Sezeryadigar/E+ via Getty Images Almost one year ago, I wrote about Barings BDC ( BBDC ) and why I believed that it represented a nice risk/reward opportunity at the time. After a 13% run in the months after publication, the share price is now exactly at the point it was when I wrote the article. Still, the stock outperformed the market by 3%, in terms of total return. Today, I’m revisiting the investment case for this company. In the following article, I will explain why I believe that Barings BDC has the structure and quality to be a quality, bond-like investment, bearing a high yield found in riskier assets. A brief recap of recent events
In my previous article about the company, I had written that the MVC merger provided Barings BDC with so much needed differentiation across riskier assets, that had the potential to boost profitability of the overall company portfolio. About six months ago, the company merged with Sierra Income Corporation, adding $2.2 billion worth of investments in the company’s portfolio. Again, as with previous transactions, the company entered into a credit support agreement with Barings LLC for any potential unrealized or realized loss over the next 10 years of up to $100 million. In addition, a $30 million share repurchase plan was announced, should the company’s shares trade over a specific percentage below NAV and the incentive fee raise from 8% to 8.25% was amended. In my book, all these actions stand for a nice alignment of interests. Moreover, 4 months ago, the company made an unsecured bond offering of $350 million, maturing in 2026, with a coupon of 3.3%. Sierra Income Corporation merger implications
The deal with Sierra Income was completed a few weeks ago and it was the second merger deal effort, the first being with Medley Capital Corporation, which collapsed. We do know that the MVC deal gave Barings BDC exposure to riskier assets, thus improving overall yields. But what did Sierra Income’s portfolio bring to the company?
According to Barings BDC Q4 2021 earnings call, Sierra Income has currently a portfolio reaching $460 million, across 66 borrowers and the largest part of it is first lien. Sierra Income’s portfolio generates a yield of 7.7% and it currently has $16 million of non-accruals. This is where the credit support agreement comes into play.
Indeed, the company’s portfolio breakdown is confirmed by its latest SEC quarterly filing , as the majority of its loans are senior secured loans. And let us not ignore the fact that $153 million out of the original portfolio value were repaid before the deal closing, thus removing some of the portfolio-associated uncertainty.
This means that Barings BDC still has a very high-quality portfolio, with a tweak of risk to make it just a little bit spicier. As we can see, at the end of 2021, approximately 70% of the company’s investments (excluding cash, short-term investments and other assets), were first lien loans. Assuming a slightly more aggressive distribution across riskier tranches, the addition of Sierra Income’s portfolio will not result in significant changes in the company’s loan quality mix. Barings BDC Q4 2021 earnings presentation The market mix is also not expected to change, with U.S. middle-market investments being the majority and cross-platform investments accounting for 30% of the company’s portfolio, give or take. In fact, the company’s management didn’t exclude a deeper dive into the cross-platform investments, should the current uncertainty conditions continue to exist. Financial performance
Data by YCharts One of the first things that I look when I examine a BDC is its net investment income. It is the root of all the good things that come out of a BDC, such as its dividend. Speaking of dividends, the company recently announced that they will increase their quarterly dividend by 4.5%, reaching $0.23 per share, which stands for 9.07% forward annualized dividend yield. For the three months ended in December 31, 2021, the company generated net investment income per share of $0.23, bringing the annual net investment income per share figure to $1.19. As we can see, the company is currently paying 100% of its quarterly generated net investment income as a dividend to its shareholders. On an annual basis though, during 2021, the company paid a total of $0.86 per share to its shareholders as a dividend, which stands for a quite decent 72.2% dividend payout rate, based on FY 2021 annual net investment income. Data by YCharts Regarding total return, the picture is more or less the […]
source Barings BDC: Quality On The Inside, ‘Junky’ On The Yield
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