Earnings call: Barings BDC reports solid Q4 and annual performance

Barings BDC, Inc. (NYSE:) has reported a positive close to the year in its latest earnings call, highlighting an increase in net investment income, a consistent dividend payout, and a rise in net asset value (NAV) for the quarter and year ended December 31, 2023.

The company focused on the strength of its portfolio, the strategic rotation out of non-core assets, and share repurchase initiatives. The call also addressed the issuance of a new $300 million senior unsecured note, aimed at bolstering the capital structure, and discussed the company’s leverage strategy and foreign currency management.

Key Takeaways

• Barings BDC reported an increase in net investment income and NAV per share to $11.28.
• Total dividends paid to shareholders remained consistent with prior quarters.
• The number of issuers on non-accrual declined, indicating a well-performing portfolio.
• The company is rotating out of non-core assets and repurchasing shares.
• A new $300 million senior unsecured note was issued to enhance capital structure flexibility.
• Net leverage ratio stood at 1.15 times, within the target range of 0.9 to 1.25 times.
• The company made $42 million in new commitments, with $35 million closed and funded in Q1.
• Competitive deal environment noted, with all-in yields in the low double-digits.

Company Outlook

• Barings BDC expects risk ratings 4 and 5 to decline in the first quarter.
• The company plans to simplify its strategy and structure, focusing on maximizing recoveries.
• Investments in Eclipse and Rocade are seen as valuable in the event of an economic downturn.

Bearish Highlights

• The slow economy and decreased M&A activity have impacted the industry.
• Capital is being raised but not deployed due to market conditions, leading to compressed spreads.
• Repayments increased in Q4, and a further increase is expected if deal flow rises.

Bullish Highlights

• Despite market challenges, the company’s portfolio shows resilience.
• The focus on sponsor-backed issuers and defensive industries has been beneficial.
• All-in yields continue to generate upper single-digit returns despite spread compression.

Misses

• There was an increase in repayments in the fourth quarter, though some were self-induced.
• Pressure from investors to deploy capital amidst competitive market conditions.

Q&A Highlights

• Executives emphasized maintaining a leverage ratio within the target range while balancing share repurchases.
• The company is working to mitigate the impact of foreign currency movements on earnings.
• Management declined to comment on the broader strategy regarding the management of equity positions.

Barings BDC’s earnings call painted a picture of a company navigating a complex market with strategic moves. The company’s efforts to rotate out of non-core assets and manage its capital structure through new issuances and share repurchases were underscored. While acknowledging the competitive nature of the market and investor pressure to deploy capital, Barings BDC remains focused on maintaining a diversified portfolio and delivering steady returns. The company’s executives conveyed a cautious optimism, expressing gratitude for the interest of participants and anticipation of continued strong performance in the upcoming quarter.

InvestingPro Insights

Barings BDC, Inc. (BBDC) has not only shown a positive earnings report but also presents an interesting profile when considering the real-time metrics and InvestingPro Tips. The company’s strategic financial maneuvers and portfolio resilience are further illuminated by the following data points:

• With a market capitalization of $1.02 billion USD, Barings BDC is positioned as a significant player in its sector.

• The P/E ratio stands at 10.76, potentially indicating a valuation that is attractive relative to earnings.

• Revenue growth has been robust, with a 31.98% increase in the last twelve months as of Q4 2023 and a quarterly revenue growth of 19.5% for Q4 2023.

These metrics underscore the company’s solid financial performance and growth trajectory. Additionally, the InvestingPro Tips provide further insight:

• Barings BDC has demonstrated a commitment to shareholders by raising its dividend for 4 consecutive years and maintaining dividend payments for 17 consecutive years.

• The stock is currently trading near its 52-week high, reflecting investor confidence and market recognition of the company’s performance.

Investors seeking to delve deeper into Barings BDC’s financial health and strategic positioning can find additional insights with InvestingPro, which offers a total of 7 InvestingPro Tips for BBDC. To explore these tips and gain a comprehensive understanding of the company’s prospects, visit https://www.investing.com/pro/BBDC. Don’t forget to use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription.

Full transcript – Triangle Capital Corp (BBDC) Q4 2023:

Operator: At this time, I would like to welcome everyone to the Barings BDC, Inc. Conference Call for the Quarter-Ended and Year-Ended December 31st, 2023. All participants are on a listen-only mode. A question-and-answer session will follow the company’s formal remarks. [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. At this time, I will turn the call over to Joe Mazzoli, Head of Investor Relations for Barings BDC.

Joe Mazzoli: 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 these projected and 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 31st, 2023, 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’ll 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 2023 earnings presentation that was posted on the Investor Relations section of our website. On the call today, I’m joined by Barings’ Co-Head of Global Private Finance and President of Barings BDC, Ian Fowler; the BDC’s Chief Financial Officer, Elizabeth Murray; and BDC’s Co-Portfolio Managers, Bryan High; and Matt Freund. We will dive into some quarterly results momentarily. But first, I would like to comment on some of the successes we experienced during the entirety of 2023. Investing in the illiquid assets is often poorly suited for short-term investors. Measuring performance in a single quarter really gives investors the appropriate lens to measure a manager’s performance. Net investment income, total dividends paid to shareholders and NAV for BBDC, all increased during 2023. While these items are important, we are equally focused on some developments not immediately captured in these metrics. During 2023, we continued executing on our commitment to rotate out of non-core assets including three legacy MVC Capital (NYSE:) positions and more than $25 million of investments to legacy Sierra Income positions. We again demonstrated our best-in-class alignment with shareholders, repurchasing more than 1.8 million shares for nearly $15 million. The number of issuers on non-accrual declined from 7% at December 2022 to 4% as of December 2023. We manage our portfolio based on operational metrics that drive stability of returns, and we expect that in the coming quarters, the commitment to our core strategies will continue to deliver for shareholders. Successful financial results such as those measured by NAV and distributions over time are the outputs, not the inputs to a successful asset manager. BBDC exhibited stability and strong operating results during the quarter ended December 31st. Our focus on the top of the capital structure, investments in sponsor-backed issuers is serving investors well in these uncertain times. Our portfolio is predominantly sponsor-backed and is complemented by a selection of non-sponsored and platform investments. Our portfolio strategy is outlined in greater detail on Slide 5. This strategy serves as our guiding light as we continue to successfully invest throughout the market and deliver compelling returns to our shareholders. Net asset value per share was $11.28 compared to the prior quarter of $11.25 and $11.05 at December 2022, reflecting a year-over-year increase of 2.1%. Net investment income for the quarter was $0.31, unchanged from prior quarter. Our performance is the result of our focus on the top of the capital structure and within more defensive industries. We believe BBDC remains well positioned for any further volatility and uncertainty in the market going forward. Investment activity during the quarter reflected a modest degree of net repayments, driven by light transaction activity during the quarter and balancing the use of our share repurchase program with other opportunities. As our shareholders know, we are actively working to maximize the value in the legacy holdings acquired from MVC Capital and Sierra Income and rotate them into compelling Barings-originated positions. Non-Barings-originated assets now only amount to 11% of the portfolio at fair value. That’s down from 24% at the beginning of 2022 and potential losses from these assets are protected by the credit support agreements limiting downside risk for BBDC investors. Our investment portfolio continued to perform well in the third quarter. Including the acquired Sierra and MVC assets, our total non-accruals are 2.5% of the portfolio on a cost basis and 1.5% on a fair value basis, with three assets being removed from non-accrual during the quarter. With the exception of two investments, all of our non-accrual assets were from acquired portfolios and therefore, are covered by our credit support agreements. Subsequent to year-end, we removed our investment in Core Scientific, Inc. from non-accrual status in connection with its January 2024 exit from Chapter 11 bankruptcy and our receipt of shares of its common stock in exchange for the debt investments that we previously held in part of the bankruptcy proceedings. On a pro forma basis, removing Core Scientific that takes down accruals down to 0.6% on a fair value basis and 1.3% on a cost basis. Turning to the earnings tower of the portfolio. The increase in base rates has largely been reflected within the portfolio with weighted average yields on floating rate investments stabilizing at 11.2%, substantially comparable to the prior quarter’s figures. We remain conservative on our base dividend policy and our Board declared a fourth quarter dividend of $0.26 per share, consistent with the prior quarter. On an annualized basis, the dividend levels — level equates to a 9.2% yield on our net asset value of $11.28. Now, I’ll turn the call over to Ian.

Ian Fowler: Thanks, Eric and good morning. Recall that BBDC is managed by Barings LLC, a credit-focused asset manager with more than $300 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 preeminent middle market companies sponsored by private equity firms. BBDC’s portfolio decreased by $51 million on a net basis in the quarter, with gross fundings of $192 million, offset by $244 million of repayments and sales which included approximately $50 million of sales to our Jocassee joint venture. Activity during the fourth quarter continued to be tempered as private equity buyers take a pause in the rising rate environment which we believe has a meaningful impact on enterprise valuations. Based on recent conversations, investment bankers who serve as the tip of the spear have reiterated their expectation that LBO activity is expected to meaningfully increase in the quarters to come. With that said, the messaging has been consistent for the past 12 months as more and more opportunities are being added to the backlog, but the dam has not yet broken. Consistent with the prior two quarters, we have seen an increase in the number of early-stage opportunities within the platform, but unfortunately, conversion rates to close deals are trending towards historic lows. Sponsors continue to execute on add-ons for companies already within their portfolios, which makes sense as add-on multiples are below original platform purchase price in effect, enabling sponsors to reduce their cost bases and hedge against any compression and exit multiples. Investors in Barings BDC benefit by having a seasoned portfolio that provides opportunities to deploy capital in two issuers, we already know well. Refinancing activity has started to increase as performing issuers have plentiful access to capital without the need to sell. There is a logical reason to believe transaction volumes improve in the months to come, namely a record backlog of sell-side mandates among the investment banking community and a need for private equity managers to show distributions to their LPs. Counter to those facts is a high level of uncertainty created by two arm conflicts, persistently high inflation, rapid increase in interest rates in the forthcoming political cycle. When opportunities ultimately do convert into an increase in closed transactions, we will continue to use our disciplined underwriting strategy to invest capital in the most compelling opportunities. Turning to our current portfolio. 74% consists of secured investments, with approximately 67% of investments constituting first-lien securities. Interest coverage within the portfolio stood at 2.2 times, modest decline from 2.3 times a quarter earlier. We are forecasting that a steady-state weighted average interest coverage for the portfolio will ultimately fall between 2 and 2.25 times as the full impact of higher rates is reflected in issuer’s financials and performance. Our avoidance of various industries prone to economic volatility, oil and gas, restaurants, retail, metals, among them, has proven to be a sound strategy against a backdrop of less economic predictability. One of the benefits to a predominantly sponsor-backed strategy has proven out over the past several quarters. Combined with what we believe were reasonable going in leverage multiples, the median gross margin in the North American Global Private Finance portfolio, a portfolio similar to BBDC stood at 49%, up from 45%, one year earlier and gives us confidence that our issuers are successfully pushing through price increases to combat inflationary pressures in their businesses. Adjusted EBITDA margins for the same sample set were 22%, up from 21% in prior year’s period, believed to be a reflection of the fact that wage gains have consumed some degree of gross margin expansion previously noted. While not perfectly comparable metric period-to-period as the volume of transaction activity in the past five quarters will skew these metrics somewhat, we believe we have reason to feel comfortable with the performance of the portfolio. The portfolio composition remains highly diversified with the top 10 issuers accounting for 20.1% of fair market value. Recall that the two top positions within the portfolio, Eclipse Business Capital and Rocade Holdings, our platform investments originating middle-market loans. These positions have a number of underlying issuers. Assets included in the other classification include structured positions and certain acquired positions that will not be originated on a new basis going forward. As Eric highlighted, we anticipate rotating of these positions as market conditions allow in the quarters to come. Risk ratings exhibited minimal movement during the quarter as issuers exhibiting the most stress classified as risk ratings 4 and 5 were 7% on a combined basis quarter-over-quarter. We anticipate this figure to decline when rolling to the first quarter in light of public developments with one of our issuers, Core Scientific, as Eric mentioned. Encouragingly, we also experienced some positive movement at certain issuers performing consistent with expectations at underwriting have outperformed during the fourth quarter. We remain confident in the credit quality of the underlying portfolio, the uncorrelated nature and associated value of investments in Eclipse and Rocade should bolster the portfolio in the event the economy enters into a long expected recession. BBDC is committed to delivering an attractive risk-adjusted return to shareholders over a long time horizon. We are investors of credit and middle-market companies. Our global reach and significant scale across asset classes gives BBDC a unique ability to select risk and return compared to other managers, but our core middle market credit is what we do. I’ll now turn the call over to Elizabeth.

Elizabeth Murray: Thanks, Ian. On Slide 15, you can see the full bridge of the NAV per share movement in the fourth quarter. NAV per share was $11.28 as of December 31st, which is an increase of 0.3% over the prior quarter and more than a 2% increase versus December 31st, 2022. Our net investment income exceeded the $0.26 per share dividend by 19% and share repurchases added another $0.01 per share. This was partially offset by net unrealized depreciation and realized gains of $0.03 per share. The valuation of the credit support agreements increased by approximately $3.6 million, which is driven by unrealized depreciation in the underlying Sierra portfolio and a reduction in the applicable discount rates during the quarter. Our net investment income was $0.31 per share for the quarter or $0.33 per share on a pre-tax basis, compared to $0.31 per share in the prior quarter. This is driven by continued benefits from higher base rates and dividend income from our platform investments and joint ventures. Our net leverage ratio, which is defined as regulatory leverage net of cash and net unsettled transactions was 1.15 times at quarter end, down modestly from 1.18 times in the quarter ended September 30th and currently sits within our long-term target of 0.9 to 1.25 times. Our funding mix remains highly defensible, both in terms of seniority and asset class, including the significant level of support provided by the unsecured debt and our capital structure. At December 31st, our unsecured debt accounted for $725 million of our fundings and equated to 50% of our outstanding balances. During the first quarter of 2024, Barings BDC issued a new $300 million senior unsecured note to enhance the flexibility of our capital structure. The net issuance was significantly oversubscribed, and we are pleased to position BBDC with significant operating flexibility in the quarters to come. Pro forma for the note issuance, BBDC now has more than $1 billion of unsecured debt liabilities accounting for more than 70% of our debt outstanding. We continue to maintain significant flexibility in our capital structure with the next bond maturity in the second half of 2025 and pro forma for the $300 million notes issued, we have expanded our ladder of maturities out to 2029. Barings BDC currently has $241 million of unfunded commitments to our portfolio companies as well as $65 million of outstanding commitments to our joint ventures. We have available cushion against our leverage limit to meet the entirety of these commitments have called upon. Eric noted earlier that we have actively been utilizing our share repurchase plan during 2023. The fourth quarter was no exception as we repurchased nearly 450,000 shares during the period and over 1.8 million shares in total for 2023. In addition, the Board authorized a new $30 million share repurchase plan for 2024. Our focus on share repurchases is one example of BBDC’s thoughtful approach to aligning our interest to shareholders. As mentioned earlier, the Board declared a first quarter dividend of $0.26 per share, a 9.2% distribution on net asset value. We consistently evaluate our dividend policy in the same manner we manage our broader business, driven by stability. Since Barings became the adviser in 2018, we have a track record of increasing or maintaining a stable dividend. We believe we can maintain a stable dividend even in a normalized rate environment, and we expect that our platform investments, Eclipse and Rocade as well as our Jocassee joint venture will continue to generate significant dividend income. These investments help highlight the importance of less correlated assets and the benefit of a diverse portfolio. I’ll wrap up our prepared remarks with a note on our investment pipelines. Thus far, in Q1, we have made $42 million of new commitments, of which $35 million have closed and funded. With that, operator, we’ll open the line for questions.

Operator: Thank you. The floor is now open for questions. [Operator Instructions] The first question is coming from Finian O’Shea of Wells Fargo Securities. Please go ahead.

Finian O’Shea: Hey, everyone, good morning. Question for Ian. I appreciated your color on transaction volumes being slow to transpire. Question is, if that continues to stall, do you think we’re looking at sort of a triage, a great triage from private equity? And if so, if you then have to take keys for companies, can you talk about how well you are positioned for that? Maybe how many sets of keys you could practically take on at the platform? Thank you.

Ian Fowler: Good morning, Fin. Yeah, so like I said, we had hoped that things were going to pick up that’s investment bankers are pretty good about talking their book. And that really hasn’t happened thus far this year. Now, what I will say is, there’s a lot of pressure for this market to open up. So I would — unless there’s some kind of black swan event, I would be really surprised if we have a low anemic year again of M&A activity. I mean, we’re looking at — base rates have plateaued. The Fed has telegraphed that they’re likely coming down. That’s obviously a positive given the valuation gaps that exists in the market between buyers and sellers. We have the election, so we need to get through that political uncertainty. I think most importantly, though, and you raised private equity and obviously, we’re focused on private equity. I think one of the biggest triggers is the pressure on private equity and the fact that a lot of LPs now are tying LP commitments to realizations. And so quite frankly, I think based on what we’ve seen — the data we’ve seen, the valuation gap isn’t huge, but it’s not what private equity firms were expecting. And I think, ultimately, they’re going to be forced to realize some companies, maybe lose a turn or two on the exit multiple, but still generate historically decent returns. So I think volume is going to pick up in ‘24 as we get later in the year and ‘25. If rates come down materially, it could be a watershed environment. Of course, if that doesn’t happen, we’re still in this period of and for those platforms that have mature portfolios. There’s still that incentive to do add-on acquisitions and create value. And that allows us to put more money to work. 70% of our origination last year came from our portfolio. It also means low runoff. And so that creates AUM stability. So that’s positive. If this really gets stretched out, I think this is where you’re going with your question, then we’re going to have to figure out how to deal with some of these companies if they’re not performing, we’re, of course, prepared. It’s something we don’t want to do to take the keys. I can tell you that it’s not in the BBDC, but we had one company during COVID that we had to take the keys in North America and the company is up for sale. So we’ve got experience doing that. We also have a very large team, over 100 people globally. So I think we’re pretty well prepared if we have to go down that road, but that’s kind of the — that’s something you don’t really want to go to unless you have to.

Eric Lloyd: And I’ll just build on that. The $100 million that Ian referenced, that’s just on the — that’s on the investment side in the direct lending area. In addition to that, we have a deep legal team internally that has strong experience working through situations like this. We have a special situation now called Capital Solutions team, has a lot of experience working through things like this. So at a firm level, we kind of bring all resources to bear and all expertise to bear to make sure we have the best outcome for our investors in those type of challenging situations.

Finian O’Shea: Very helpful. Thank you. This is a follow-up on the recent bond issuance this quarter, January or February. Understanding the benefit of unsecured, it’s also a more expensive market, and it looks like you already had adequate unsecured debt for your ratings and so forth. So seeing if you could provide color on the thinking there and the timing and why more unsecured? Thank you.

Elizabeth Murray: Yes. Thanks, Fin. When we originally went to market in 2021, we had messaged at that point that we would be a serial issuer. And so, of course, the markets have been closed for the past couple of years, and they recently opened up with several other BDCs in the market and looking at our maturity ladder and also our mix between secured and unsecured, we felt like it was an appropriate time and this again extends our maturity ladder. As soon as the $300 million came in, we used that to repay some of our credit facility. So I think long-term, this really sets us up for success. I’ll also say, Fin, that we did swap the interest rate on this. So we have a swap in place.

Eric Lloyd: Thanks so much.

Operator: Thank you. The next question is coming from Kyle Joseph of Jefferies. Please go ahead.

Kyle Joseph: Thanks guys. Good morning. Thanks for taking my questions. I think first one for Ian. Just kind of want to get your take on how the competitive environment has evolved over the last few years with kind of the slower deal flow, as you mentioned, but also recognizing BDCs at least publicly have been resilient to higher rates in inflation. But give us a sense for what spreads have been doing and what if the steel environment were to come to fruition, expectations for spreads in that environment?

Ian Fowler: Yeah. Great question, Kyle. Good morning. So, like I said, obviously, the economy is slow. M&A activity down in our space in the last few years. There’s more platforms that have been created. A lot of capital has been raised, but not deployed, just given the conditions in the M&A market. So there’s a lot of pressure coming from investors for managers to deploy capital. Again, I think if you’ve got a portfolio, you’re in a sweet spot because at least you’re putting capital to work in companies you know well and helping those companies become bigger, better, stronger, more diversified credits. So that’s sort of a safer bet. And if you’ve got to play the new M&A market, which not only being low in volume, the quality of deals has been very inconsistent. And so that’s a tough place to be to have that pressure to put money to work. I think there’s so much capital being raised because we’re in this Nirvana situation where for this asset class, it’s the first time historically in years where you’ve had both an increase in base rates and spreads and as we’ve talked about in the past, you’re generating all-in yields in the low double-digits. I will say that just given the competitive nature and the number of platforms, it is getting competitive, especially for good quality deals. You can’t really compete on leverage, just given where rates are. So we’re really seeing deals being moderately levered around, call it, 4.5 times senior. Docs are still in our favor as lenders. But as you kind of raise, we are seeing some compression in spreads in the last quarter of last year. I’d say, spread — or the last half of last year, I’d say spreads compressed about 50 to 75 basis points, upfront is about 50 basis points, but all in all, you’re still generating upper single-digit yields. I think as the market opens up and more attractive opportunities are out there, I think that competitive nature will continue. I mean — it’s again, historically, this asset class generates senior debt, 6% to 8%. We’re over that right now. So I think you have to expect over time as the market becomes more normalized, you’re going to have some reversion of all-in yields back to sort of the historical returns that we’ve had in the asset class.

Kyle Joseph: Got it. Helpful. And then one follow-up just on repayments. Obviously, they were elevated in the fourth quarter, but it sounds like some of that was self-induced for lack of a better term than you guys are rotating out of Sierra and NBC. But if we do get this pickup in deal flow, would you expect a corresponding increase in repayments as well? Or how does the higher rate environment influence that?

Matt Freund: Yeah. Kyle, this is Matt. I would certainly agree with the sentiment that if we see kind of an increase in deployment opportunity, that’s necessarily going to be a corollary to increased exit opportunities on the other side. I think that if we look at the portfolio, average hold horizon is kind of stretched up to, call it, four-ish years, plus or minus. And while we feel really good about the quality of the credit in the portfolio, eventually, we’re going to see some turnover. So it’s not something that concerns us in any capacity, but I think it will start to return to kind of a historical means. Does that answer your question?

Kyle Joseph: Yeah, yep. Thanks guys. Appreciate it.

Matt Freund: Of course.

Operator: Thank you. The next question is coming from Robert Dodd of Raymond James. Please go ahead.

Robert Dodd: Hi guys. On the Core Scientific. You mentioned — by my math, you probably got a little over 6 million shares now on that after the exchange. I mean, is it the same price of stock that’s publicly traded? And what’s the intent there? I mean are you intending to hold that? Are you locked up or you’re looking to liquidate the shares you’ve got from that position and maybe rotate them into something income producing?

Bryan High: Yeah. Hey, Robert, this is Bryan. So in terms of the stock itself, it is the same stock that you would see on the public markets. Our intent there is to maximize recoveries, but also I think we’ve been pretty clear that, that’s not part of our ongoing strategy. So marrying those two things together over the course of the coming quarters is sort of on us to make decisions around what to do with that. Obviously, having a public stock gives us some liquidity, and that was the intent in making that election within the bankruptcy proceeding.

Robert Dodd: Got it. Thank you. And because it ties in, I mean your 15% equity, some of that obviously is income producing located, et cetera. But obviously, this, as of today, pro forma for this equity is going to be 16% plus. I think if my math is right. Can you give us a recap back what’s a reasonable timeline to get at least the non-income producing piece of equity down into the — into maybe the mid-single-digit?

Bryan High: So it’s a great question. And so as we’ve tried to articulate in past quarters, we have described our investment philosophy and kind of the buckets around strategy. And as it sits as of 12/31, we kind of have 8% of the portfolio that sits in other. The big kind of noteworthy items in that other bucket today would include two large European equity positions. The position in Core Scientific that was previously a debt security and will now be an equity position, as you know and then a handful of other candidly, non-core, non-future style strategies. As we think about where that 8% goes over — and so I think organizationally, we’re really focused on the 8%, not necessarily just on the equity piece of it, but on the 8% of the other. And the important distinction is that Rocade and Eclipse, both constitute equity, but we expect those will be part of our go-forward strategy kind of in the perpetuity. And so as we kind of roll forward four quarters in the future, our hope would be that we could cut that number, that 8% non-core to something closer to 4% to 5% by the time we get to the end of the year, the biggest movers in that are going to be one of the two large European equity positions we’re hoping to monetize and then Core Scientific public equity, which we are hoping to monetize, of course, only at levels that we find to be reasonable returns of capital. And so I would guide you to that benchmark as we look forward to the next handful of quarters.

Eric Lloyd: And as a reminder, those two large European equity positions that don’t have yield were acquired. Those aren’t things that we made an underwritten investment on. Unlike Rocade or Eclipse, which have attractive yields that come off them.

Robert Dodd: Got it. Got it. Yeah. One more, if I can, it relates to this. On Rocade, I mean you made a, I think, $15 million incremental investment. I’m sure this platform made more, but in that business, I mean is that — was that opportunistic that was a big case or whatever it is, however I should turn that? Or is that kind of a temporary increase? Or should we expect it to continue to potentially grow at that pace? I mean, it grew about $30 million during 2023. Is that the kind of growth that platform could add and it’s income producing in a good return as well. So not criticizing, just trying to scale the growth opportunity there.

Elizabeth Murray: Yeah, Robert, good question. And on Rocade, when we initially made the investment, the platform as a whole had a $250 million preferred equity target. And so they’re able to draw on that. And so the $15 million that you’re referencing was just a preferred draw. And I believe we have about $17 million left on that draw. We don’t anticipate much to be drawn in 2024. It was just, say, we’re ramping in 2023 and getting a credit facility in place. But you can just know that once that unfunded amount has been drawn, we are not going to make any additional commitments at the BDC level.

Robert Dodd: Got it. Thank you.

Operator: Thank you. The next question is coming from Casey Alexander of Compass Point. Please go ahead.

Casey Alexander: Hi. Good morning. And thank you for taking my questions. First off, there’s been some off-hand criticism of the BDC of surrounding the degree of complexity that the BDC has. And a good for instance here in this quarter, is the puts and takes from forward currency contracts that it costs about $9.5 million or about a $0.09 per share swing that had not happened at all. This would have been a fabulous quarter. So I think investors would benefit if you could explain why these puts or takes are there, what the foreign currency contracts are covering? Are they doing what they’re expected to do relative to the investments that they’re covering? And what should we expect from that in the future? Because that’s a pretty big swing to earnings that could have made this a good quarter, a really fabulous quarter.

Matt Freund: Yeah. Thank you for the question, Casey. And I certainly agree that there are layers to our strategy and to our structure based on kind of a historical makeup that had just clouded some of the picture. We’re working to simplify it, and we will continue to do so. Specific to your question, and so let me just, at a high level, describe why these are in place and then give you some perspective in terms of how to interpret it this quarter as well as where we expect it to go in the future. And so as I think our investors know, we have a global focus at Barings and historically speaking, whenever the public vehicle was acquired in 2018 and then subsequently ramped, we used a fair percentage of European assets to do that. And so, as we think about the non-USD-denominated portions of our portfolio, we are not in the business of taking FX risk on those par and principal positions. And so what we do is, we are rolling FX — we maintain rolling FX hedges on a quarterly basis that actually insulate kind of the portfolio performance from the FX movement. Admittedly, as you have appropriately noted, that will — that can have the capacity to create volatility if the FX movements are happening within the quarter and then whenever the FX hedges are themselves rolled. And so that did happen this quarter that also coincidentally happened last quarter. If you look at the movement between the USD, EUR FX rate from October 1st to December 31st, you’ll see that the euro strengthened meaningfully. As part of that, whenever those contracts were rolled, there was a meaningful FX gain that was kind of recognized with respect to that position. In terms of the go-forward strategy, I’m confident in telling you that foreign transactions, non-US-denominated transactions will be a lower percentage of the portfolio as we continue moving forward. And we are also actively working to kind of figure out ways to mitigate the severity of the movement that we see on the FX line, because we agree with you that it creates a little bit more of a cloud that actually intended to be a net neutral impact to the underlying shareholder.

Casey Alexander: All right. Thank you. Secondly, in the originations and repayment schedule, there was a significant amount of repayments that were actual sales, not to the JV, but outside the platform. And I’m looking at the net debt to equity ratio that you’re reporting on the last page of your release of 1.15 times. I mean should we think — I mean, it clearly looks like you’re trying to manage to a particular level. Should we be thinking about that as kind of the sweet spot of where you’d like to stay? Or do you think that you’ve calmed things down in the portfolio a little bit as you get rid of some of the non-income producing equity, you can take that number up a little bit and generate a little higher ROA. How are you thinking about managing to that level?

Matt Freund: Yeah. I’ll start and then want to make sure that Elizabeth has a comment — has an ability to comment on the leverage targets generally. So our stated target is 0.9 to 1.25 times. We will and intend to operate within that range. As a theme for us this quarter, I think that we wanted to demonstrate flexibility. So we were focused on kind of the senior unsecured issuance, which gives flexibility to our capital structure. We appreciate that historically, we’ve run a little bit higher in terms of our leverage ratio than perhaps we really wanted to. And so I think that there was certainly an active — there was a very active momentum around freeing up some capacity for possible investment opportunities here moving into 2024. And so as we think about where we want to be, where we will operate, we have no change in our guidance to the 0.9 to 1.25 times. But I do think that, to your point, is there capacity when we see opportunity to invest to perhaps increase that leverage ratio? The answer to that, I think, is absolutely. I want to make sure that Elizabeth has a chance to maybe augment any of those comments.

Elizabeth Murray: Yeah. What I would add, Casey, when we look long-term at our leverage, we’re trending between 1.1 and 1.2 times and I think you’re going to continue to see that trend. But we also want to have that flexibility if we do see investment opportunities to be able to take them. And then we also balance that with share repurchases. We don’t ever want to be in a position where leverage is so high that we aren’t able to repurchase shares. So we balance all three of them.

Casey Alexander: Well, fair enough. Thank you for that Elizabeth, because I do think that where the stock closed last night at 0.81 times shareholders would like you to see you continue with the share repurchases. My last question, and you may want to pass on this, but I’m going to throw it out there anyway. The core position, equipment leasing position was actually significantly larger than just what you held on balance sheet at Barings. It was probably close to double that size. So I’m just wondering, are you guys managing the equity position in coordination with the rest of the platform? Or are you guys managing your position independent of position that’s held at the rest of the Barings’ platform? And that will be my last question. Thank you.

Bryan High: Yeah, Casey, I appreciate the question. It’s Bryan again. I don’t think we’re going to comment on the broader Barings platform strategy. So I will take you up on passing on that question, but —

Casey Alexander: I’m not surprised, but it was worth a shot. It cost me nothing to ask the question.

Bryan High: No worries.

Casey Alexander: It’s all right. Thanks, Bryan.

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

Eric Lloyd: I just really want to thank everybody for dialing in and your interest in us, and we look forward to following-up with you and putting together another great quarter for you. Thanks very much.

Operator: Ladies and gentlemen, thank you for your participation. This concludes today’s event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.

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