Barings BDC - Earnings Call - Q4 2020
March 24, 2021
Transcript
Speaker 0
Greetings, and welcome to the Barings Fourth Quarter and Full Year twenty twenty Earnings Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to CEO, Eric Lloyd.
Please go ahead.
Speaker 1
Thank you, Kevin, and good morning, everyone. We appreciate you joining us for today's call, and I hope that you and your families are doing well and staying healthy during this unprecedented time. Please note that throughout today's call, we'll be referring to our fourth quarter twenty twenty earnings presentation that is posted on the Investor Relations section of our website. On the call today, I'm joined by Barings BDC's President and Co Head of Global Private Finance, Ian Fowler Tom McDonald, managing director and portfolio manager Brian High, Barings head of US special situations and co portfolio manager and the BDC's chief financial officer, Jonathan Bach. As we typically do, Ian and John will review details of our portfolio and fourth quarter results in a moment, but I'll start off with some high level comments about the quarter.
The way our earnings calendar fell this year, it's been almost four point five months since our last earnings call. And as you saw in our preliminary earnings release in February and yesterday's filings, we finished 2020 with an extremely active quarter. Between a record quarter for originations, completing the MVC Capital acquisition, issuing new unsecured debt and announcing a dividend increase, we have a lot to cover today. The timing of this call also affords us the opportunity to provide greater visibility into the 2021, and you will see the strong finish to 2020 has continued into the new year. Let's start with the high level on Slide five of the presentation.
The macro trends we saw in the third quarter continued into the fourth quarter as broadly syndicated loan prices continue to increase and ended the year back at pre COVID levels. And while BDC equity prices were also up in the fourth quarter, increases have lagged the BSL market and BDC equities ended 2020 with a 21% decline for the year. Now turning to Barings BDC, flip to Slide six for our fourth quarter financial highlights. Our net asset value per share improved $02 in the quarter to $10.99 As you might expect, based on the market trends I outlined, net unrealized depreciation in our investment portfolio drove NAV per share higher, but this impact was partially offset by net dilution from the MVC Capital acquisition. When we announced the transaction last August, we outlined that the fixed share exchange rate was based on Barings BDC's NAV per share as of 06/30/2020 of 10.23.
Given the increase in our NAV per share since that time, we did experience some NAV per share dilution when the transaction closed in December. This dilution, however, is expected to be a near term impact as we continue to believe both the drivers behind the transaction will result in long term NAV per share accretion. Importantly, our actual net asset value increased from approximately $526,000,000 at September 30 to almost $718,000,000 at December 31. This expanded equity base will provide for increased leverage and investment capacity and the opportunity to reposition certain assets into directly originated investments could help drive NAV per share and earnings accretion in the future. Our net investment income increased from $0.17 per share in the third quarter to $0.19 per share in the fourth quarter.
Given that the MVC Capital acquisition closed on December 23, this increase was not driven by the acquired assets, but rather the impact of net new Barings originated investments totaling $332,000,000 as we effectively completed the rotation out of our initial broadly syndicated loan portfolio. This increase in core earnings drove the increase in our first quarter twenty twenty dividend twenty twenty one dividend rather to $0.19 per share, up from $0.17 per share in the fourth quarter. Ian will discuss originations in more detail, but the fourth quarter total deployments were a record for both Barings BDC and the overall Barings global middle market lending footprint. Our existing investment portfolio continued to perform well in the fourth quarter. As of December 31, our total investment portfolio was carried slightly above original cost and no Barings originated assets were on non accrual.
One asset acquired through the MVC Capital transaction with a value of $3,000,000 was on non accrual status. But overall, that portfolio's performance continues to be in line with our original expectations. Slide seven outlines some additional financial highlights for the quarter. Here you can see our investment portfolio at fair value grew to almost $1,500,000,000 at year end. The $380,000,000 increase, however, included a $140,000,000 decrease in our short term cash investments.
Thus, our true investment portfolio actually increased $525,000,000 during the quarter as a result of the MVC Capital acquisition and the net deployments I referenced earlier. Even with this increase in size, our net debt to equity ratio is 1.04, well within our target range for leverage. The quality of our capitalization also improved with the issuance of 175,000,000 of unsecured notes in the fourth quarter and this focus on our capital structure continued in the 2021 with an additional $150,000,000 unsecured note issuance in February. Let me wrap up my comments with a few high level observations about 2020 as a whole. It was an unprecedented year on many levels, and the global pandemic created business and personal challenges too numerous to name.
If you had told me in 2020 or April 2020, the Barings BDC would end the year having completed its portfolio rotation out of broadly syndicated loans into directly originated assets, having no Barings originated assets on nonaccrual, receiving an investment grade credit rating and completing the acquisition of a low levered BDC to discount the NAV, I certainly would have taken that outcome in a heartbeat. This result was driven by a number of factors, including the hard work and dedication of people across the entire Barings platform, various investment teams and our internal partners, partnership with our private equity firms and our portfolio companies and other partners. Two other elements that we frequently discussed were also critical to this outcome. First, Barings wide investment frame of reference allowed us to participate in a differentiated deal flow across public and private markets, finding the most attractive risk adjusted returns at different times during the year that certainly saw a high level of volatility. Each 2020 presented different investment dynamics, and Barings BDC was able to remain active throughout the year.
Second, we continue to believe the alignment between a BDC and its manager is critical. Our alignment was further evidenced by the credit support agreement that was put in place as part of the MVC Capital acquisition as well as a lower base management fee that became effective on 01/01/2021 as a result of last year's shareholder vote. During challenging times, we believe this type of alignment is critical to achieving optimized results for shareholders. 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. Let me begin on Slide nine with some additional details on the record level of investment activity that Eric mentioned. Net new middle market investments totaled $393,000,000 with gross fundings of $528,000,000 partially offset by sales and repayments of 135,000,000 New investments included 24 new platform investments totaling $418,000,000 and $110,000,000 of follow on investments and delayed draw term loan fundings. We also had $13,000,000 of net new cross platform investments. As a reminder, these are investments 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 collateralized loan obligations and asset backed securities.
Our initial BSL portfolio decreased by $74,000,000 And given that only $15,000,000 of that portfolio remained at year end and it has been further reduced to approximately $2,000,000 today, we will no longer be reporting it separately going forward. We've included the assets acquired in the MVC Capital acquisition under cross platform investments on this slide, with a total of $185,000,000 acquired at the closing of the transaction and $5,000,000 of subsequent repayments before year end. You may have expected to see a higher number based on our initial discussion of the transaction, but MVC had over 30,000,000 of assets and repayments following our August announcement, consistent with our expectations. Two logical questions when you have a quarter with deployments of this level are: one, why was volume so high? And two, how can you be confident with the quality of the originations?
Direct lending to middle market companies effectively stopped in the second quarter as the focus shifted to simply navigating the crisis. As government policies took shape and companies began to fully understand the implications of the pandemic, the third quarter started to see a pickup in transactions involving quality companies that demonstrated an ability to navigate the challenging environment. This dynamic came into full effect in the fourth quarter as pent up demand for transactions, both LBOs and add ons involving quality companies with a proven twenty twenty track record drove what was almost a full year's worth of activity in a single quarter. You can see on Slide 10 that direct lending spreads continue to tighten across the different lending subsectors as volumes pushed higher. In terms of quality of the originations, I believe 2020 created a unique dynamic whereby the high fourth quarter volume could effectively be viewed as the result of an elongated due diligence process as companies needed to demonstrate their ability to manage through the crisis before entering into a transaction.
Over 70% of our middle market fundings in 2020 occurred during the fourth quarter, and I take comfort in the fact that these new investments were underwritten under a COVID focused lens. Slide 11 provides a bridge of our portfolio from September 30 to December 31. In addition to the net deployments I just outlined, unrealized depreciation of $25,400,000 was a key driver of a portion of the increase in portfolio fair value. We did have $1,500,000 of net realized losses, primarily as a result of BSL sales. You can see a breakdown of the key components of our investment portfolio at December 31, if you turn to Slide 12.
With the rotation out of our initial BSL portfolio and the closing of our MVC acquisition, this slide now breaks down our portfolio into middle market, MVC and cross platform components. We were invested in approximately 1,200,000,000 of private middle market assets at year end, which included $129,000,000 of unfunded commitments and $223,000,000 of cross platform investments, which included the remaining $30,000,000 of unfunded commitments to our joint venture investments. The MVC portfolio was valued at $180,000,000 at year end, consistent with the original transaction value booked at closing. The $1,400,000,000 funded total portfolio was spread across 146 portfolio companies and 29 industries. One investment acquired from MVC was on nonaccrual status, and we had no material modifications to the cash payment terms of our debt investments.
In terms of cash conversion, 3.8% of our revenue consisted of PIK interests with no restructured PIK investments for portfolio companies facing liquidity challenges and unable to pay their cash interest. For our middle market portfolio, weighted average first lien leverage was 5.2 times, consistent with what we reported last quarter. Our total investment portfolio, excluding short term investments, is now made up of eighty two percent first lien investments, which is down from 92 at the end of the third quarter. Slide 13 provides a breakdown of the driver of this change, which is attributed entirely as expected to the MVC Capital acquisition. Excluding the investments acquired from MVC and short term investments, we ended the year with a portfolio comprised of ninety three percent first lien assets, an increase from the third quarter given the high level of first lien deployments in the fourth quarter.
The MVC portfolio on the other hand was comprised primarily of equity, second lien and mezzanine debt investments. We believe this portfolio can initially serve as an attractive complement to the Barings originated portfolio, and the acquisition was a unique opportunity to buy a large portfolio at a discount to NAV. As I mentioned before, we have been sizable payoffs of approximately $30,000,000 since the deal was announced, and we will continue to drive toward the exit of noncore lower yielding equity investments and increasing core earnings by redeploying this capital into higher yielding assets. Thus far, the portfolio has performed in line with our original expectations. Our top 10 investments are shown on Slide 14, with no investment exceeding 2.5% of the total portfolio and the top 10 representing only 21% of the total portfolio.
Our portfolio remains diverse and with limited exposure to any single investment or industry. You can see that our two largest investments were acquired as part of the MVC Capital transaction. Keep in mind that the that while these are large exposures, they are also supported by the credit support agreement in place with Barings LLC, thus reducing potential downside risk for these investments. Portfolio diversification is critical for many reasons, but we believe its importance will continue to be highlighted in the current environment. I'll now turn the call over to John to provide additional color on our financial results.
Speaker 3
Thanks, Ian. And jumping to Slide 16, here you can see the bridge of the company's net asset value per share since last quarter, showing an increase of 2¢ per share to $10.99. Our net investment income outpaced our dividend by 2¢ per share, while net unrealized appreciation on our investment portfolio in foreign currency transactions drove an increase of 34¢ per share. The appreciation included a cent a 10¢ per share reclassification adjustment to more than offset the 2¢ per share of net realized loss on investments in foreign currency. Offsetting the unrealized appreciation was a 5¢ loss on extinguishment of debt and a net 28% 28¢ per share reduction due to MVC cap the MVC Capital transaction.
Now as Eric mentioned earlier on the call, BBDC's NAV appreciated since June 30, and that drove this per share dilution. But the increase in NAV on an absolute dollar basis should result in long term accretion from the transaction. What item you do not see on this NAV waterfall is the impact of share repurchases as we did not make any in the fourth quarter given the NBC merger. As we announced in connection with the merger, however, our board affirmed the company's commitment to repurchase up to 15,000,000 of common stock at then current market prices at any time shares trade below 90% of any of Barings BDC's then most recently disclosed net asset value. This program will begin after the filing of our form 10 q for the 2021 and is subject to compliance with covenant and regulatory compliance covenant and regulatory requirements.
Slide 17 shows a further breakdown of our net unrealized depreciation for the quarter on both a dollar and per share basis. The 34¢ per share of net unrealized depreciation, which equates to approximately $17,000,000, included appreciation of approximately 9,000,000 on our current middle market investment portfolio. Of this 9,000,000 of appreciation, 5,000,000 was attributed attributable to lower spreads in the broader market for middle market debt investments, and 6,000,000 was attributable to foreign currency appreciation, which was partially offset by 2,000,000 attributable to underlying credit or fundamental performance. While we did have 2,000,000 of unrealized depreciation due to the underlying credit of investments, it was isolated to a few specific names. We continue to be pleased with the resiliency and performance of the companies across the portfolio, both the Barings originated assets and those acquired in the MVC Capital transaction.
Our cross platform investments saw appreciation of approximately a million dollars $11,000,000, and we had 5,000,000 of reclassification adjustments that I mentioned that more than offset the 2,000,000 of net realized losses that we incurred during the quarter. Slide 18 shows our income statement for the last five quarters. As we've discussed, our net investment income per share increased to $0.19 for the quarter, driven by a $3,500,000 increase in total investment income. Deployments into higher yielding middle market and cross platform investments helped drive this increase in total investment income as well as a 900,000.0 increase in fee income, of which 500,000.0 was due to an increase in nonrecurring fees. This increase in total investment income was partially offset by higher interest and financing fees, which rose as a result of hiring borrowing levels and higher interest costs associated with our unsecured debt issuances.
From a balance sheet perspective on slide 19, I'd really point two key takeaways out. The first is the overall increase in the size of Barings BDC in terms of both assets and equity. We ended the year with 1,680,000,000.00 of total assets driven by net deployments in the quarter and the MVC Capital acquisition. Net asset value increased to 718,000,000, in large part due to the equity issuance for the MVC Capital acquisition. If you compare this to where things stood at 12/31/2019 with 1,200,000,000.0 1,250,000,000.00 of total assets and 571,000,000 in net asset value, it shows significant growth during the year.
Second, even with this significant growth, the company remains well positioned from a debt capital debt capitalization perspective, ending the year with a debt to equity ratio of 1.32 times or one point o four times after adjusting for cash, short term investments, and net unsettled transactions. The high aggregate amount of short term investments in cash resulted really from the timing of certain sales late in the year. As a result, the need to fund the new deployments in early twenty as well as the need to fund new deployments in early twenty twenty one. More importantly, you can also see in the liability section the shift in our mix of debt to a higher reliance on unsecured debt issuance. If you turn to slide 20, you can see how this funding mix relates to our assets, both in terms of seniority and asset class.
Our goal's been to match a diverse portfolio of assets with a diverse capital structure of secured debt, unsecured debt, and equity. The recent increase in our equity and unsecured debt levels correspond to the increase in equity and junior debt positions acquired through the MVC merger. This diversified liability structure better positions Barings BDC to take advantage of the wide investment frame of reference across the Barings platform and provides more flexibility during periods of market volatility. Details on each of our borrowings are shown on slide 21, which shows our debt profile for each of the last two quarters as well as pro form a for the new $150,000,000 unsecured debt private placement we completed in February. This new issuance included 80,000,000 of five year notes with a coupon of three point four one percent and 70,000,000 of seven year notes with a coupon of four point o 6% or a blended coupon of 3.71%.
Following this issuance, we now have total unsecured debt outstanding of 375,000,000 maturing between 2025 and 2028 with an additional commitment to raise up to 25,000,000 of unsecured debt. Jump to slide '22. Barings BDC has available borrowing capacity under our $800,000,000 senior secured corporate credit facility, which was further enhanced by the 150,000,000 unsecured note offering in February as well as our remaining 25,000,000 unsecured debt commitment. The chart on slide 22 outlines the impact of using this available liquidity on our net leverage, including the impact of funding our unused capital commitments. Barings BDC currently has a 129,000,000 of delayed draw term loan commitments to our portfolio companies as well as 30,000,000 of remaining commitments to our joint venture investments.
This table shows how we have the available capacity to meet the entirety of these commitments if called upon while maintaining cushion against our regulatory leverage limit. Slide 23 depicts our paid and announced dividends since Barron took over as the adviser to the BDC. As Eric mentioned, last month that we outlined, our first quarter twenty one twenty twenty one dividend was 19¢ per share, an increase of 2¢ per share compared to the fourth quarter. Now that wraps up our comments on 2020 results, but I'd like to conclude our call with a brief discussion on our expectations for 2021. And I'll frame this in the context of what we are expecting to see in the market and then how we believe we will be prepared to react to those expectations.
So jump with me to slide '25. These charts from Refinitiv and Cliffwater show recent trends in institutional loan issuance as well as loan repayments and sales, and the data points to a high likelihood of increased prepayment velocity in 2021 relative to past cycles. As with most things, there are both positive and negative elements to a highlight a highlighted repayment trend. On the positive side, there can be a near term earnings lift from the recognition of unamortized OID and fees, which are taken in to net investment income when an investment repays. So looking at Barings BDC's middle market investment portfolio, the balance of unamortized and fees is approximately $28,000,000.
So there's certainly the potential for increased fee income relative to the levels recognized in 2019 and 2020. Of course, the downside of repayments is the need to redeploy that capital, but Barings has two critical advantages that help us mitigate this risk. First, the hurdle rate for our incentive is set at the target dividend yield, which means potential spread compression for redeployed capital will be borne by the investment manager, not investors. And second, our wide investment frame of reference should help us redeploy that capital on a timely basis and maximize both our liquidity and complexity premiums. And if you look on slide 26, you'll see the key strength of the Barings platform that could help facilitate redeployment of this capital.
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 in different market cycles and periods of volatility. Just as it helped Barings BDC grow its initial portfolio, this multichannel origination strategy should enable should enable Barings BDC to redeploy capital if the repayments materialize. Slide 27 provides a quick updated view of our graphical depiction of relative value across the triple b, double b, and single b asset classes, and 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. This translates into the actual results on slide 28, which show the premium spread on our new investments in the fourth quarter relative to liquid credit benchmarks as we sought attractive illiquidity and complexity premium spread. As outlined here, Barings BDC deployed $566,000,000 at an all in spread of 760 basis points, which represents a 297 basis point spread premium to comparable liquid market indices at the same risk profile.
Diving deeper into our core middle market segment across Europe and North America, we averaged a 265 basis point spread relative to liquid market indices. And within the cross platform investment strategy, you can see the incremental premium that this asset category provides with premiums from 717 to 1,026 basis points. The bottom line is that in a period of increased repayment velocity, we and others expect to see in 2021, portfolio diversification and a wide frame of investment reference will be key. We believe our our ability to invest across platforms and generate excess shareholder return via illiquidity and complexity premiums will be a key differentiator for Barings BDC in this upcoming repayment cycle. Now I'll conclude with slide 29, which summarizes our new investment activity so far during the 2021 and our investment pipeline.
Well, note the record setting pace of the fourth quarter. The first quarter has been extremely active with approximately 224,000,000 of new commitments, of which 202,000,000 have been closed and funded. Of these new commitments, 80% are first lien senior secured loans and 12% are in joint ventures. And the weighted average origination margin or DM three was seven and a half percent. We've also funded approximately 27,000,000 of previously committed delayed draw term loans.
The current Barings global private finance investment pipeline is approximately $1,800,000,000 on a probability weighted basis and is predominantly first lien and senior secured investments. As a reminder, that pipeline is estimated based on our expected closing rates for all deals in our investment pipeline. And with that, Kevin, we will turn the line back to you for question and answer session.
Speaker 0
Thank you. We'll now be conducting a question and answer session. We ask that you please ask one question and one follow-up, then return to the queue. If you'd to be placed in the question queue, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue.
You may press star two if you'd like to remove your question from the queue. Our first question today is coming First
Speaker 4
question, I think, Ian talked about the ability to rotate still. Just looking at the portfolio, obviously, you're now out of BSL. You have these very high yielding assets from MVC. So I would have thought that rotation would be a headwind. Can you just provide a little more context there on on the on the benefit of rotation for the portfolio?
Speaker 3
I think what I can do, Fin, is I'll talk about some of the sources of liquidity, and the opportunity to to to generate investment capital. And then Ian and the teams can outline kind of the spreads at which, one deploys. So if we we look at at at the current MVC Capital assets, we've not seen material prepayment continue to accelerate. Those loans continue to perform as expected. And where we start to see additional portfolio opportunity for for rotation will come out of the ability to generate liquidity through transactions and sell downs with our joint venture partner in Jocassee.
And based on the the current opportunity set, we're starting to still see that there are attractive illiquidity premium to invest at in that current market. And then I'll also leave open that over time on a non you know, our our noncore asset base, particularly as it relates to to nonyielding equity, that can be realized, but it'll be realized in an appropriate time to maximize net asset value. But I would turn it over to Ian as it outlines as we outlined the ability to invest at current spread and what the remainder of 2021 looks like from an investment investment perspective.
Speaker 2
So when we look at the third quarter and fourth quarter, we saw spreads that were wider than first quarter twenty twenty and fourth quarter twenty nineteen, anywhere from 25 to 50 basis points. OID was was wider too because at at that point, you know, sponsors were looking for commitments and reliability. And just based on the way our portfolio performed through COVID, we we were in a offensive position in terms of pivoting to take advantage of opportunities in the market and pick up market share while a number of our competitors were dealing with right side balance sheet capital issues or or portfolio issues or quite frankly both. So we we were able to take advantage of that and generate some really attractive, investments. Now I will say that as you look at 2021, we're definitely seeing compression in in yields.
You know, we're not correlated to the liquid market. We follow the the liquid market. So eventually, we'll head in the same direction, and that's that's occurring now. So some of that will dissipate, but, you know, even in the beginning of 2021, they were pretty attractive yields. And the and the thing I'll say also, which I've never seen in in my career, is just the the volume of activity at the end of last year with really high quality assets.
You know, it it because these assets were assets that obviously performed well through COVID and and, you know, were under writable and and very attractive. So it was a really unique opportunity. Oh, okay. That's that's helpful.
Speaker 4
And then I I guess, you know, sort of similar topic. You just addressed partially post quarter. You you're you're finally getting some some repays, which you haven't had. It helps the top line. You haven't had material at least.
It looks like post quarter, these are picking up. I don't know how much you know, we have most of the quarter's data. I don't know how much this is expected to continue, and and pressure the top line of your your core middle market book. I assume it's mostly that. Yeah.
I think you mentioned wide frame of reference. Most most managers will claim that. But what what do you think this environment does on a net basis? Does the return compression going forward swallow this this fee income you'll start to receive, I guess, just on the core book?
Speaker 3
I think you'd likely see, Fin. This is John. You'd likely see it it it match and a couple of points. So so while we while we point to a top line, level of potential, one, we haven't seen, repayments materialize to a point where you would which would jeopardize the the return profile offered. And and there is a a second point as well.
There's the issue as it relates to the top line, Fin. What happens is given where hurdle rates get set inside the BDC space, that return compression that occurs impacts a number of BDCs as it relates to the bottom because the hurdle rate is set at a at a low level relative to relative to the dividend yield. So in our case, what you find is to even if there is a level of repayment compression on redeployment, which does get offset by the natural attrition of upfront fee income that's amortized, the investors don't feel that level of experience as a result of how the alignment was effectively established. In terms of the the frame of reference, I think you kinda see there is a there is a pretty wide berth in where we focus with the opportunity that's generated, net asset appreciation above our cost, and that'll continue. But, really, we'd highlight the differentiators differentiation that shows stability on the top line, but that added layer of alignment and incentive protection that occurs on the bottom line that's a bit differentiated relative to the field.
Speaker 0
Thank you. Our next question today is coming from Kyle Joseph from Jefferies. Your line is now live.
Speaker 5
Congrats on a very, very busy close to twenty twenty and what looks like a good start already in 'twenty one. I think it'd be helpful, you know, obviously, the portfolio has gone through a big transformation, particularly in the fourth quarter away from BSLs with with MVC and cross platform. I think it'd be helpful if you remind us of kinda how you're thinking about the appropriate leverage for the BDC given the portfolio transition?
Speaker 3
So I'll take this with a view that our leverage expectations remain absolutely constant at a 1.25 one to 1.25 times leverage band. In addition to the absolute leverage level, a lot ties into the mix of of what that leverage level is because on an absolute basis, it's one part of the story. And so for us, we heavily value the flexibility that comes with the unsecured debt private placements that were were done, and we appreciate that with our with our partners as well as in our work with the with the rating agencies. I'd argue that you'll likely see continued stability in both the mix and absolute level that you're seeing today, with no intention to to move too far out of either band. Kyle?
Speaker 5
Hey, Kyle. This is Eric.
Speaker 1
I'd I'd add to what John said I'd add to what John said and just, you know, you go back to our original revolver we put in place. And at the time, going back a couple years, we ended up taking a couple $100,000,000 more than we originally looked for and really said at that time, I was willing to pay the unused fee on that amount for that increased optionality or flexibility. And you've seen us do it here on the unsecured debt issuance. Right? A higher cost, so a little bit of a drain from from a net perspective, but we believe that that mix is the right place to go.
We really wanna always make sure we look at that cushion on our borrowing base of our really, for the most part, hits our core middle market assets and make sure we have plenty of cushion on that so we never get into a difficult position on that. So the liability side of this, we spend a lot of time on, and and we're willing to, you know, give a little bit, at times to make sure we maintain that kind of cushion and flexibility.
Speaker 5
Very helpful. Thanks. And I'll just ask one follow-up. Obviously, we know your credit in bearings book is solid, no nonaccruals. But just want to get a sense for the revenue and EBITDA growth trends you saw in the fourth quarter, how that compared to the third quarter and any changes year to date?
Speaker 2
So this is Ian. So I I can say in terms of our our book, and and again, as as you look at, you know, portfolio construction for us and and credit philosophy, one one of the areas that we tend to avoid and deemphasize is consumer facing businesses, especially those with, you know, consumer discretion risk. And so a lot of the businesses that was dealing with consumers such as gyms, retail, restaurants were all areas that that we avoided. The other thing I would I would note is that most of the businesses that we have in our portfolio, in fact, pretty much all the businesses in the portfolio were deemed at some point to be essential businesses. So if you if you look at,
Speaker 4
you know, the
Speaker 2
entire entire Barings platform, you know, there there is and again, it it all depends on the industry and and the the recovery through shelter in place and and lockdowns. But in terms of enterprise value, feel very confident about all the businesses that we have in the portfolio. In terms of liquidity, same. There are some businesses that lost two or three months of of revenue, like dental management practices, but they've come back. So overall and then obviously, we have businesses that actually performed really well during COVID.
So if you look at it from a portfolio perspective, it's it's definitely, you know, flat to up on on both revenue and EBITDA.
Speaker 1
Hey, Kyle. It's Eric. I I would just add to what Ian said. In the portfolio characteristics deck we laid out December 31, if you look at that middle market portfolio, number numbers off top of my head, I think we're 5.2 times through the first lien, 5.6 times through the total, and that's really pretty consistent with what you've seen over time. That's a metric we we track, making sure that, you know, we don't get too extended on either the the senior leverage, which is primarily where we are from a tranche perspective, or the total leverage.
And Ian's point, I think, you know, the fact we've had no nonaccruals is a real positive on our on our core book. And then and I'd say businesses are are impacted differently. So I don't have a good index for you as far as the exact percentage because, you know, you have some businesses that this COVID has really benefited. And then there's plenty of others that I'd say in general, they're kind of flattish.
Speaker 0
But so you blend it up,
Speaker 1
to Ian's point, it's up, meaning from a revenue and EBITDA perspective. And I think it's representative in some of those statistics you see there, understanding that we put a lot of new assets on the books. So that 5.2%, if you compare it to the third quarter, which I believe is a similar number, at that time, it can be skewed you can't just look at it as assuming that the portfolio companies all stayed at the same leverage because we put on a bunch of new assets in the fourth
Speaker 2
Yes. And I would just add that the interest coverage is over 4x, which is a pretty good metric.
Speaker 0
Thank you. Our next question is coming from Ryan Lynch from KBW. Your line is now live.
Speaker 6
Hey. Good morning, guys. First question I had was, you mentioned kind of one area that that could really help offset the the strong level of of prepayments that could be coming down the road, is your guys' diversity in your platform and the ability to do cross platform investments, which have a much higher yield. But as I look at at least the fourth quarter activity, you guys only had $38,000,000 in new originations and only 13,000,000 increase in cross platform investments. So that's a pretty small number in probably the most robust quarter that we're going to have in a long time period for that vertical.
So can you just talk about do you expect that to increase, and and and why would why would that do so? Right.
Speaker 3
Is there a way I would
Speaker 1
at it first. Go ahead, Bob.
Speaker 3
No. I I'd say and and we we can we can complement it here. I I'd argue that, really, it depends on in in space time. And what we outlined in in the discussion as it relates to repayments is is another rail that we believe are important for investors to to prepare for. Now you you prepare for the worst and hope for the best.
Our expectation is the fourth quarter had a significant amount of illiquidity premium that was being generated inside the core middle market category. That's continued to move into the first quarter. And as you think about the the repayment spectrum, where we focus in the core middle of the middle market, you find more insulated repayment trends that can occur as opposed to the differentiation at the upper end of the middle market or in more junior debt style transactions at that upper end of the middle market. So as a result, our view is that in the fourth quarter and also continue to the first quarter, we continue to drive a material amount of opportunity inside the core direct channel. And to the extent that that either ebbs and flows or we see more prepayments, right, you have the opportunity to invest in other channels at the same time.
But, really, it's what presents the best illiquidity premium or the best complexity premium to date. And so it's it's a little less of one's great, one's not. It's all kind of seen at at one point in time, and you can kinda get a sense that to the extent there were prepayment velocity increasing, there is a lot of additional places to make sure that we can retain focus that Barings does very well. But I'll turn it to Eric.
Speaker 1
Hey, Ron. I would I would look at it a couple fold. One, think I cross platform is about 15% of the portfolio right now. And so in any one quarter, it it may be more or less depending on what opportunity we see. Brian High, who's on the phone, runs our special situations business here in The US.
Tom McDonald, who's on the phone, one is of our senior portfolio managers in liquid credit, which also ties into our structured products. So we look at that relative value pretty very actively to see where that value is. And frankly, in the fourth quarter, we saw better value in the direct business than we did in some of those other cross platform opportunities. Now that would be different in sometimes in the second or third quarter of this past year, when you saw real volatility in the liquid markets, we saw the value there. And I think it's evidenced by, I think John referenced it, about $11,000,000 of unrealized or, gains in our cross platform investments.
And that's really a result of some of that volatility we saw earlier in the year for the most part because if you go back, two years ago, we weren't really talking about cross platform. We were talking about the core part of the business. I'd say the second part of it would be, frankly, when we saw the volume coming in, in the fourth quarter. So if you think of we did 24 new platforms in the fourth quarter, That's a pretty incredible statistics in our in our core business. And we weren't really wanna make sure we we manage our leverage appropriately when we saw that pipeline coming in to make sure that, you know, we didn't put on too many other assets of cross platform.
And then when this when all these new platforms and then get our leverage as we reference, we kinda wanna keep that number between one and one and a quarter. And we also look at the leverage assuming that we have all the commitments we have have to get drawn, meaning our delayed draw term loans and our JV. As John referenced there, it's about one three. And so balancing that, dynamic of leverage given the opportunity set is another lens that we put everything through.
Speaker 6
Okay. Understood. That's helpful helpful color on that. You know, kind of on that that same theme, you all have have a a pretty strong international presence, and I think that really was visible in the fourth quarter with a good amount of capital deployed in Europe and Asia Pacific. Can you maybe just talk about, from the middle market lending standpoint, how do those markets and, again, I'm sure each of those different markets, whether it's different countries in Europe or, obviously, you know, different countries in Asia, but but how do those markets from a high level look relative to to US middle market, from a kind of a term structure.
It's just just favorability of of of of lending in there versus over here.
Speaker 1
Okay. I'll take a crack at it first and then turn it over to Ian to to add some color to it. So we do have balanced businesses in The US and Europe. And if you look at the some of the latest, statistics in Europe depending on what service you wanna use, we were kind of the number two provider of capital for direct lending to sponsors in Europe. So it's a place that we are a lead we have a lead position in the marketplace, and we're and we're very active.
I would say Europe was came out of it came out of the COVID a little quicker than The US. So if you think of the fourth quarter activity that we saw in The US market, I'd say we saw, you know, that kind of begin to happen in the third quarter in Europe. And as Ian referenced earlier, at really attractive spreads and upfront fees in The US, the same would have been true in Europe. And so I'd say it was kind of a quarter ish ahead. But the fourth quarter remained very strong for us too, as you saw, and it continues to be strong here in the first quarter on our European business.
Europe for us is not exclusively, but primarily UK, France, Germany, Benelux, and The Nordics. That's primarily where we operate. UK is our largest market. France is our second largest market. Those make up the majority of the portfolio.
In the European market, the business is the the the financing is different than The US. What we see in The US is primarily a sponsor will, you know, work with us, and then they'll club us up with one or two or three other part parties. In Europe, it's almost exclusively kind of bilateral or a one provider of capital arrangements. So it's kind of a winner take all market for the most part in European in the European business. The last thing I'd say is is probably from Europe perspective is, you know, the performance of that those assets in that portfolio of European business would be consistent with our North American business, meaning it's had really strong credit performance, through cycles and really good team.
Now going to to Asia Pacific because that can be a you know, people can kinda say, what are you doing there? It's really based in Australia. So Adam Wheeler, who is coheds of our global, direct lending business with Ian Fowler, Adam's based in London, leads our business outside of The US. He relocated from Sydney to London a number of years ago, and we have a team on on the ground in Australia. It's all me good.
I think this is our eleventh year that we've we've had business in Australia. Let's go back and check that for sure. So it's a market we've operated direct lending in consistently. Last thing I'd say is if you think of these markets from predominantly Europe, which you've seen activity, it's very similar in philosophy to what we do in The US. The middle part of the middle market, so think of it as 25 to $30,000,000, euros, pounds, pick your pick your term, and all private equity backed primarily.
So very consistent philosophy across the two portfolios. In fact, if you looked at our systems and our portfolio management system, our our screening memos, you name it, you took a deal from Europe and you took a deal from The US, you wouldn't other than the currency, you wouldn't be able to tell the difference between the two. Yeah. And then our portfolio management system, they're all in a common portfolio management system that we're able to integrate and provide reporting and every everything else we need to investors, institutional or the BDC. Ian, what did I miss there?
Would you add like that?
Speaker 0
You you did
Speaker 2
a great job. The the only thing I'd throw out is that on a total leverage basis, European deals are typically less leveraged. You you don't really see junior capital over there, and the OID is wider. So it's a pretty attractive risk adjusted return. And then from a credit perspective, what's really interesting over there, a lot of times, yes, you do have companies that are in different markets, meaning different countries.
But a lot of times, you're dealing with a a company that's focused in a market that's one country. And, basically, that that creates a very strong defensive position. And and so they really become, you know, a duopoly or or, you know, a a major player in in that country, and it's tough for other other businesses based in other countries to penetrate that market. So we like that kind of diversification from an investment perspective.
Speaker 0
Thank you. Our next question is coming from Robert Dodd from Raymond James. Your line is now live.
Speaker 7
Hi, guys. Congratulations on on a a very, very active quarter. If I can, first on kind of the the the JV. I mean, Jakafi, I mean, John, you you mentioned that it could present an opportunity for for to enable rotation. But, I mean, the the bigger question there, I guess, is it's it's been quite a good performer.
Right? I mean, it's it's it's generated a return for you in terms of return on capital, but not in the form of dividends so far. So Mhmm. Can you give us any any color on when or even if you you we should expect Chikashi to to start paying, dividends to the BDC and obviously as an independent board, but, you know, any color you can give us on that point?
Speaker 3
Sure. You you made the the point on the independent board. To the extent that a dividend were to be paid, you know, it would be that decision. And, maybe it might be important to take just a higher level approach of how we looked at JVs. What we wanna do is make sure that it runs contrast to perhaps a previous view that that one should, put as much, item or as much in it, right, liquid credit or otherwise, overlever it, and then, overly rely on that cash flow stream, to pay dividends and even in a stressed situations.
Right? Well, you know, our view is joint ventures allow for material diversification. Barings has a wide frame of reference, and having that strong joint venture partner participate in a number of those assets alongside the BDC helps manage for diversification purposes, liquidity purposes. And then it gets to the fundamental question. If one viewed that there was great opportunity to retain earnings inside the venture and it does not compromise the earnings profile of either partner, right, the BDC or or or the pension provider, then retaining capital inside the venture may be a great course of action because you also get equity built on the reinvestment of that capital in those attractive assets.
So it kinda harkens to a point that I think you've you've made, which is that, you know, BDCs that both demonstrate dividend stability and growth and NAV growth are often the the best ones to generate perpetual premiums above NAV. And so no set policy as it relates to the to the dividend or distribution from Jakafi, but the the view is pretty simple that if you have the ability to reinvest your capital and grow NAV inside that venture, that's a positive outcome.
Speaker 7
Got it. I I appreciate the color on that. And another one, if I can, on kind of the the the combo, you always give us a lot of market information, which I find very, very useful. If we look at the combo of kind of page slide 12 and slide 28, I mean, the median EBITDA in the BDC is about 20, for the the direct lending, is is 23,000,000. That's you know, the median for an average of BDCs in general is probably double that.
The median for the BSL market is probably 10 times that. So when I look at at slide 28 and I look at your middle market lending North America, you know, slightly north of 700 spreads, well above the liquid, can you give us any color on how much of that comes from the illiquidity premium? How much of that comes from size, of of the borrowers? And maybe how the dynamics in competitively spread OID, etcetera, as they shift, how those are going in in your 20 plus million dollar EBITDA versus the the the the larger end of private credit versus the syndicated market? So I realized that was a lot of a question.
Speaker 2
So, Robert, I'll start and then, you know, Eric and John jump in where I've I've missed something. But, look, just at a high level, you know, our view when you look at relative value, it's always been in the middle of the middle market. And that is both from a risk and return perspective. A risk perspective, you're dealing with companies with greater size than than the small end of the market. And actually, the the pricing wasn't all that different between the low end and the middle market.
And then with the large end of the of the middle market, maybe it's great that you could put more money out out the door, but the structural structural protection is pretty unattractive or has been unattractive. And so, you know, from a risk return perspective, we like that middle. And actually from a repayment side, and John mentioned this, you know, we feel like we're somewhat insulated but not immune from the repayments that are gonna occur. Eventually, it'll reach us, but it's gonna hit the large end of the market first. Regarding the the the illiquidity premium and the size, what's really attractive about that size of business is for us, it's typically a platform company.
And I would say over 80% of the time, the investment thesis from the private equity firm is to grow that platform by consolidating within an industry. So, you know, that allows us a to, you know, because of our ability to write checks up to, you know, 250,000,000, we can we can provide the capital upfront. The the the sponsor doesn't have to worry about that. So they know they're gonna get the capital that they need. That puts us in a driver spot in terms of the the documentation, and we get paid for it through the OID.
And then you also get a better spread than you would at the larger end the market. And we can take that platform company, and we've had examples, even companies lower, million of EBITDA, that we've been able to help grow to 50 or 60, and then as the incumbent lender, provide financing to the next buyer and grow it to a 100,000,000 in EBITDA. And to me, from a risk perspective and an origination perspective, that's what's really attractive about the private equity, market. Eric, John, is there something?
Speaker 1
Well said. The only thing I I would add is, you know, I I wouldn't say, you know, for us, Robert, that's our strategy. And I think the key is that we stick to our strategy and that we don't I I call them hobbies, you know, sometimes it's style drift. But people then at various times, they kinda go out there and say, oh, that that looks like an interesting place to go or that looks like an interesting place to go. Example for us is, you know, we don't do energy in our direct lending business.
And when energy has had some volatility and spreads have been really wide, people come in and said to us, why aren't you investing in energy right now? And I'm like, because we didn't do it before for a reason. We're not gonna do it now just because it appears cheap because we're not we're not excellent at that. So we kinda go where we think we're excellent and where the attractive return is, and Ian said it very well. That's the starting point.
Watch companies grow. There's some people at the upper end of the market that do it extremely well too at their part of market, and they're and they're excellent at that part of the market. And so I think the key is to make sure you know you know what you're good at, you know what your focus is, you know what your strategy is, and you stay intent intensely disciplined on that. And if you do that, I think then that's the key part. For us, we think it's the better place to to be.
That doesn't mean some of the other places are bad. Just this is the one that the line's best with what we believe is the best value.
Speaker 0
Thank Our next question today is coming from Mickey Schleien from Ladenburg. I
Speaker 8
wanted to ask a high level question, just thinking about the outlook for this year and next year because we're starting to see some meaningful wholesale price inflation and some tightness in at least parts of the labor market despite what we're reading about unemployment. So I'd like to understand how you feel about your borrowers' ability to pass those cost increases on to their customers and protect their margins and their ability to service the debt that they have with you.
Speaker 2
I can I can start and make you see in and then Eric, if you wanna jump in? I mean, so, you know, we mentioned the the the high quality assets that we that we saw last year. That was the starting point of our underwriting. And and I think you gotta break it out into if the company was benefiting from COVID, the question is, is that sustainable? And and and so, you know, maybe you gotta strip that away and and look at a a normalized run rate as you underwrite that business.
And and, you know, every single deal that we look at, we still continue. Even though they were high quality assets that performed well through COVID, the reality is we actually don't know the geometry of the recovery here. Like you said, there's there's things out there. There's definitely some inflationary pressures out there. You know, on the flip side, you've you've got the government from a fiscal standpoint providing a loss stimulus.
You've got monetary support. So you have those those big picture factors, macro factors in there. So when we underwrite these companies, you know, that analysis of, you know, that company's ability to maintain those margins and and being able to do it in a number of different ways, passing on price increases as as part of our ongoing analysis. But as we looked at all these deals that we've underwritten in the last forever, but, like, certainly, we didn't give it up in the last two quarters. We're also focused on a downside case and and looking at these companies through a recession.
And and that obviously includes things like pressure margin pressure and things like that. So totally agree with you. You can't just say that these companies, because they performed well during COVID, aren't gonna have any issues down the road.
Speaker 8
Thank you. Thank you for that. That that's interesting insight. And and in terms of the uncertainty about the geometry of the recovery, I mean, I I can't agree with you more, and there's still uncertainty as to how the, you know, pandemic will progress, and it looks like it will take longer than anybody would have hoped. So apart from industries like software, there are still companies that are under severe stress.
And I think in your prepared remarks, you mentioned that overall, you're you're you're fairly pleased with liquidity amongst your borrowers. But in those industries that are stressed, whether it's hospitality or restaurants or gyms, how do you how do you feel about the level of those borrowers' ability to sustain themselves through the pandemic in terms of their liquidity and and and their need for you to provide additional support to them?
Speaker 0
Well, making sure it's unfortunate for them.
Speaker 2
I can go ahead.
Speaker 4
Go ahead.
Speaker 0
Excuse me. I I
Speaker 2
I can can sleep at night because we we we don't have exposure to to those industries. I mean, I I think you're right. I mean, there are some there are some broken or impaired business models out there, And I I don't know how they're gonna recover certainly to the the position they were pre COVID. And so, again and this was just this is just part of our philosophy as as a middle market direct lender, you know, those industries that you're referring to are just really tough industries to to underwrite. And and we weren't underwriting it because of really the the the consumer discretion and how you underwrite that, like, with retail and restaurants, for example.
And and so, we avoided that, and that obviously worked out well for us during COVID. Eric?
Speaker 1
The only thing I'd add to that, Mickey, is we actually are a provider of revolvers to many of our portfolio companies, which is different than a number of other direct lenders that maybe aren't aren't in a position to provide those revolvers to the extent that we are. And so that liquidity is something that, you know, we have really direct oversight of, you know, day daily information on what those borrowings are. It's not like we're relying on a local bank that's providing the revolver, and we're just providing the term debt. And so I think that we view it as a as an attractive risk mitigation tool, that access to that revolver knowledge and what's going on in that liquidity and the fact that it sits here with us, we think it's a positive.
Speaker 0
Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Eric for any further or closing comments. Thank you, Kevin. And I just, I
Speaker 1
guess I wanna conclude by just saying thank you to everybody on the phone. You know, we started this journey a couple years ago when we, purchased TCAP and externalized the manager. And we told many of you that are following us and and they're on the call now then what our plan was, and we hope we, you know, proved out that that was the plan and we stuck through to what we said we were going to do. And I wanna also, you know, conclude by thanking the team here at Barings as I referenced. You know, the fourth quarter, 24 new platform companies, the level of of work and dedication that that it came from from our teammates on our investment teams, not just our direct lending, but our totally across the platform, our partners in legal operations and all the other areas.
It was a really proud moment for Barings in the fourth quarter, and I think it's really going to benefit shareholders going forward. So thanks, everybody, for joining, and we look forward to talking to you next quarter.
Speaker 0
Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.