Joe Mazzoli; Head of Investor Relations; Barings BDC Inc
Eric Lloyd; Executive Chairman of the Board, Chief Executive Officer; Barings BDC Inc
Matthew Freund; President, Co-Portfolio Manager; Barings BDC Inc
Elizabeth Murray; Chief Financial Officer, Chief Operating Officer, Principal Accounting Officer, Director; Barings BDC Inc
Bryan High; Co-Portfolio Manager; Barings BDC, Inc
Finian O'Shea; Analyst; Wells Fargo Securities LLC
Robert Dodd; Analyst; Raymond James
Casey Alexander; Analyst; Compass Point Research & Trading, LLC
Operator
Good day everyone. At this time, I'd like to welcome you to the Barings BDC Inc conference call for the quarter ended and year-ended December 31, 2024. (Operator Instructions)
Today's call is being recorded and a replay will be available approximately two hours after the conclusion of the call on the company's website at www.barings.com under the Investor Relations section.
At this time, I'll turn the call over to Joe Mazzoli, Head of Investor Relations for Barings BDC. Please go ahead, Joe.
Joe Mazzoli
Good morning, and thank you for joining the call. 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 quarterly report on Form 10-Q for the quarter ended December 30, 2024 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. I will now turn the call over to Eric Lloyd, Chief Executive Officer of Barings BDC.
Eric Lloyd
Thanks, Joe, and good morning everyone. We appreciate you joining us for today's call. Please note that throughout today's call we'll be referring to our fourth quarter 2024 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, Matt Freund; Chief Financial Officer, Elizabeth Murray; and Barings Head of Global Private Finance; and BBDC Portfolio Manager, Bryan High.
In the fourth quarter of the fourth quarter, BBDC delivered another strong and consistent set of results fueled by best in class credit performance and the strength and stability of our franchise.
Consistent with broader industry trends, lending activity during the first three quarters of 2024 was somewhat muted. During the fourth quarter, we experienced a meaningful uptick in deployment. Both as part of add on transactions within the existing portfolio and for new buyouts by a number of our long standing sponsor clients.
The result of this activity produced strong originations during the period that we are proud of strong deployment combined with benign credit environment. And our focus on the top of the capital structure investments in the middle market and combined to serve our investors well.
Our focus on the core of the middle market is reflective of our lower leverage levels and more attractive risk adjusted returns. Which is why we find this to be the best segment of the market for BDC and our shareholders.
Consistent with how we have defined our strategy in past discussions, our portfolio strategy is outlined in greater detail on slide 5. And we continue to successfully invest throughout the market and deliver compelling returns to our shareholders.
As we reflect on the full-year 2024, the performance of BBDC has been strong. Total shareholder return during 2024 exceeded 24%. And top quartile among publicly traded peers. These results were driven by a number of tailwinds, some of which are specific to the industry and some of which are specific to Baring's managed portfolios.
Interest rates, while elevated, have been stable for several quarters. Credit performance has been held up broadly across the industry, but has been particularly durable within BBDC.
Deployment opportunities, as I previously noted improved during the December quarter compared to 2023 and the first half of 2024. While we closed 2024 on a strong and stable footing, we have entered 2025 with caution.
Economic data appears to be overwhelmingly positive. Credit fundamentals, namely cash flows, revenue growth and margins are all exhibiting positive trends. As Matt will discuss in great detail, we are optimistic that additional transaction activity will blossom in 2025. However, it is equally as clear that uncertainty, particularly regulatory and trade uncertainties, have given private markets a pause.
As our investors know, we are often investing in illiquid credit securities alongside private equity firms. We're investing in illiquid equity securities. The regulatory shifts that have occurred only in the first two months of 2025 make it difficult for private capital investors to assess the possible shifts they may experience over the coming three to five year horizons. Consequently, we remain cautious on the pace of new buy opportunities and expect the size of the existing portfolio to continue to be providing compelling opportunities to invest.
Add-on transactions remain a compelling way for private equity firms to enhance the value of portfolio companies and allow bearings to deploy capital into companies we already know.
While not anticipated to the extent volatility is on the horizon, we have confidence in our credit selection and believe our underwriting discipline will continue to provide stable returns in the quarters to come.
Turning to some to some specifics on BBDC, net asset value per share was $11.29 substantially unchanged compared to $11.28 reported at the prior fiscal year end. A testament to the portfolio stability. Net investment income for the quarter was $0.28 per share and out-earned our dividend of $0.26 per share.
Digging a bit deeper into the portfolio, we continue to actively maximize the value of the legacy holdings acquired from NBC Capital and Sierra. Our goal remains to divest these assets at attractive valuations as we did this quarter. Barings originated positions are now 93% of the portfolio at fair value, up from 76% at the beginning of 2022.
As a reminder, potential losses from the acquired assets are protected by credit support agreements limiting downside risks for BBDC investors. Our investment portfolio performed well during the fourth quarter, with the non-accrual rate declining from a mere 50 basis points in September to 30 basis points as of December.
There is no substitute for fundamental credit analysis, which has always been at the core of our investment philosophy and is reflected in the health of the BBDC portfolio today. Including the acquired Sierra and NBC assets, our total non-accruals are the industry leading 0.3% on a fair value basis and 1.6% of the portfolio on a cost basis. This is down from 1.5% on a fair value basis and 2.5% on a cost basis as of December 30, 2023.
Turning to the earnings power of the portfolio, the weighted average yields at fair value was 10.4%. We remained conservative on our base dividend policy. And our Board declared fourth quarter dividend of $0.26 per share, consistent with the prior quarter. On an annualized basis, the dividend level equates to a 9.2% yield on our net asset value of $11.29.
As we have separately announced, our Board has also declared a $0.15 dividend of supplemental dividends that will be paid in three quarterly installments taken together with our regularly scheduled dividend.
The dividend level equates to 11% yield based on December's net asset value. We believe the best measures of the portfolio's performance, non-accruals, net asset value, and NII were extremely compelling for the year ended December 2024. And we anticipate continued strength in the quarters ahead. I'll now turn the call over to Matt.
Matthew Freund
Thanks Eric. CBDC is managed by Barings LLC, a credit focused asset manager with over $420 billion of assets under management. The bulk of the portfolio is sourced from the Global Private Finance Team, an organization with more than 100 investment professionals located around the globe, providing financing solutions to high quality, market leading middle market companies sponsored by top tier private equity firms.
BBDT deployed $298 million of capital in the quarter, offset by $222 million of sales and repayments, resulting in net sales and deployments of $76 million. Reflecting one of the most active deployment quarters in recent history, repayments during the quarter included various non-core positions acquired with Sierra Income's legacy portfolio.
As Eric noted, we are executing on the strategy that we have been telegraphing for the past 24 months. Simplifying the portfolio and selectively investing in what we believe are the most compelling middle market direct lending opportunities in the market.
During our prior call, we noted that we had started seeing green shoots related to new deployment opportunities. Our gross and net originations during the quarter validated that anticipation. Originations activity was fueled both by add-on transactions as well as new issuer financings. The mix of our funding did skew somewhat towards add-on activity at a higher rate than historical averages. Which we believe was largely reflective of industry results during the period for scaled asset managers such as bearings.
As we evaluate forward-looking activity into the balance of 2025, we remain cautious, as Eric noted. Recall that the average transaction timeline from initial inbound activity to ultimate closed transactions typically ranges from three to six months.
Initial inbound transactions initially increased following the November elections. But as we closed 2024, the volume of inbound inbound activity started to recede. The deal landscape appears primed to support M&A activity in 2025. Supported by extended whole periods within private equity portfolios, interest rate stability, and a positive economic indicators that Eric mentioned. Juxtaposed against these favorable favorable characteristics, we have perceived in our private equity relationships and company management teams an underlying sense of uncertainty related to the intermediate outlook. All of this is to say that we are cautiously optimistic for the year ahead.
Turning to our current portfolio, 72% of the portfolio consists of secured investments, with approximately 69% constituting first lane securities. BBDC has experienced stabilization of interest coverage during 2024 and finished the quarter with a weighted average interest coverage of 2.2 times above industry averages and consistent with our results for the prior quarter.
We believe strong interest coverage demonstrates the merits of our approach, focusing on leading companies in defensive sectors and thoroughly underwriting their ability to weather a range of economic conditions.
The portfolio composition remains highly diversified, with the top 10 issuers accounting for 23.1% of the fair market value. Recall that the top two positions within the portfolio, Eclipse Business Capital and Ricade Holdings are strategic platform investments that we own and provide BBDC shareholders with access to differentiated, compelling opportunities to invest in asset-backed securities and litigation funding solutions. Two areas we believe to provide attractive total returns as well as diversification benefits for the broader portfolio.
Turning to portfolio quality, risk ratings exhibited minimal movement during the quarter, as our issuer is exhibiting the most stress classified as risk ratings 4% and 5% or 11% on a combined basis quarter over quarter compared to 10% in the immediately preceding quarter. Non-accruals accounted for only $8 million of fair market value within the portfolio and 0.5%, 0.3% of fair market value, which we believe is one of the lowest levels of non-accruals across the industry. We remain confident in the credit quality of the portfolio.
We expect BBDC's differentiated reach and scale coupled with its core focus on the middle market credit and focus on shareholders and our focus on shareholders will continue driving positive outcomes in the quarters and years to come.
The BBDC portfolio is a through the cycle portfolio designed to withstand a variety of economic environments and prevailing interest rate levels. To this end, BBDC was structured to align both fees and credit performance hurdles with shareholders.
Before turning the call over to Elizabeth, I'd like to share an observation from an industry call I participated in earlier this week. The presenters were focused on trying to dissect the causes of pick interest income and specifically whether pick signaled portfolio distress that could manifest itself in the quarters to come. I found the results to be confirmatory to our understanding, but wanted to offer this anecdote to the audience.
The presenters analyzed a large pool of loans and noted that of the loans reviewed, nearly 60% of those loans had a pick component during the fourth quarter of 2024 that did not have a pick component at the time of the original underwriting. Of this pool of loans with modified pick, EBITDA experienced a negative keger of approximately 20%, and loan to value substantially increased since the time of the original underwriting.
We regularly get asked about our pick income and whether we feel it is a sign of stress in the portfolio. We'll now take the opportunity to call out that beeing's pick interest income during the quarter was 5.1% of total investment income and compared to our trailing five quarter average of 5.7%. This combination of data points served as a reinforcement to the discipline and quality underwriting within the portfolio. I'll now turn the call over to Elizabeth.
Elizabeth Murray
Thanks Matt. On slide 15, you can see the full bridge of the NAB per share of movement in the fourth quarter. NAB per share was $11.29 as of December 31, which is a decrease of 0.2% over the prior quarter and an increase of 0.1% year over year.
Our net investment income exceeded the $0.26 per share dividend by $0.02 per share or 8%. Net unrealized appreciation from investments, CSAs. And FX equaled $0.08 and was offset by netized losses on the portfolio and FX of $0.13 per share. The net relies loss on the portfolio was predominantly due to this restructure of our investments in CEO, which is reclassed from unrealized depreciation.
The valuation of the credit support agreements increased by approximately $12.2 million. The fair value of the CRS CSA increased from $32.2 million in the third quarter to $44.2 million as of December 31.
During the fourth quarter, the Sierra portfolio had sales and repayments of approximately $12.5 million and had 23 positions remaining in the portfolio. Down from 28 positions as of September 30.
Year over year, we rotated out of approximately $100 million or 45% of the remaining Sierra portfolio in 2024. The fair value of the NBC CSA increased from $19 million to $19.2 million as of September 30, predominantly due to the rolling maturity of the contract board one quarter with four positions remaining. Our net investment income was $0.28 per share for the quarter or $0.30 per share on a pre-tax basis compared to $0.29 per share in the prior quarter and $0.31 per share for the fourth quarter of 2023.
For the year, net investment income was $1.24 per share compared to $1.20 per share for 2023. Investment income in the quarter was primarily driven by dividends from joint venture and platform investments and a fee associated with repayment activity. This is partially offset by a slight decline in interest income associated with the impact of decline in yields from the portfolio's base rates are lower quarter over quarter.
Incentive fee expense is slightly higher but continued to be at a normalized level. Our net leverage ratio, which is defined as regulatory leverage net of unrestricted cash and net unsettled transactions, was 1.16 times at quarter end, up slightly from 1.09 times and the quarter end of September 30. And it currently sits within our long-term range of 0.9 times to 1.25 times.
Our current leverage provides ample capacity to seize opportunities and pursue attractive deployment opportunities in the quarters to come. Our funding mix remains highly defensible both in terms of minority and asset class, including the significant level of support provided by the unsecured debt in our capital structure.
At December 31, our unsecured debt accounted for $1 billion of our fundings and equated to approximately 70% of our outstanding debt balances. We maintain a diversified funding mix by maturity, counterparty, and type, and have a limited near term of maturities on our debt outstanding with our ladder of maturities extending to 2029.
BBDC currently has $323 million of unfunded commitments to our portfolio companies, as well as $65 million of outstanding commitments to our joint venture investments. Our overall liquidity remains strong, with over $464 million of available capital, and we are well positioned to continue to support our unfunded commitments and new origination activity.
As mentioned earlier, the Board declared fourth quarter dividend or first quarter dividend of $0.26 per share, and special dividends totaling $0.15 per share and 11% distribution on net asset value. The special dividends will be paid in three equal quarterly.
Installments of $0.05 per share in each of the first three quarters of 2025. In 2024, we continued to be active users of our share repurchase plan and purchased 150,000 shares in the fourth quarter for a total of over 650,000 shares during 2024.
In addition, the Board authorized a new $30 million share repurchase plan for 2025. Our focus on share repurchases is one example of BBDC's thoughtful approach to aligning our interests with shareholders.
I'll wrap up our prepared remarks with a note on our investment pipeline. Thus far in the first quarter, we have made 81 million of new commitments and funded 50 million.
With that operator, we'll open the line for questions.
Operator
Thank you. And I'll be conducting a question and answer session. (Operator Instructions)
Finian O'Shea, Wells Fargo Securities.
Finian O'Shea
Hey everyone, good morning. I was looking at a name at is another slight mark, but it's a partial or or pick not accrual, and I was seeing if you could outline. Just the spirit of a pick non accrual and how that compares to the the regular definition of something that you don't anticipate, collection of full interest in principle for. Thank you.
Elizabeth Murray
Yes, and thanks for the call. And the way we determine that is when we meet with the investment team that was an investment that prior to us putting on pick on accrual it paid its full cash, which I believe at the time was a 15% interest rate. And we underwrote it where it would pay, I believe, half of that.
And so it's actually performing where we underwrote it and so when it was determined that they were going to start paying cash and they wanted to pick a certain portion, we didn't believe that we would be able to recover the full value including the pick, but we knew we could with the cash.
So that's why we thought it was prudent to put it on on a cool, but it is performing now as it was underwritten, it just for a certain period of time was performing above where it was underwritten.
Finian O'Shea
Okay, so it seems like you'll collect the regular principal but not the pick part of it.
Elizabeth Murray
Correct, and we're going to -- they're paying the cash current and we will collect the principal.
Finian O'Shea
Okay, that's helpful. Thank you, and what can you -- the CSA marks, could you run through of that or how much was interest rate or timing related versus fundamental?
Matthew Freund
Yeah, then. Good question. Overwhelmingly, it was directly related to the marks on Black Angus Steakhouse, which, as I'm sure you're reviewing the material. You'll see that there was a sequential quarter on quarter evaluation mark associated with that position and a corresponding increase in the value of the CSA. There was, as you alluded to, impacts of interest rate and timing, but the bulk of the change quarter on quarter is going to associate with the Black A at Steakhouse mark.
Finian O'Shea
Okay, great, it's all for me thanks so much.
Matthew Freund
Thanks so much.
Operator
(Operator Instructions)
Robert Dodd, Raymond James.
Robert Dodd
Hi, and congrats on the reporter and congrats on the continued portfolio rotation that's 2024. What are you going to do for us in 2025 on the portfolio rotation? So I mean just any thoughts on on how you expect that to progress through this year especially with uncertainty to the point on.
And it's easy to rotate a portfolio in an active market that inactive one or slower one. I mean, any thoughts on on how that might progress through through the year. I mean, really good job so far.
Bryan High
Yeah, hey Robert, it's Bryan. A couple of thoughts and then obviously Matt can chime in as well. But yeah, obviously we're going to continue to try to rotate out of the the non-Barings names from from the acquisitions with a focus on really trying to move the non-income producing assets to the best of our ability while also trying to maximize value so that we can get income producing assets which will hopefully benefit from an ROE perspective.
So that's kind of a goal of ours. Obviously, market timing is everything to your point on the overall market. The good news is this is fully ramped and we're kind of within our leverage targets. And so if there's not a lot of deal flow coming in. There's typically not a lot of repayments at the same time so it's relatively.
Easy to manage from that perspective. That being said, as Matt alluded to in his comments, we do have a decent pipeline of of new opportunities and expect to continue to originate consistent with our strategy previously.
Operator
Thank you.
Robert Dodd
On just kind of the comments about the uncertainty, I mean, as you said, the economy -- all the economic metrics for the overall economy look good right now. Obviously, tariffs are starting to be implemented. There's there's cost cutting, et cetera. I mean, so can you give us any kind of like where you have exposure to those things. I mean you have some other.
Transportation businesses, you have some automotive, et cetera. And then a lot of services, obviously. But you know how much of that the services side is exposed to government spending, how much of that the hard goods are exposed to tariffs, any color you can give us there?
Matthew Freund
Yeah, so look, we're pulling out the playbook from several years ago kind of running these analysis on the portfolio. Fortunately for all of us it's not the first time we've done it.
We've done a kind of an initial, frankly, props to the team for proactively organizing some efforts around this analysis. Our pre-lien indications are that somewhere between 60% and 75% of the portfolio will be unimpacted by regulatory uncertainty. And then I think that the balance is going to be a sliding scale depending on exactly what the underlying issuer does and exactly where they are operating.
It's obviously way too early to say in terms of where we're headed from a portfolio perspective. We do have, as I'm sure many managers do, we have our kind of top. Our top hits in terms of where we think kind of the 15 issuers are that might be the most impacted.
And as you can imagine, we're staying in contact with them on a more regular basis. But certainly optimistic that well-managed businesses owned by relatively sophisticated private equity firms are going to be in a position to modify their cost structures and adapt to a changing environment. I think that perhaps equally as important is just the opportunity for net deployment on a go forward basis, and that's where we've really seen a lot of uncertainty, private equity firms we've talked to.
Early in 2025 listed a slate of probable sales of their portfolio companies. And I would venture to say that that is kind of shrunken into a trickle in terms of where people have their heads now from a from a sale process perspective. So it's just a broader theme around uncertainty and we're obviously going to keep our ear to the ground on both fronts.
Robert Dodd
Got it. Thank you.
Operator
Casey Alexander, Compass Point.
Casey Alexander
Yeah. I just want to ask it's I'm -- maybe asking the same question in a different way. Okay, given that your comments regarding the uncertainty and the lack of kind of deal proposals, is it fair to think and actually fee and other income had a pretty good quarter in the fourth quarter. But is it fair to think of fee and income?
As you look out across 2025, it is likely to be, flat to down as opposed to -- I think a lot of people were thinking it was going to be up in 2025. Because they thought it was going to be very robust deal activity.
Matthew Freund
Yeah, it's a fair question, Casey. I wouldn't say that it's going to be flat to down. I think that our current expectation is it's going to kind of be flat to flat. And the reason for that is just the broader maturity dynamics within the overall portfolio.
And so while you may not see the OID acceleration associated with upfront fees, what I do think you'll -- what I -- this is, here we are in February. So I forecasting the whole year but like what my what my gut tells me is that we're probably going to see some more activity with respect to amendment fees, extension fees, those sorts of things.
And so while you what you may lose from an OID acceleration perspective, you're probably going to make up from an amendment fee perspective. And that's my gut in terms of where we are now of course if M&A activity picks up. Then the reverse will also be true, but with a kind of fully invested in season portfolio that that's our operating base case right now.
Casey Alexander
Well I mean, while you're on the phone. You could take a crack at 2026 if you want to. So like I said, that fourth quarter number was a bit high. Was there a one time or a single deal that contributed to a little bit higher fee and other income in the fourth quarter than we've seen in previous quarters?
Matthew Freund
Yeah, I would say that the answer to your question directly is yes. There was a transaction that did have a more substantive fee component to it in the fourth quarter. And I would tell you that it did create a little bit of an outlier dynamic. And so if you were looking for modeling purposes for the forecast, I would suggest that you use kind of a trailing fourth quarter average as more of a baseline.
Operator
Thank you very much.
Matthew Freund
You got it.
Operator
Thank you. We reached the end of our question and answer session. I'd like to turn the floor back over for any further closing comments.
Eric Lloyd
Thank you, Kevin, and thank you to everybody who participated on today's call. Please stay safe and have a great day.
Operator
Thank you. That does include today's teleconference and webcast. We disconnect your line at this time, and have a wonderful day. We thank you for your participation today.
