BBDC - Barings BDC: 12% Yield 23% Discount

2023-12-08 09:15:00 ET

Summary

• We discuss various aspects of BBDC, including its holdings, earnings, new business, dividends, taxes, insiders, profitability, leverage, debt, liquidity, and performance.
• Analysts' price targets and valuations are also mentioned.
• We rate BBDC a Hold. While its 23% discount to NAV is attractive, we're leery of its lower amount of sponsored investments.

In our late August article about Barings BDC Inc ( BBDC ), we wrote, "While BBDC's 19% discount is very tempting, it looks very overbought on its slow stochastic chart. We intend to add BBDC to our watchlist and wait for Mr. Market's next dramatic hissy fit before jumping in."

Performance:

At the time, BBDC was trading at $9.18, with a 19% discounted Price to its 6/30/23 NAV/share of $11.34. Over the past quarter, it has dropped by 1.71%, and is down 6.7% over the past month, vs. increases of 1% and 1.93%, respectively by the BDC industry.

Valuations:

Its current discount is even deeper than 19% - at its 12/6/23 price of $8.65, BBDC was trading at a 23.11% discount to its 9/30/23 NAV/share of $11.25, which is much deeper than the BDC average discount of 3%. Its P/Sales is also deeper than the industry average.

P/NAV isn't the only valuation to watch when analyzing BDCs. Price/Net Investment Income per share, P/NII, is equally, and potentially more important. We want to know if the market is giving enough credit to a BDC for its trailing and future earnings.

In BBDC's case, its trailing P/NII of 7.72X is lower than the BDC industry average of 8.48X, and its forward 2024 P/E is also somewhat lower, while its EV/EBIT is a bit higher. However, while BBDC's earnings multiples are lower than average, they aren't major undervaluations.

Company Profile:

BBDC is a publicly traded, externally managed business development company ("BDC") that primarily makes debt investments in the middle market companies. BBDC is managed by Barings, LLC, a $347+ billion global investment manager. Barings has successfully financed middle market buyouts, acquisitions and recapitalizations for over 25 years. (BBDC site)

Holdings:

BBDC's $2.52B portfolio is dominated by Senior Secured loans, with 67% in 1st Lien and 7% in 2nd Lien loans. It also holds 14% in Equity positions, in addition to smaller percentages in Mezzanine and Structured loans, plus its JV. The weighted-average portfolio yield as of September 30, 2023 was 11.2%, while its weighted-average spread was 627 basis points.

89% of the debt portfolio is at floating rates.

76% of BBDC's investments are sponsored, which is a lower % than certain other BDCs. This is a key point, as those sponsors usually have a much larger stake in the underlying companies, and will therefore lend them support in times of financial stress, so as not to lose their equity.

The portfolio is dominated by middle market company investments, with the US at 44.5%, European middle market companies, at ~13%, Asia Pacific middle market at 2.5%; followed by cross platform investments, at 27%, with the Sierra-SIC JV at 10%, and the MVC at ~3%.

The top issuer, Eclipse Business Capital, accounted for 6.2% of exposure and the top 10 issuers accounted for 21.8%. Eclipse is also supported by a diversified pool of asset backed loans.

As of 9/30/23, there were 335 issuers, with Finance & Insurance, Business Services, and High Tech still the top 3 industry exposures:

BBDC has a hurdle rate of 8.25%, which is a bit higher than the public BDC rate of 7.1%. It also has a total return hurdle (aka a "lookback") that reduces the income-based incentive fee in the event of losses.

Portfolio Ratings:

There were two BBDC-originated investments on non-accrual. Total non-accruals represented 1.6% of total portfolio at fair value, as of 9/30/23. Excepting 2 investments, all of BBDC's non-accrual assets were from acquired portfolios and therefore are covered by credit support agreements from the Sierra CSA and the MVC CSA acquisitions.

Earnings:

Like other BDC's, higher interest rates have boosted BBDC's earnings. Q3 saw 26% topline growth, with 19% growth in NII and NII/share. On the flip side, realized gains went into the red, as higher interest rates pressured the earnings of some holdings, resulting in a swing from ~$7.86M in realized gains in Q3 '22 to a $17M realized loss in Q3 '23. BBDC has a share buyback program, which decreased the share count by ~2% vs. Q3 '22.

As with other BDCs, 2023 has been a great year for earnings thus far for BBDC, with Total Investment Income up 37%, NII up 20%, and NII/Share up 12.8. Interest expense rose ~$21.8M, up 54% vs. Q1-3 '22.

New Business:

BBDC made 10 new investments during Q3 '23. Total originations were $138M, while sales and repayments totaled $104M, for net deployments of $34M. An investment in one portfolio company was restructured, which resulted in a loss of $3M, and received proceeds related to the sale of equity investments totaling $0.5M, recognizing an $8.3M net realized loss on those sales.

Dividends:

BBDC went ex-dividend this week for a $.26 quarterly distribution. Its trailing coverage factor is a healthy 1.2X.

Its 5-year dividend growth average is -1.17%, but that is due to a special distribution of $1.7836119/share made by Mass Mutual Life Insurance Company (Barings LLC) to Triangle Capital Corporation stockholders in connection with the transaction where Barings LLC, a wholly-owned subsidiary of Mass Mutual Life Insurance Company, became the external investment adviser to Barings BDC Inc.

Subtracting that special $1.78 2018 payment gives BBDC a very attractive 25.71% 5-year dividend growth average, one of the higher averages in the BDC industry.

Profitability & Leverage:

BBDC has continued to improve its ROA and ROE so far in 2023, hitting marks that are a bit above BDC industry averages. Debt/NAV leverage has receded considerably since Q4 '21, although it was slightly higher than the Q4 '22 amount. At 1.27X it's in line with the BDC industry's 1.25X average.

The Asset/Debt ratio was stable, as of 9/30/23, whereas Interest coverage increased considerably, to 3.72X, vs. 2.52X in Q4 '22:

Debt & Liquidity:

As of September 30, 2023, the Company had cash and foreign currencies of $49.8M, $796.1M of borrowings outstanding under its $1.1B senior secured revolving credit agreement, $725M aggregate principal amount of unsecured notes outstanding and a net receivable from unsettled transactions of $53.5M.

Its next maturity isn't until Q3-4 2025, when $112.5M in unsecured notes comes due. Its $1.065B revolver and $80M in unsecured notes come due in February 2026.

As of 9/30/23, ~50% of BBDC's funding was comprised of fixed rate unsecured debt, with a weighted average coupon of 3.79%. It has $338M of unfunded commitments to its portfolio companies, in addition to $65M of outstanding commitments to its joint venture investments.

Analysts' Price Targets:

At its 12/6/23 price of $8.65, BBDC was ~1.8% above analysts' lowest price target of $8.50, and was 12.3% below the average $9.86 price target. It received a downgrade on 11/13/23 from Wells Fargo, which lowered its target from $9.00 to $8.50, and also lowered its rating from Overweight to Equal Weight.

Parting Thoughts:

We rate BBDC a Hold. While its 23% discount to NAV is attractive, we're leery of its lower amount of sponsored investments; and its P/NII and Forward P/E valuations aren't that compelling vs. its industry. BBDC is 24% above its 52-week low, and ~9% below its 52-week high.

Other than an early 2022 spike into 1.5X-plus P/Book territory, BBDC has spent much of the past 3 years with sub-1X P/Book valuations.

All tables furnished by Hidden Dividend Stocks Plus, unless otherwise noted.

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