclusive of TCAP's prior results. And so the way the management fee -- base management fee looks is it looks at the 2 prior quarters, it makes those averages and it backs out unsettled trades. So we're still looking back to those 2 quarters because it's a 2-quarter look back, but now those are strictly Barings -- overall Barings reporting quarters and you just have to look at the unsettled trades because it was our view not to charge a management fee on something that wasn't earning its full economic -- full economics. And so if you back out those unsettled trades from that average, you get exactly the fee that was calculated.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [26]

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Got it. Got it. On the JV, a question, I guess, what's you -- the goal, the target, if you will, ROE for that vehicle? Either ROE to you, or the kind of returns within the vehicle because obviously in the past a lot of BDCs have used JVs to goose up their ROE by applying double average, et cetera. Is the goal of this JV to kind of augment ROE for the BDC or diverse -- I mean, you mentioned diversification, obviously. Diversity of earning streams have a lot of value even if it doesn't increase the ROE per se. So can you give us a little bit of color on that about what the -- is it primary purpose diversification of income flows or would you expect it to depending on the assets that go in, obviously, to be accretive to the numbers of ROE or accretive to the value of ROE through diversification?

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Jonathan Gerald Bock, Barings BDC, Inc. - CFO [27]

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Yes. Appreciate that, Robert. Let's just get to a philosophical focus for us, where we look at risk-adjusted return and we want to generate risk-adjusted return really where it sits. And if you try to back into a number and effectively solve, perhaps you can see managers really end up creating mistakes trying to find high-yield product that might not exist. So think of it as a great return diversifier, right, first. And if you think of the investment opportunities that exists, you've got investment opportunities that are commensurate with the BDC kind of ROE and hurdles -- target rates over time. But it always kind of carried a focus on underlying risk management. And really when you think of Barings platform overall and the ability to generate similar returns that do it across a number of uncorrelated asset classes, that was what was very attractive to us in order to enter in this joint venture with the trusted partner.

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Operator [28]

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Our next question is coming from Christopher Testa of National Securities Corporation.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [29]

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Just on the BSL composition of the portfolio, obviously it didn't move down that much even though the prices rebounded significantly. Was this purely a function of needing to do the securitization?

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

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Yes, I think that's right. So it did move down, I think, the pipeline. There wasn't a significant pipeline, I think, on the middle-market side. So that's why it didn't move down. What I also think, obviously, the price recovered on the underlying assets. So I think that's what you see there. And we did move obviously a portion of those over into the CLO. Well, we did retain some of them, larger positions, on the balance sheet.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [31]

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Got it. So -- and going forward, I know you guys have said that you have the 1-year noncall on the static pool and you can't sell any of the BSL in that. So should we expect the pace of sales of BSL to slow because you're basically only able to sell what's outside of that to them rotating to middle market, is that a fair way to look at that?

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Jonathan Gerald Bock, Barings BDC, Inc. - CFO [32]

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I wouldn't -- Chris, this is Bock. I wouldn't look at it that way. I think of it now, number one, there's still the ability to sell some of the collateral within the BSL CLO. But remember, we have another $400 million that sits outside in BSL that you can also utilize. The second point is, that's not affected by prepayments. And what you'll find is, is that the national turnover that's occurring in that BSL book heavily matches our ability to fund middle-market investment. So you term out, you match fund, you have no mark-to-market issue as it relates to CLO, but you're still able to get the prepayments, you're still able to sell some and you have additional bucket that sits across to the right of $400 million in BSL, that can also be used as a part to fund middle-market assets along with additional leverage liquidity.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [33]

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Got it. That's helpful. And I know you guys touched on this a little bit with Casey's question. But why the choice of static over one that's not where you could take advantage of dislocation and not have that mark-to-market risk and reinvest?

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Jonathan Gerald Bock, Barings BDC, Inc. - CFO [34]

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Sure. It purely gets to just the math and when you think of the available liquidity the underlying entity has. So if you think of the difference between a static versus a reinvestment deal, you might find that, that could be anywhere between 30 to 40 basis points more. So if you end up locking in that financing cost at a higher spread, you may end up finding yourself worse off if you had available liquidity to make investments over time on an attractive revolver. So our view was, with the significant amount of liquidity available already through the middle-market line, right? And with the portion of the [AUM] line still outstanding, you really actually are able to drive ROE with the static choice, and at the same time, preserve your ability to make investments in the event spreads widen.

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

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Chris, this is Eric. Let me try and jump in and make sure we're tying this all together, I think we are. So the reason we didn't put all the liquid collateral into the static is obviously we don't want to tie our hands that way, right? The reason we did it, however, is the cheaper cost of financing and importantly, the matched funding of that financing, the terming out that financing. So big picture numbers, as John said, $400-ish million of broadly syndicated loans are not in the static CLO. That allows us basically using $100 million per quarter directly originated deals about 1 year's worth of pipeline that we could sell broadly syndicated loans to fund middle-market collateral. In addition, within the static CLO, we do have the ability to sell some of the collateral within that 1-year period of time that could benefit if we -- if our originations were higher than $100 million per quarter and repayments that would come in provide cash that comes out of the static CLO into the BDC that also will provide incremental liquidity. Then ultimately, you could have your other pools of leverage if you wanted to if you're -- had a really robust year, you could move it up. But we believe that the liquid collateral outside of the static gives us the financing that we need in order to sell those assets, in order to ramp the pool consistent with what we've represented to you and others.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [36]

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Got it. That is extremely helpful. And touching on the JV a bit more, obviously you guys are able to use a bunch of different sort of investments. Are you going to have multiple different credit lines within that structure for the different investments or is there going to be just one single line on everything?

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

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I think you'll find that there'll be a diverse liability structure inside the joint venture, just the same way as we look at diverse sources of funding inside the BDC.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [38]

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Got it. And given that this is obviously off balance sheet and you go to higher leverage and you guys have the reduced-asset coverage. Just philosophically, how do you kind of look at the total economic leverage of the JV combined with your total balance sheet leverage. What I'm getting at is, if the mix of the assets and the JV, say, takes you to 1.5x and becomes the larger part of the book, does that make you maybe want to not take a balance sheet leverage as much because you're looking at the total economic leverage or is that something that you're not really concerned with.

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Eric J. Lloyd, Barings BDC, Inc. - President, CEO & Interested Director [39]

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Yes. So I'm going to start now, turn it over to John. I want to be really clear about the JV, which, I think, John was, but this has -- no part of this was about, sort of when you start goosing leverage or double leverage. That was not and is not in any way shape or form the reason why we did it or the intention of it. It is -- it really was around the diversification of the asset pool and access to what we believe could be noncorrelated assets consistent -- versus what's in the BDC. So that's kind of where it starts. And that was the reason we went into it. Obviously, we want it to be ROE accretive, which means we're going to put leverage on it and some diversified pool which we're working through right now. Where that leverage comes out and how we finance that, we do not believe it would impact our philosophy on how we'll do the BDC because the whole purpose of going into the JV was not about leveraging -- getting double leverage or anything like that. But I'll John let you...

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Jonathan Gerald Bock, Barings BDC, Inc. - CFO [40]

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I'd also say, sometimes when you think about the BDC space in JVs, there can be the situation where the tail wags the dog. And so when you think about our deliberate design for this in collaboration with a trusted partner, our view was a $50 million investment of equity for the BDC really one -- fits the point where you're able to a offer good diversified return, but also prevents some of the issues that you see in certain circumstances where the returns end up kind of forcing the BDC either to pay out an uneconomic dividend or look at something -- had shareholders look at something that's less than sustainable over time.

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Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [41]

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Got it. Yes. No, and I absolutely appreciate you guys aren't trying to just lever this up. I was just kind of asking in the context of if, for example, liquid credit present itself the best opportunity relative to more diverse things, and that made the JV leverage go up, how do you look at it in that way. But I fully appreciate what you guys are trying to do with the JV. But those are all my questions and really appreciate your time today.

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Operator [42]

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Our next question is coming from Paul Johnson of KBW.

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Paul Conrad Johnson, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [43]

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I just had a question on basically the earnings. You guys have had a pretty good progress with your middle-market deployment. So I'm sort of wondering how should we view the progress that you guys have made commensurate with your earnings growth. I know you mentioned on the call earlier just some late fundings and higher financing costs with reasons that earnings were sort of flat quarter-over-quarter. But I was wondering, if you can just talk a little bit more about the some of the factors that you would expect to increase your, sort of, run rate earnings.

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Eric J. Lloyd, Barings BDC, Inc. - President, CEO & Interested Director [44]

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Yes, this is Eric. I'll start, and I'll turn it over to John to provide more detail. The unused fee that we closed in mid-February through this quarter, and as I highlighted in my comments, will impact the second quarter from a full quarter perspective on $800 million. That was a decision that we made and I made around really locking in liquidity at a time where we are in the marketplace. So that $800 million, given the unused fee does have a drag, I believe it's in the best interest of shareholders to have that sized facility and have that liquidity over the next 5 years as we continue to build our liability structure because we believe strongly that term financing and liquidity are a foundational part of a strong BDC. How that ties into the earnings with the assets, I'll turn it over to John to walk through any specifics.

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Jonathan Gerald Bock, Barings BDC, Inc. - CFO [45]

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I'd say that in the -- if you look it as a per share impact, I mean, to the extent that you have an unused fee of 37.5 basis points on kind of the outstandings that can range between $0.01 or $0.02. Potential earnings track until one is in effect through looking at utilization for the facility. As that -- want you to just know that it's temporary. And so if you think about the general $100 million a quarter pace. And that pace is not just -- it's not set in stone. It's tied to relative value, it's just that what history would tell us. That kind of puts the earning growth profile just on track as slow and steady growth. Here it's a point where we always want to make sure that slow and steady wins the race. And that's kind of what you could expect for how we're building the portfolio, and more importantly, how we are deploying the capital.

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Paul Conrad Johnson, Keefe, Bruyette, & Woods, Inc., Research Division - Associate [46]

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Sure, great. That's very good color on that. I appreciate that. And my last question was just sort of a modeling question on your G&A, which is just a little bit higher than we had expected this quarter. I think it was about, like, 66 basis points or so annually. We're just wondering is that sort of a good run rate from here? Or were there any sort of onetime items in there and you'd expect that to be a little bit lower going forward?

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Jonathan Gerald Bock, Barings BDC, Inc. - CFO [47]

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No real kind of expectations. You put on kind of that number, you just kind of look at overall the expenses that come in, in the quarter as it relates to financings or using legal expenses as a portion of setting up those financings. So I would say, you can kind of expect over time some level of consistency, but really it's not something we can easily forecast because it is just tied to what we're doing as it relates to all the ways we're trying to drive value.

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Operator [48]

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Our next question is coming from Fin O'Shea of Wells Fargo.

We'll move on to our next question from [James Dowd] of Dowd Capital.

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Unidentified Analyst, [49]

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Yes, just had a question relating to the share buyback that you put out there in February. I'm also really pleased to see you standing by that. But you're announcing in this that you've bought some in the first quarter and continue buying in the second quarter. Is there any way of us seeing those buybacks? Do you have to announce them at all or is it just that you'll mention them in the quarterlies going forward?

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Eric J. Lloyd, Barings BDC, Inc. - President, CEO & Interested Director [50]

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We don't have an obligation to announce those. What we've communicated to shareholders and to research analysts and everybody out there is one of our foundational principles of -- in Barings is transparency. And so we communicated that we are going to give you a quarterly update every single quarter on where we stand versus that share buyback. We're not going to be making an announcement and then not share that for a year or 2, or could give you a quarterly update on that both through our Q earnings release, obviously, and then through these kind of presentations. So you should expect to get an update at the end of the second quarter on this also.

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Unidentified Analyst, [51]

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Brilliant. And then as a reminder, this is operated as sort of an arm's length buyback by -- you've given specific instructions to the broker and they just transact as per those instructions?

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

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So there's really 2 components to it. And so remember this is the buyback from within the BDC's, so the shareholders benefit from these purchases. There's an automated process, you want to think of it that way that basically says buy X amount at a given NAV. Then there's a supplemental part that's in there too that can supplement that automatic programmatic plan.

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Unidentified Analyst, [53]

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And that supplemental base, is that overseen by the Board, is that?

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

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Really management is overseeing that. But the shareholder -- the share buyback was approved by the Board that was announced in February.

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Operator [55]

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Our next question is coming from Fin O'Shea of Wells Fargo.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [56]

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A lot was asked and answered today so I'll try to continue a little bit on the joint venture side. You kind of outlined these strategies here and talked about -- think about 10 quarters of ramp, which, I think, will be $100 million or so net origination a quarter. So can you talk about the hold sizes you may have, will this be a chunkier portfolio. And -- otherwise what's the sort of origination versus financial capital supply and demand from these lines. And your -- do you see sort of pro-rata allocation as you wish that would enable you to ramp this seemingly more quickly than your core BDC portfolio in the direct lending line? I know I asked a lot there but if you sort of...

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Eric J. Lloyd, Barings BDC, Inc. - President, CEO & Interested Director [57]

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Yes. Hey, Fin, it's Eric. I'll start and then I'll turn it over to Ian and John to highlight. Couple of things I want to make sure we are really clear on. One, we do not see the JV cannibalizing the ramp of the BDC as we blade it out. So -- but that -- we don't see that happening. We expect the BDC to ramp consistent with what we've communicated to shareholders. So this is not in any way we'll take away from that. Second one is the diversification of the assets in the JV. As John referenced, it allows for U.S. and European liquid collateral. Think of it as the type of stuff that you're seeing in our broadly syndicated loan portfolio that's in here right now. That type of collateral. It allows for directly originated U.S. and European assets. It allows for structured credit, it allows for real estate debt as well as some other asset classes. Therefore, although it may seem that $550 million of equity with leverage, use whatever AUM assumption you want, it may seem like a portfolio of similar size to the BDC, the breadth of collateral that can go in there, combined with the liquidity of the collateral that could go in there, we feel that portfolio can ramp on a very timely basis that achieves the needs for the BDC shareholders and for our JV partner within that process. Does that answer your question?

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

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Yes, very much.

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Operator [59]

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Thank you. At this time, I'd like to turn the floor back over to Mr. Lloyd for closing comments.

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Eric J. Lloyd, Barings BDC, Inc. - President, CEO & Interested Director [60]

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So lastly, right, I just want to make sure we say thank you for entrusting your capital with us. We hope that we stay consistent to the representations we made. We closed this transaction in the summer of last year and each quarter going forward. So thank you for your time today. And we look forward to having conversations with you in a quarter from now.

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Operator [61]

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Ladies and gentlemen, thank you for your participation. This concludes today's conference. You may disconnect your lines at this time, and have a wonderful day.