Barings BDC - Earnings Call - Q3 2020
November 10, 2020
Transcript
Speaker 0
At this time, I would like to welcome everyone to the Barings BDC, Inc. Conference Call for the Quarter Ended 09/30/2020. All participants are in a listen only mode. A question and answer session will follow the company's formal remarks. 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.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 discussed disclosed under the section titled Risk Factors and Forward Looking Statements in the company's annual report on Form 10 ks for the fiscal year ended December 3139, and quarterly report on Form 10 Q for the quarter ended 09/30/2020, each as filed with the Securities and Exchange Commission. Barings BDC undertakes no obligation to update or revise any forward looking statements unless required by law. At this time, I will turn the call over to Mr.
Eric Lloyd, Chief Executive Officer of Barings BDC. Ladies and gentlemen, please stand by. We need to bring Mr. Lloyd back online. Mr.
Lloyd, please go ahead.
Speaker 1
Thank you. And I guess this goes with 2020. We start conference calls with challenging situations like this. So apologize for that, I got dropped. Thank you, Donna.
Good morning, everyone. We appreciate you joining us for today's call, and I hope you and your families are doing well and staying healthy and positive during these times. Please note that throughout today's call, we'll be referring to our third quarter twenty twenty earnings presentation that's posted on our Investor Relations section of our website. On the call today, I'm joined by Barings BDC's President and Barings Co Head of Global Private Finance, Ian Fowler Tom McDonald, Managing Director and Co Portfolio Manager Brian Hai, Barings Head of U. S.
Special Situations and Co Portfolio Manager and the BDC's Chief Financial Officer, Jonathan Bach. Ian and John will review details of our portfolio and third quarter results in a moment, but I'll start off with a few high level comments about the quarter. Turn with me to Slide five of the presentation. We've shown this slide in the last several quarters to provide a sense of the volatility of broadly syndicated loan prices and the correlation to BDC equity prices. In the third quarter, broadly syndicated loan prices continued to increase with spreads down over 100 basis points.
BDC equity prices, however, remained relatively flat quarter over quarter, largely driven by factors such as select dividend reductions and increased non accruals for some companies. Jumping to our third quarter financial highlights on Slide six. Barings BDC's net asset value per share improved by $0.74 in the quarter, a 7.2% increase to $10.97 Unrealized appreciation on our investment portfolio was the primary driver of this increase as market and credit driven improvements continued to help reverse some of the unrealized depreciation we experienced in the first quarter. As of September 30, our total investment portfolio was carried at 98.3% of cost compared to eighty seven point four percent six months ago at March 31. We had no non accrual assets at the end of the quarter as all of our investments remain current on both interest and principal payments.
While at some point every direct lender including us will experience non accruals, I am especially pleased with this portfolio's performance during this trying year, which I view as a testament to both our original underwriting and our ongoing portfolio management of our investment teams. Our net investment income per share was $0.17 up from $0.14 per share in the second quarter and above our third quarter dividend of $0.16 per share. We continue to take advantage of market conditions to rotate out of our initial BSL portfolio and redeploy that capital into higher yielding middle market and cross platform investments. Total sales and repayments of $252,000,000 included two ten million dollars from our initial BSL portfolio, which was redeployed into $145,000,000 of new originations with a weighted average all in spread of nine twenty one basis points. The investment pipeline has remained very healthy in Q4, as John will discuss in more detail later, And we now expect by the end of the year to have largely completed our rotation from our initial BSL portfolio into primarily a middle market portfolio.
Based on these results and expectations for the coming quarter, we announced yesterday that our Board increased our fourth quarter dividend payable in December to $0.17 per share. Turning to Slide seven, you'll see some additional financial highlights for the quarter. John will go through the details of the financials shortly, but I do want to make one key point. You can see on the first line of Slide seven that our investment portfolio increased $82,000,000 for the quarter. This increase, however, included a $153,000,000 increase in our short term cash investments from BSL sales that were used to repay debt after quarter end.
Thus our true investment portfolio actually decreased $70,000,000 during the quarter as a result of our portfolio rotation that I referenced earlier. Despite this decrease in portfolio size, you can see that our total investment income actually increased slightly during the quarter. Even with continued downward pressure on LIBOR, the rotation out of initial BSLs and the higher yielding middle market and cross platform investments, those drove an increase in total investment income and better positions the portfolio for continued growth going forward, while still maintaining a high quality predominantly first lien portfolio. Slide eight outlines the key strengths of Barings platform that help facilitate this portfolio rotation. Barings BDC is uniquely positioned within the broader Barings global fixed income franchise to focus primarily on middle market direct lending, but also take advantage of Barings wide investment frame of reference to participate in a differentiated deal flow across both public markets to find the most attractive risk adjusted returns in different market cycles and periods of volatility.
This multichannel origination strategy has enabled Barings BDC to grow its cross platform investments over the last six months as a complement to the middle market direct lending portfolio. And as I mentioned previously, increase our dividend to $0.17 per share for the fourth quarter. It is this large experienced and global platform that we believe will continue to drive long term shareholder returns. I'll wrap up my comments by providing a brief update on our planned merger with MVC Capital. The transaction is progressing in accordance with our original timeline as we have filed our preliminary and amended proxy statements with the SEC.
We still expect the shareholder meetings to approve the transaction to be held in December with a targeted closing date for the merger in mid to late December. We encourage all of our shareholders to review the BDC's registration statement on Form N-fourteen and the definitive proxy materials once made publicly available on our website and on the SEC's EDGAR page. I'll now turn the call over to Ian to provide an update on the market and our investment portfolio.
Speaker 2
Thanks, Eric, and good morning, everyone. Focusing first on the broader market, please turn to Slide 10 of the presentation. As you would expect, middle market activity is down in The U. S. This year compared to 2019 with a focus on add on acquisitions.
This is where Eric's comments of a wide frame of reference are of particular importance. If there is a limited universe of quality transactions in the market, firms with the ability and experience to execute across investment types will be in the best position to take advantage of the quality opportunities. Jump to Slide 11. The Credit Suisse Single B Leveraged Loan Index continued to tighten in the third quarter and is now back inside middle market levels. As we saw an increase in activity, direct lending spreads were generally within a 25 basis point range across the different subsectors relative to the second quarter.
Switching gears to the Barings BDC portfolio on Slide 12, we show a summary of our investment activity for the third quarter. So we are on the same page, let me define cross platform investments. We are categorizing investments here that take advantage of the breadth of the Barings investment platform, including items such as opportunistic liquid loan and bond investments, special situation investments and structured products that would include CLOs and asset backed securities. Relative to a slow second quarter, the third quarter was much more active in terms of both middle market and cross platform investments. Net new middle market investments totaled $53,000,000 with gross fundings of $96,000,000 partially offset by sales and repayments of $43,000,000 New investments included seven new platform investments totaling $80,000,000 and $16,000,000 of follow on investments in delayed draw term loan fundings.
We also had $50,000,000 of additional cross platform investments and continued the rotation out of our initial BSL portfolio. Slide 13 provides a bridge of our portfolio from June 30 to September 30, which includes increases in the values of our portfolio investments that John will describe in more detail shortly. At a high level, I will say that overall, our portfolio has performed well during the pandemic, and you can see some of the key components of this if you turn to Slide 14. Here, you can see an enhanced view of our total investment portfolio at September 30, including key portfolio characteristics such as revenue contribution and certain credit statistics. The goal of this slide is to provide further details on the three primary components of our portfolio, which are our initial BSL portfolio, our middle market portfolio and our cross platform investments.
Here are a few high level points of note. Our initial BSL portfolio, which at one point totaled roughly $1,200,000,000 is now down to $96,000,000 with further reductions expected in the fourth quarter. In terms of our core portfolio, we were invested in roughly $758,000,000 of private middle market assets at quarter end, which included $92,000,000 of unfunded commitments and $186,000,000 of cross platform investments, which included the remaining $42,000,000 of unfunded commitments to our joint venture investments. The $9.00 $6,000,000 funded total portfolio was spread across 125 portfolio companies and 28 industries as we continue to focus on diversification within our portfolio. As Eric mentioned, we have no investments on nonaccrual status.
And just as importantly, we had no material modifications to the cash payment terms of our debt investments. For any lender, it is ultimately the conversion of investment income into cash that is key, which is why I want to draw your attention to the income contribution section of this chart. Here, you can see that only 2% of our revenue consisted of PIK interests, with no restructured PIK investments for portfolio companies facing liquidity challenges and unable to pay their cash interests. In addition to the strong performance of the current investment portfolio, I believe it is worthwhile to outline the premium spread on our new investments relative to liquid credit benchmarks. Jump to Slide 15.
As many investors have become accustomed to Barings, they understand we as a team seek attractive illiquidity and complexity premium across our wide investment frame of reference. This enhanced diversification drives improved investor outcomes and allows us to remain disciplined in not over allocating to one core market. As outlined here, Barings BDC deployed $145,000,000 at an all in spread of nine twenty one basis points, which represents a three seventy two basis point spread premium to comparable liquid middle market indices at the same risk profile. Diving deeper into our core middle market segment across Europe and North America, we averaged a two zero seven basis point spread relative to liquid market indices. And within the cross platform investment category, you can see the incremental premium that this asset category provides with premiums ranging from 500 to almost 1,200 basis points.
We've discussed the benefits of our wide investment frame of reference, and Slide 16 provides a graphical depiction of relative value across the BBB, BB and B asset classes. It continues to show the relative value opportunities that can exist for investors at different levels of credit risk and how the value of choice across markets provides a meaningful benefit to BDC investors, leading to the actual results I outlined on the prior slide. Our top 10 investments are shown on Slide 17, with no investment exceeding 3.1% of the total portfolio and the top 10 representing only 24% of the total portfolio. Our portfolio remains diverse and with limited exposure to any single investment or industry. With that, I'll turn the call over to John to provide additional color on the financial results.
John?
Speaker 3
Thanks, Ian. On Slide 19, you can see the bridge of the company's net asset value per share since last quarter, showing an increase of $0.74 per share. While our net investment income outpaced our dividend by $01 per share, the primary driver of the increase was net unrealized appreciation on our investment portfolio and foreign currency transactions of $1.17 per share. This appreciation included $0.59 per share reclass adjustment to more than offset the $0.43 per share net realized loss on investments in foreign currency. These net realized losses were driven primarily by sales of investments in our initial BSL portfolio, with roughly 80% of those losses coming from the complete exit of positions in Fieldwood Energy and Men's Wearhouse.
You can see a further breakdown of our net unrealized depreciation on both a dollar and per share basis on Slide 20. The $1.17 per share of net unrealized appreciation, which equates to approximately $56,000,000 included an appreciation of approximately $17,000,000 on our middle market investment portfolio, of which $14,000,000 was attributable to lower spreads in the broader market for middle market debt investments and $1,000,000 of which was attributable to underlying credit or fundamental performance. Both our cross platform investments and our initial BSL portfolio saw appreciation of $7,000,000 and we had 28,000,000 of reclassification adjustments I mentioned that more than offset the $21,000,000 of net realized losses we incurred in the quarter. I'd like to point out that Slide 20 provides a further breakdown of the values of our cross platform investments a special situation, opportunistic liquid, structured products and our joint venture investments as we continue to look for ways to increase the clarity and transparency around our investment portfolio. Slides twenty one and twenty two show our income statement and balance sheets for the last five quarters.
As we've discussed, our net investment income per share increased to $0.17 for this quarter. In addition to the total investment income elements that Eric mentioned, I'd like to point out that our fee income included only $91,000 of nonrecurring fee income. So our growth in net investment income for the quarter was not driven by onetime fees that will go away in future quarters. We also saw a $900,000 decrease in our interest expense for the quarter as a result of lower LIBOR and the lower spread on our senior credit agreement due to the investment grade credit rating we received in the third quarter. From a balance sheet perspective on Slide 22, the high level of short term investments driven by sales within our initial BSL portfolio was fully used to repay our debt securitization on October 15.
We also issued $50,000,000 in our first series of unsecured notes during the quarter. This $50,000,000 issuance was the first series of draws under our $100,000,000 unsecured debt commitment we announced in early August. Our debt to equity ratio at September 30 was 1.32x or 0.74x after adjusting for cash, short term investments and unsettled transactions. Details on each of our borrowings are shown on Slide 23, which shows our debt profile for each of the last two quarters as well as pro form a for certain financing activities that occurred subsequent to quarter end. In addition to the full repayment of both classes of CLO notes in October, last week, we completed a new $175,000,000 unsecured debt issuance comprised of $62,500,000 of five year notes with a coupon of four point two five percent and 112,500,000 of seven year notes with a coupon of 4.75% for a blended coupon of 4.57%.
As part of this new issuance, the remaining $50,000,000 commitment from our August unsecured debt issuance was reduced to $25,000,000 And following both issuances, we now have total unsecured debt outstanding of $225,000,000 split evenly between five year and seven year maturities with an additional commitment to purchase up to $25,000,000 of unsecured debt. This diverse liability structure better positions Barings to take advantage of the wide investment frame of reference across the Barings platform and provides more flexibility during periods of market volatility. Jump now to Slide 24. Barings BDC has available borrowing capacity under our $800,000,000 senior secured corporate credit facility, which was further enhanced by the $175,000,000 unsecured note offering as well as our remaining $25,000,000 unsecured debt commitment. The chart on Slide 24 outlines the impact of using this available liquidity on our net leverage, including the impact of funding our unused capital commitments.
Exposure, we have $92,400,000 of delayed draw term loan commitments to our portfolio companies as well as $41,900,000 of remaining commitments to our joint venture investments. This table shows how we have the available capacity
Speaker 0
to meet the entirety of these commitments if called upon while maintaining cushion against our regulatory leverage limit.
Speaker 3
Venture Slide 25 updates our paid and announced dividends since Barings took over as the advisor to the BDC. As Eric mentioned, we announced yesterday that our fourth quarter twenty twenty dividend will be $0.17 per share, an increase of $0 per share compared to the third quarter. I'll wrap up with two final points, starting on Slide 27, which summarizes our new investment activity so far during the fourth quarter and our investment pipeline. We've been active since October 1 with approximately $155,000,000 of new commitments, of which approximately $131,000,000 have been closed and funded. Of these new commitments, 98% are in first lien senior secured loans, and the weighted average origination margin or DM3 was 8.2%.
We've also funded approximately $9,000,000 of previously committed delayed draw term loans. The current Barings global private finance investment pipeline is approximately $2,400,000,000 on a probability weighted basis and is predominantly first lien senior secured investments. As a reminder, this pipeline is estimated based on our expected closing rates for all deals in our investment pipeline. And finally, I believe it's important to highlight the incentives point that we've discussed on previous calls. As many of you know, Barings seeks to ensure that its incentive fee structure provides the adequate latitude to make the right loan in the right structure throughout credit cycles.
And this is a concept we often like to outline as investment math, whereby we seek to answer an important question asked by LPs. What do you need to lend at in order to generate the ROE promised? As a part of the MVC transaction, Barings is seeking to lower its base management fee to 1.25%, down from 1.375%. As one compares this investment math relative to that of other fee structures, it becomes clear that Barings BDC can sufficiently prosecute its 8% targeted ROE at NAV while maintaining the freedom to invest in lower spread collateral relative to other examples posted here. In our view, this high degree of investor alignment, when combined with our wide frame of reference, can lead to a superior investor outcome over time as it limits the requirement to stretch for yield and income only to see NAV degradation in the future.
Also related to the MVC merger, as we continue to work towards the closing, we have not made any share repurchases under our repurchase plan for 2020. And as a reminder, in connection with the merger, Barings BDC has committed up to $15,000,000 in share repurchases following the closing of the transaction. Now as 2020 challenges will follow us and follow the market into 2021, we look forward to meeting those challenges with enhanced liquidity, a quality investment portfolio and a strong origination outlook centered on investment discipline in a multichannel origination approach with a very wide investment frame of reference. And with that, operator, we'd like to open up the line for questions.
Speaker 0
Thank you. Ladies and gentlemen, the floor is open for questions. In the interest of time, we do ask that participants limit themselves to one question and one follow-up Our first question is coming from Fin O'Shea of Wells Fargo. Please go ahead. Mr.
O'Shea,
Speaker 4
Hi, please take everyone. Yes. Sorry about that. Thanks. I appreciate everybody the opportunistic strategy breakout.
And now it looks like you'll have more of an unsecured debt profile. So I guess first question for Eric. Does this mean we'll see a shift in strategy or perhaps a more fluid strategy on the origination side? Obviously, the BDC started out mostly oriented to middle market, but it looks like you started to get opportunistic in the volatility this year, which is obviously great. And now we're seeing more clear language.
So any just high level on what this means for how we look at the BDC going forward?
Speaker 1
Thanks, Ben. So those of you who joined us almost two years ago, now a little over two years ago, when we were able to execute on the Triangle transaction, we were new to the BDC space. And I said at that time on our initial call that the first job order was frankly to establish credibility with our shareholder base, with the analyst community and within the industry and do what we say we're going to do. And the focus then and continues to be the core part of the portfolio to be directly originated first lien senior secured loans. To John's point, we think the fee structure allows us to do that at levels that are very sound from a credit perspective, as evidenced by the lack of we have no non accruals on our in our portfolio right now in the BDC, while also kind of preserving the return that we're targeting for investors.
That being said, as we've kind of evolved over the course of the past quarters, we've tried to share at times kind of the insights into bearings in the platform. You saw some European deals if you go back a year ago. And then we've started to introduce some of our other capabilities into the BDC from an investor return perspective. That's not intended to be in any way shape or form a shift in strategy. But I do think when we think of the 30% bucket that we have, it is our obligation as a manager to make sure that we're looking for the best risk adjusted returns across our wide spectrum of investment capabilities we have at Barings and bring those to bear for our investors, of which obviously at Barings we're by far the largest investor in the BDC.
So no shift in strategy. We're still going to say, we call it boring is beautiful. The core of the portfolio is going to be directly originated, first lien senior secured. But you will continue to see some portion of that 30% bucket do what I believe we're being paid to do, which is find the best risk adjusted returns we can, particularly in parts market volatility. And we're agnostic to where that comes within bearings.
This is a bearings BDC, not just our private finance platform.
Speaker 4
Sure. That's very helpful. And another one on our platform verticals that on middle market Europe that appears to have been very robust this quarter. A lot of that was sold to the down to the JV. Just trying to get a feel as if that was that for the BDC's appetite or was that to create space for MVC?
I know they have Europe as well. But just on a higher level on allocation, how does the BDC and JV fit in line? Like are they both equals in claiming allocation to Europe deals? Or does the BDC get its fill and then the JV gets its fill of that? Any color on how we can think of where Europe fits in for, I guess, the BDC shareholders?
Speaker 3
Sure, Fin. So we'll start with kind of a high level view of where we believe that the joint ventures can make quite a deal of sense. So to manage the 30% bucket, it's always important to realize that the JV, it's about diversification of return across a wide investment frame, not over levering middle market or over levering BSL investments in order to generate a risk return to try to solve a problem. And so what happens is when the BDC participates, the BDC participates in Europe and U. S.
Loans on the exact same frame as all our clients. But remember, the BDC cannot hold a vast majority of European loans because of a result of the 30% limitations. So what you'll see is there's a level of diversification or, we'll call, loan transfers or sell downs to the joint venture so that the BDC can still have exposure to the space, but at the end of the day, not end up over allocating the 30% bucket into, let's say, just a few names across Europe. It's nice to have a very diversified portfolio. So on a go forward basis, Tim, you'll see you referenced the transfers.
Those would have been European loans that were done in a previous, say, two quarters ago, right? And then they were effectively transferred down, and you can expect to see transfers in the future. Kind of keep into the view that the BDC, while it wants to have some level of European exposure, it does always make sure to watch that diversity level appropriately. So from a participation perspective, it all starts with the BDC as what gets onboarded inside the BDC and then gets transferred down to the JV as both the partners agree if it's an attractive opportunity to transfer down. And so really, it's about diversification.
It's about maintaining what we saw, at least in this quarter, was, as Ian had outlined, attractive BM, but also making sure that diversification widely occurs both in the joint venture and in the BDC portfolio itself in that 30% bucket.
Speaker 4
And can you remind us of the JV's target leverage profile?
Speaker 3
I think when we announced the transaction, nearly one point years or sorry, nearly one years point ago, there was an expectation of roughly 2x, right, across the equity position. Note that this is a JV that BDC participates in with roughly $50,000,000 capital investment in our JV partner at roughly $500,000,000 in equity.
Speaker 4
That's helpful. Thank you, everybody.
Speaker 0
Thank you. Our next question is coming from Robert Dodd of Raymond James. Please go ahead.
Speaker 5
Hi, guys. Good morning Congratulations on the quarter. And also on the disclosures, some of the things incredibly helpful to us and I think investors, I mean, particularly like the restructured PIK line. I mean it's zero for you, but that element is something that's extremely difficult to tease out of the schedule of investments, but provides a really compelling picture for your portfolio in contrast to some others out in the market. But just on the spreads, etcetera, that you saw, you're seeing, I mean, on Page Chart 14, if I look at the middle market, right, the average spread for the middle market business now is 5.36%.
At the end of 'nineteen, it was 5.28 So it's only moved up very modestly, while leverage obviously has ticked up. The leverage in that portfolio was 4.7% at the end of 'nineteen. It's 5.2% now. In the context of what's going on, on Chart 15, where your deployments were at 7.3%, meaningfully higher spreads, can you walk us through kind of the change there in terms of spreads to leverage and how that relates to kind of the much wider spreads you saw in the deployments for Q3? Is there 200 basis points wide of your average for the quarter?
Just trying to get a feel of risk, leverage, pricing, etcetera, and how that's playing out.
Speaker 2
Robert, it's Ian. I'll start and then Eric or John can jump in. So a couple of things going on here. First of all, as you look at the portfolio and you look at Europe versus U. S, typically in Europe, the deals are bilateral deals.
So there's one tranche of debt. And typically, that debt is a little higher than The U. S. Market. But at the same time, the OID and the spreads could be higher as well.
So on a relative value basis, it can be a very attractive investment. And then in terms of The U. S. Market, the way I would look at it is in this market, any company that certainly in the third quarter, and now, that's getting financed and attracting new capital is a high quality company. It's COVID light or COVID green.
It's performed well, and it's unwritable through a recovery that we yet don't know what that geometry is going to look like. And so if you look at the and you're right, if you look at the spread, the spread is pretty much flat in The U. S, a little different than Europe. The leverage has actually come down about zero two five turn ish. But what has changed in the North American market is the OID.
And that really reflects the fact that in this market, with scarce deal flow, sponsors are trying to take deals off the table, whether they're proprietary in nature or it's a limited auction, and it's highly competitive. And so sponsors are looking for financing partners that can provide capital and reliability and responsiveness to help them take those deals off the table. And so they're paying more for those deals through the OID. So if you're an agent, if you're leading these transactions, you're benefiting from that higher OID. And you can see on that portfolio chart that our OID is around 3%, which was definitely higher than pre COVID.
You add on to that in North America, slightly lower leverage, better documentation and really high quality deals. And so you get to a point where you can look at a very attractive investment opportunity. And you can look at it in terms of on a relative value to the liquid market. We talked about that illiquidity premium or you can break it down to return by turn of leverage and look at it from that perspective as well.
Speaker 5
Got it. I appreciate that. If I can kind of tying on to that, the Slide, I guess, seven. Originations since in Q4 since, I mean, the DMVs and spreads are not the same thing. But at 8.2%, that seems to be holding in pretty well, right?
I mean given where spreads were in Q3, can you give us any color on for that Q4 origination or those Q4 originations so far? I mean is any of that the really high spread opportunistic stuff that you did in Q3 that we see on Slide 15? Or is that more of the middle market type deals where you're still finding opportunities to capture quite attractive spreads and DM margins even in Q4, even with competition coming back?
Speaker 2
I'll start with the middle market, and then I'll let Eric and John jump in. We continue to see the deals that we are working on continue to be attractive from that perspective. Now obviously, there's a lot of capital out there. And so our expectation is that with this competition, you're going to see some of those returns compress over time. I think the other thing that you want to be focused on is, and I mentioned this earlier, once you get through a dislocation, it's really the high quality businesses that can attract new capital.
Clearly, companies coming out of the woodwork here that maybe aren't so high quality in nature that are going to be looking for financing. So you want to make sure you pick the right ones. And so what we're not going to do is start taking undue risk and looking for that return and take on too much risk for that return. So we're going to stay disciplined. And I think we're in a really good spot because as we went through the whole COVID situation, while other platforms were dealing with capital issues and liquidity issues.
We didn't have any of those issues. So the market saw us as a stable and reliable source of capital. And quite frankly, we're getting a lot of portfolio companies and new platform opportunities coming to us because of what some of these sponsors saw during the market. And in a couple of cases, we've actually replaced existing agents. So I see it continuing.
We're extremely busy right now in terms of the pipeline, but nothing lasts forever. We expect things to get back a fairly competitive environment. And Eric and John, I don't know if you want to add anything to that.
Speaker 1
I think, Ian, you answered it very well. The only thing I'd just specifically, Robert, that does refer to not exclusively, but very much our core directly originated middle market business. So I of those deals that were funded in October, those were probably August type of initial due diligence and transaction based And on how time so as Ian said, nothing lasts forever. So I'd say it's more competitive today than it was in August, but we're still finding some really attractive opportunities.
Speaker 5
Got it. Got it. I appreciate that. And one more if I can. Obviously, your leverage pro form a for cash or short term investments in these deployments, obviously, is in a pretty good spot.
The MVC deal, if it's approved by shareholders, would delever you even more. And even in the context of that leverage, obviously, earnings are very good and drove an increase of dividend. So given the deals that you have managed to or the attractive spreads you've got with this leverage profile, has there been any thought to either maybe even targeting staying at a lower leverage given that if you can produce the earnings at a lower leverage, that's lower risk all in? I mean any thoughts on that?
Speaker 1
Yes. So we started at the beginning of this, I think one of our first calls, referenced how managing the liability side of our balance sheet was going to be something we focused on and hopefully would be a differentiator for us. And I think what you've seen with our cost of capital, our unsecured issuances that you've seen here, staggering out those maturities have all been positive. When we looked at the pipeline we saw coming in really that August, September time frame and how the strength of the pipeline that we saw for October type of closings, and as John referenced, the probability weighted pipeline that exists now going forward, combined with the return or the strength of the liquid market, We really viewed it as a time to frankly sell a lot of our liquid collateral at that time that it added some volatility to our underlying NAV and move that and so sell that. That created the cash, which makes the net leverage to your point, at an attractive level.
We saw the pipeline coming through. We said all along, buying optionality on whether it be unsecured credit, you go back to our original revolver, we ended up taking more revolver capacity than we initially went out for to buy that optionality. And so to the extent that we can generate the appropriate return for shareholders at a lower leverage is something we'll absolutely evaluate. It's really for us, it's about maintaining that optionality and that flexibility to make sure that when the market opportunity is there, that we have the leverage capacity to take advantage of it for the benefit of shareholders.
Speaker 5
It. I appreciate that. Thank you, and congrats on the quarters.
Speaker 0
Thank you. Our next question is coming from Ryan Lynch of KBW. Please go ahead.
Speaker 6
Hey, good morning. Thanks for taking my questions. I know this is just one quarter of data that we're looking at, but I really appreciate the breakdown of the investments in the middle market versus cross platform. But this quarter, twothree of your originations were kind of in the middle market and onethree were in that cross platform. That feels pretty high.
But do you think you're going to sustain that type of breakdown? Or is it just given this uncertain economic times, this is creating increased deal activity in that cross platform? Any sort of long term breakdown, of course, it depends on the market environment, but do you have any sort of long term breakdown of what percentage of that cross platform strategy you would like to make as a percentage of portfolio, just given that's a much higher yielding strategy?
Speaker 1
Thanks, Ron. Derek, it really is just what the market opportunity provided us. It wasn't a huge volume quarter if you look at the middle market relative to the cross platform. But we saw some good opportunities in the cross platform investments and we thought to capitalize on them. If you look at the October number that we referenced there, I mean, you'd see that be a much, much higher percentage of directly originated first lien senior secured.
And as I look at Q4, I would think of it as kind of a core stuff that we told you we were going to do over time. So we don't have a target. We don't look at it and say, we want 25% of it to be that. We look at it and say, you got to manage the 30% bucket, right? We don't want to get right up against it too much from a percentage basis.
So if you think of that, the core part of the portfolio, I'd say it's kind of always going to be kind of 75 plus percent of what we do. But I do think that when we see those opportunities and one of the benefits I think Barings brings to the shareholders is between our really deep liquid team in U. S. And Europe, our structured credit team, our private and public ABS teams, We just our deal flow is really robust across various asset classes. And as importantly, it gives us a relative value framework that I think if you go back to fourth quarter, I think it was two year or a year and a half ago or so, we had a really slow origination quarter and that was where we had a lot of volatility in the liquid markets.
And we didn't see a real illiquidity premium. So we kind of put our foot on the brake on the middle market in that case because we didn't really see that as value. And so where we do see value, we're to step in there to benefit shareholders. But I wouldn't view it as a change in strategy and nor is it a target we have. But I would think of it as using that 30% bucket, some portion of it for this type of investment, which I think can help differentiate ourselves versus other managers.
Speaker 6
Okay. Understood. Just recently, over the last several months, you guys have done a really good job getting the IG rating and diversifying the liability structure with some unsecured notes, including more in the fourth quarter. Obviously, there's a lot of benefits, and I think that should be well received by the market, your guys' diversification and liability structure. Those unsecured notes are a little bit higher cost than your line of credit.
So I'm just wondering, as we sit here today with pro form a for the issuance you guys have done in the fourth quarter, do you feel good about the composition of your liability structure? Or would you still like layer on additional unsecured notes in the future if the pricing is right?
Speaker 3
Ryan, this is Bach. I'll argue that there is certainly an opportunity to layer in more unsecured debt, just generally speaking, because there is a general expectation for that of investment grade BDCs to have senior secured debt, right, think of your revolvers, no more than 30% of your total assets. And so you can kind of look at our ratio and understand it where we are versus where many IG rated BDCs are targeted or kind of ranked. Honestly, true north when it comes to how you think about unsecured debt issuance comes out in Slide 28. Because clearly everyone saw the benefits of unsecured debt issuance, right.
It helped quite a few respected peers navigate the timeframe and it also avoided the material dilutive rights offerings, etcetera, that had occurred in more secured oriented type debt structures. That being said, you don't want to let your liability structure become the tail that lags the dog. And so if you have a high focus on attractively priced debt and you make sure that when you put it together with your alignment, your fee structure, etcetera, and you're able to continue to prosecute across a wide array of assets with that required spread math that we referenced, then yes, it's attractive because it provides flexibility and protection during times of volatility. But at the same time, it doesn't force material yield seek to the detriment of investors because you can see that happen just to SaaS because it's a two edged sword. So for us, we're comfortable.
You can kind of see the math outlined on '28, and that's more of a long term view for us. And so you could expect additional unsecured debt to be layered in while keeping a very important point on price and realizing that there can be downsides when you increase your unsecured debt too much to the point where it forces you into the wrong asset base at the wrong time. But right now, we can expect more and still allow us to achieve our objective returns with a very stable and boring liability structure.
Speaker 6
Okay. Understood. That's all I had today. Congrats on the really nice quarter, guys.
Speaker 1
Thanks, Ryan. Appreciate it.
Speaker 0
Thank you. Our next question is coming from Casey Alexander of Compass Point. Please go ahead.
Speaker 7
I know we only have a couple of minutes, but I just have two questions. Was it at the point where when you looked at the spread available on the broadly syndicated loan portfolio, which you said the yield at fair value was 4.8% versus your cost of capital that it simply didn't make sense to hold any of them anymore?
Speaker 3
Less of a cost of capital decision, Casey, and much more of an opportunistic redeployment opportunity because clearly, you can look at those two as exclusive events and not necessarily connected because even a smart manager that might be raising carry, right, could still hold liquidity at a certain cost to the extent that they felt they weren't exiting those at proper fair value redeploying them at wider spread.
Speaker 7
Yes. Okay. And secondly, Ian,
Speaker 2
if
Speaker 7
you could give us some color in terms of you talk about the cross platform investments, and I understand Eric says, you're still in bearings lane. You're not in the normal lane of the normal BDC. So I think investors would benefit from understanding what type of companies are these, what type of opportunities are these that are creating this excess return so that they can get a better feel with some more specificity about how you're investing and what your investing philosophy is?
Speaker 1
Why don't we have Brian Hai, who's on the phone, answer that. He's one of our co portfolio managers. He runs our U. S. Special situations business.
So maybe Brian, if you're available to add a little color to that and then Iain, you can backfill.
Speaker 8
Yes, sure. Thanks, Eric. So if you if I just have you turn back to Slide 15, you can see that John broke it out nicely in a few different buckets. The special situations investments being think of them as more of a rescue financing type of an investment. Good companies, they got caught up in COVID, running out of liquidity, and we're looking for attractive ways to provide them capital with solutions that are maybe a little bit not down the middle of the fairway, whether it's a dropdown of assets to finance on a first lien basis or a super senior loan or something like that.
Opportunistic liquid is exactly what it would sound like. It's just good intrinsic value based on dislocation in the market. Typically, for this vehicle, we're looking for more off the run transactions that maybe don't have a liquidity bid in the market, and we know them fairly well given the research platform that we have here at Barings. And then the structured products, this is another form of rescue financing. The theme that I would point to, I guess, in the third quarter was EETCs related to some of the airlines providing capital with some of the metal as a collateral but having the underlying risk of airline as well.
So we think we get a good risk adjusted return given the fact that we have those hard assets, and we can leverage our ABS team within bearings as well as our real assets team to really understand exactly what it is we're lending against and then take a broader view on the overall credit of the airline as well.
Speaker 1
Casey, based as on your well as this kind of theme that Ryan hit it, Fin hit it. From day one, we promised you transparency and communication. So one of the takeaways from me will be, if we get to the point we can have an Investor Day, we'll maybe be virtual, we'll Zoom it or something. We'll do a real focus on these other areas because I think we spent a lot of time on our traditional first lien senior secured middle market business. But maybe we'll use some time during that investor meeting to really do some deep dive in a couple of these areas so that people can get really understand the teams, the depth of the team, the track record and all of that so that there's no concern around it.
Speaker 7
That's helpful. Thank you. That's all my questions.
Speaker 1
Thanks, Casey.
Speaker 0
Thank you. Our next question is coming from Kyle Joseph of Jefferies. Please go ahead.
Speaker 9
Good morning, guys. Nice quarter. Thanks for taking my questions. And yes, let me echo that appreciate all the color in the deck. I know you guys have a lot going on, and I think the deck does a good job really explaining it and making it easy to understand.
So appreciate that. Most of my questions have been answered. Just a few. Obviously, in terms of portfolio yields, obviously, there were some kind of nuances in the quarter in terms of the buildup of short term investments ahead of the debt pay down. But just want to get kind of a refreshed outlook given the portfolio rotation we saw in the quarter, some of the new investments you're seeing in terms of ABS and opportunistic.
Give us a sense for your kind of near term yield outlook and then layer in how that looks with theoretically MVC portfolio on top of it into next year.
Speaker 3
Kyle, what I would do is if you turn to the balance sheet. So clearly, you can also looking at our subsequent events, right, the DMs on average of 8.2%. So and as Ian and Eric outlined, kind of a focus on the, we'll call it, core direct lending at widespread, expect that to continue. You can expect the debt structure to change now that you know, of course, we announced the securitization paydown as well as the unsecured debt. And so when you get to that kind of blending, right, you can approach certainly a leverage target, a bit higher than where we are now.
But before the delevering activity that would occur on the onboard of the MVC merger, right? So all in all, I think it was perhaps referenced previously that you can expect origination strength in the quarter from ourselves. You can also expect earnings lift as it relates to a higher earning portfolio that becomes onboarded. And you could also likely expect leverage to remain fairly constant over this time frame, well, not a little bit higher than 0.74%, clearly, because you can imagine it's been a heavy deployment quarter. But at the same time, with more we'd be left with more than enough carrier dry powder capacity to take advantage of opportunities in the future while still generating an improved ROE as a result of the rotation.
So all those kind of factors come together, to just point as a refresh of improved ROE with still improved ability to deploy capital to the extent volatility returns and middle market volumes stay robust moving into 2021.
Speaker 9
Very helpful. And then one follow-up for me. I think it's been glossed over a little bit in the quarter, but obviously we were we're still in a pandemic. There's a lot of companies struggling. I know you guys referenced no non accruals and no increase in PIK income from restructurings and anything like that.
But can you give us us a sense for just broadly how portfolio company performance has trended between second quarter and third quarter? Did you see ongoing recoveries? Did some continue to struggle? And just kind of talk about the trends you're seeing in on average in your portfolio.
Speaker 1
I'll give a couple of high level comments then turn it over to Ian to kind of give some specifics. I'd say the first thing I'd say is the partnership approach I've seen with our private equity clients during this situation has really been strong. And I think that partnership from both sides really is defining in a lot of ways and I think will lead to enhanced relationships. Two, I'd say management teams in general have adjusted business plans and business models much more quickly and much more creatively than I would have expected. And so I think just in general, I'd say the partnership that the private equity firms and us have worked in a constructive manner, combined with management teams who have been, I'd say, very impressive on their ability to adapt, had really part of the reason or a lot of the reason why this portfolio continuing to perform as it is in addition to our underwriting on the front end.
But I'll turn it over to Ian to give anything specific in kind of second to third quarter.
Speaker 2
Yes. Well, first of all, I would just put a finer point on what Derek said. I mean, one of the reasons why we like the sponsor business is because of that very fact that sponsors if you pick the right sponsors and we underwrite the sponsors that we work with, we expect them to be ahead of the curve and to be proactive. And we definitely saw that during COVID and the dislocation caused from COVID. And of course, as you underwrite the issuers, we underwrite the management teams.
And so the combination of both the efforts by the management teams and the sponsors to rightsize the business. But also in terms of communication and transparency, that was really important for us. You may recall that we discussed last quarter, we went through each company in the portfolio, working with the sponsors and the Portco management teams to forecast the next two quarters. And obviously, it was done at a time with a lot of uncertainty. And expecting the worse, we were pretty proactive and I think conservative in terms of our internal risk ratings, and we downgraded a number of companies expecting some adverse impacts because of shelter in place and the COVID dislocation.
But at a high level, recall that we limit and avoid many consumer facing businesses generally, and especially those that are discretionary in nature, such as retail, restaurants and gyms. So the good news for us is our portfolio was comprised of mostly essential businesses with yes, they were some of them were impacted initially by shelter in place, but came out of that. And we really avoided the industries that I think a lot of other people have had to deal with in a tough environment where the business model has been impaired because of COVID, and they haven't been able to work their way through it. So third quarter, we just saw a lot of better financial performance than what we initially estimated when we had those initial conversations, and we've reversed many of those downgrades that took place in the second quarter.
Speaker 9
Our
Speaker 0
last question today is coming from Bryce Rowe of Robert W. Baird.
Speaker 10
I wanted to maybe talk about a topic we haven't talked about for the for the last couple of quarters because of the ongoing acquisition. But with that expected to close here by the end of the year, just curious what the appetite might be for more stock repurchases given your action in the past. I assume that they're still up grabs, so to speak.
Speaker 1
Yes. So we announced as part of the transaction, right, that we'll do $15,000,000 of share buybacks post the transaction, the closing of the MVC. And we work with our Board on that strategy on an annual basis depending on factors. And so it's always something that will be in a discussion that will evaluate using basically the equity as a form of return to shareholders if it's attractive. At the same time, we want to make sure we balance the scale and liquidity of the underlying corpus of equity, too.
And so that, in combination with our Board, is something we look at on an annual basis, but we've already committed to the $15,000,000 post transaction.
Speaker 0
Thank you. At this time, I'd like to turn the floor back over to Mr. Boyd for closing comments.
Speaker 1
I just want to thank everybody for dialing in and your time. I know, particularly for the analyst community, you all are very busy at this time. I appreciate the compliments on our transparency and the quality of the deck. And Jonathan Bach and Elizabeth Murray and their team have really put a lot of effort into that. And so I'm glad it's recognized by people out in the investor community.
If we can answer anything else, always let us know. We're always here. Just everybody stay healthy and stay positive out there. And thanks for your time and support.
Speaker 0
Ladies and gentlemen, thank you for your participation. This concludes today's event. You may disconnect your lines and walk off the webcast at this time. And have a wonderful day.