Barings BDC (BBDC) Q4 2025 Earnings Transcript

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DATE

Friday, Feb. 20, 2026 at 9:00 a.m. ET

Call participants

• President — Matthew Freund
• Chief Executive Officer — Tom McDonald
• Chief Financial Officer — Elizabeth A. Murray

Takeaways

• Net asset value (NAV) per share -- $11.09, essentially flat from $11.10 in the previous quarter, reflecting portfolio stability.
• Net investment income (NII) per share -- $0.27, down from $0.32 in the prior quarter, with full-year NII at $1.12 versus $1.24 in 2024; primarily driven by recurring interest income and complemented by joint ventures.
• Dividend -- Board declared a first quarter dividend of $0.26 per share, matching the prior quarter; annualized, this represents a 9.4% yield on NAV.
• Portfolio composition -- 96% Barings-originated positions by fair value at quarter-end, up from 76% at the start of 2022, highlighting successful legacy asset rotation.
• Weighted average yield at fair value -- 9.6%, showing a slight decline from the previous quarter due to lower base rates.
• Net leverage ratio -- 1.15x, down from 1.26x last quarter and within management’s stated target range of 0.90x-1.25x.
• Credit quality -- Non-accruals (excluding Sierra CSA) at 0.2% of assets at fair value, declining from 0.4% in the preceding quarter; risk ratings (categories 4 and 5) stable at 7% combined.
• Sierra portfolio reduction -- 12 positions remaining with $70 million in value and $32 million repayments, down from 16 positions and $79 million last quarter; year-over-year reduction of roughly 75%.
• Sierra credit support agreement (CSA) valuation -- Increased by $7.7 million quarter over quarter to $60.5 million due to sales, repayments, and portfolio maturity adjustments.
• Share repurchases -- Over 450,000 shares repurchased in the fourth quarter, totaling over 700,000 shares for the year; $0.02 per share NAV accretion attributed to this activity.
• Funding and capital structure -- $112.5 million of private unsecured notes repaid; $300 million senior unsecured notes issued; 84% of debt outstanding is unsecured, reflecting funding diversification.
• Spillover income -- Approximately $0.80 per share held, representing about three quarters of the regular dividend and supporting payout flexibility.
• Software exposure -- 14% of portfolio fair value is in software issuers; management underscored minimal exposure to high-leverage or ARR-based software loans.
• Interest coverage -- Weighted average portfolio coverage at 2.4x, above industry averages and unchanged sequentially.
• Dividend coverage -- NII of $0.27 per share exceeded the $0.26 quarterly dividend, consistent with the company’s stated payout strategy.
• Share repurchase authorization -- New $30 million share repurchase plan approved for 2026, highlighting capital return focus.

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Risks

• CFO Murray stated, “we expect the declining base rates reflected in the trajectory of the forward SOFR curve will likely put downward pressure on net investment income, and as a result, our regular dividend may decrease from current levels.”

Summary

The leadership transition was formalized with Tom McDonald assuming the CEO role as of Jan. 1, with a stated focus on accelerating portfolio repositioning, particularly legacy asset exits and redeployment into income-generating assets. Management clarified that 14% of fair value is exposed to software, but reiterated Barings BDC (NYSE:BBDC)’s avoidance of high-risk, high-leverage, or ARR-based software credits. Strategic emphasis was placed on expanding deployment into platforms like Jocassee and continuing to wind down non-core joint ventures, with future capital allocation expected to be increasingly tactical across specialty asset-backed, complex credit, and high-yield opportunities.

• Tom McDonald noted Barings BDC’s “all-weather portfolio” benefits from sectoral defensiveness, while management warned of “increased dispersion across managers” and differentiation from riskier industry peers.
• CEO McDonald confirmed initiatives to wind down the Sierra CSA and legacy JVs are “a strong effort of ours as a team—to make sure we address that in a timely manner and again to try.”
• Liquidity profile was highlighted as robust, with “undrawn capacity on our revolving credit facility and incremental flexibility from our joint venture with Jocassee.”
• Strategic flexibility is supported by a diversified, largely unsecured funding base, with a limited near-term maturity schedule and $0.80 per share in spillover income.
• Capital allocation going forward will leverage Barings’ broader origination platform and may “be just a little more tactical” in asset selection, including potential allocations to liquid credit when opportunity allows.

Industry glossary

• CSA (Credit support agreement): A contractual arrangement providing credit loss protection structured into the portfolio, such as the Sierra CSA referenced for legacy assets.
• Spillover income: Undistributed taxable income carried forward to support future dividend coverage and payout flexibility.
• ARR (Annual recurring revenue) loan: Loans to software companies underwritten primarily based on recurring topline revenue as opposed to cash flow or EBITDA metrics.
• Jocassee JV: Barings BDC’s joint venture with Jocassee, referenced as a vehicle for incremental origination and funding diversification.
• GPF (Global private finance): Barings’ core private credit origination and underwriting platform referenced as strategic to Barings BDC’s investment focus.

Full Conference Call Transcript

Thanks, Joe, and good morning, everyone. On the call today, I am joined by Barings BDC, Inc.’s President, Matthew Freund, Chief Financial Officer, Elizabeth A. Murray, Barings Head of Global Private Finance and BBDC Portfolio Manager, Bryan D. High. Before I discuss our quarterly and annual results, I would like to take a moment to speak about the leadership transition that we recently implemented and my involvement with the BDC franchise going forward. As many of you know, I assumed the role of CEO of Barings BDC, Inc. effective January 1.

Prior to stepping into this position, I spent most of my career deeply rooted in fundamental credit research and underwriting, portfolio management, and investor alignment across multiple strategies within Barings. Having navigated multiple credit cycles and managed leveraged credit businesses for decades, I bring a perspective that reinforces my conviction in the strength and durability of our investment process, and importantly, in our continued ability to deliver value for our shareholders. What has been immediately clear in my early months is what I long believed to be true. Barings BDC, Inc. benefits from a best-in-class direct origination platform focused on the core middle market.

This differentiated sourcing capability, paired with our disciplined underwriting and strong alignment with shareholders, represents a powerful combination—one that positions us well to drive attractive long-term risk-adjusted returns. While I bring a fresh perspective, the strategy, process, and philosophy that define BBDC remain firmly intact. Our approach is working, and my focus is on enhancing the processes that already operate effectively and complementing the strengths of an exceptional existing team. It is my intention to accelerate existing initiatives and implement additional initiatives, all with a clear focus on ultimately improving ROE.

Tom McDonald: I have had the privilege of connecting with many of our stakeholders following the leadership transition, and I look forward to continuing that dialogue in the weeks and months ahead. In the fourth quarter, BBDC delivered strong net investment income accompanied by excellent credit performance within the Barings-originated portion of the portfolio. Origination activity across the platform during the fourth quarter reflected continued success in our core strategies. Net deployment was influenced by fund-level leverage, and the fourth quarter reflected a period of net repayments consistent with our prior guidance. A strong and highly diversified portfolio, combined with a benign credit environment and our focus on top-of-the-capital-structure investments in middle market issuers, has continued to serve our investors well.

We focus on the core middle market given its lower leverage and stronger risk-adjusted returns, making it the most compelling segment for BBDC and our shareholders. In addition, our emphasis on sectors that perform resiliently across economic environments provides an additional level of stability to our portfolio. This combination of senior secured financing solutions, core middle market focus, defensive non-cyclical sectors, and a global footprint offers our investors strong relative value and a meaningful differentiation within the broader BDC landscape. BBDC’s portfolio has performed largely as designed. Our defensive diversified issuer base is built as an all-weather portfolio.

We believe this approach serves investors well regardless of the broader macroeconomic conditions, which, as Matt will touch on momentarily, we feel are broadly favorable. At the same time, we are beginning to see increased dispersion across managers in the space. Our experience suggests that underwriting rigor often reveals itself over multi-year periods rather than quarters. As investors in private credit know, it can take three, four, or even five years for the portfolios to season and for credit performance to materialize. Importantly, we have avoided ARR loans, deeply cyclical issuers, and creative financing structures that appear to be presenting headwinds to the sector.

As we continue through 2026 and into 2027, we are confident that BBDC will continue to demonstrate the merits of rigorous credit underwriting, fundamental credit analysis, and a long track record within the asset class. Turning to our results, net asset value per share was $11.09 per share, substantially unchanged from the prior quarter. Net investment income for the quarter was $0.27 per share compared to $0.32 per share in the prior quarter. These results reflect continued strength in Barings-originated investments, ongoing credit stability, and disciplined capital allocation. Now digging a bit deeper into the portfolio, we continue to actively maximize the value in legacy holdings acquired from MVC Capital and Sierra.

During the fourth quarter, we accelerated the rotation of the Sierra portfolio, exiting approximately $50,000,000 of legacy positions on a combined basis between directly owned assets and assets held in the Sierra JV, as Elizabeth will comment on shortly. As of quarter end, Barings-originated positions now make up 96% of the BBDC portfolio at fair value, up from 76% at the beginning of 2022. Turning to the earnings power of the portfolio, the weighted average yield at fair value was 9.6%, reflecting a slight reduction from the prior quarter due to a reduction in base rates. Our Board declared a first quarter dividend of $0.26 per share, consistent with the prior quarter.

On an annualized basis, the dividend level equates to a 9.4% yield on our net asset value of $11.09. As Matt will cover momentarily, BBDC is well positioned to navigate the current market volatility and deliver consistent risk-adjusted returns in the quarters ahead. I will now turn the call over to Matt.

Matthew Freund: Thanks, Tom. I would first like to comment on my excitement to have you as part of our team. Barings manages nearly $0.5 trillion of capital, primarily in credit and credit-related investments.

Tom McDonald: Point five. We recognize the increasing convergence between various markets,

Matthew Freund: And know that your significant experience in high yield, stressed, and distressed markets augments the capabilities of our team that will benefit our investors in the quarters to come. Turning to the topic on many investors’ minds: software and the prospects of AI impacting underlying credit portfolios. Software accounts for approximately 14% of the fair market value of the BBDC portfolio. For those that follow our public filings, you will notice that we have long used the Moody’s industry hierarchy for our industry classifications, which does not separate software as a distinct industry. Nevertheless, after reviewing our information, 14% of the portfolio is invested in issuers primarily providing software to their underlying customers.

Our portfolio is under-indexed relative to other private credit portfolios, as we have historically avoided both annual recurring revenue loans as well as highly leveraged software issuers. We rarely provided the most aggressive leverage packages. As a consequence, we are often not perceived to be competitive in the eyes of the issuers and sponsors for these software assets. We stuck to our historical knitting, and the resulting software exposure reflects this approach. With that said, we believe the rhetoric related to an existential crisis within the software vertical is overblown. The current market tone is reminiscent of a few other periods in recent memory.

During 2018, the U.S. initiated a trade war with China, with justified concerns that industrial and manufacturing businesses would experience headwinds, causing bankruptcies across the country. At the onset of the COVID pandemic during 2020, logical arguments were made that healthcare companies would be forever transformed, and loans to 2022, interest rates began a historical rise, ultimately leveling off at more than 500 basis points by mid-2023. The rapid rise in interest rates caused many investors to express concern about indebted companies and the confidence and sustainability of various industries. Within the context of Barings-managed portfolios, we did not experience a wave of industrial defaults, healthcare defaults, or general industry defaults due to any of these events.

What we did witness, however, was that during these periods of rapid industry change, businesses of weak management, poor business models, and questionable value propositions did experience stress. And some companies did fail. But it was not the macroeconomic events that drove losses; it was the fact that macroeconomic events exacerbated weaknesses that already existed. We believe we stand on the precipice of another period of rapid industry evolution, and in this case, within the software ecosystem. Business models will be tested, and some may ultimately fade away, but well-run businesses managed by smart and capable people are expected to continue exhibiting success. Poorly run businesses will experience the same business cycle that all poorly run businesses ultimately experience.

Products will become obsolete, customers will leave, and the relevance will be diminished. One area we are most interested to follow in the months to come is the performance of ARR-related loans. As both Tom and I have commented on, and in particular, those that were expected to transition to cash flow or EBITDA-based covenants but have not. We do not have exposure to issuers such as these, and would encourage investors to try and stratify the risk to these kinds of financings, as we anticipate headwinds will be over-indexed in this segment of the software ecosystem in the quarters to come. Turning now to the state of originations.

We ended 2025 with sequential improvement in deployment as compared to the prior three quarters. Our outlook into 2026 takes a more measured tone. As the new year is upon us, we are again hearing early indications that 2026 will represent a banner year for M&A opportunities in the coming twelve months. Given our strategy to focus on the core of the middle market, large market transactions, which we define as financings for issuers with more than $100,000,000 of EBITDA, are less relevant to our business. And while financings of this size may materialize, it will have a muted impact on our overall deployment at Barings.

Our continued commitment to the core of the middle market will benefit from our incumbent positions, which is likely to provide compelling deployment opportunities regardless of what the future may hold. We are highly focused on the trends in both base rates and interest rate spreads. Base rates continue to gradually migrate lower from post-COVID highs. Narrowing spreads have begun to show some level of support. The benefits of the active portfolio rotation we have previously discussed are coming into sharper focus. BBDC shareholders benefit from a largely invested portfolio that can selectively redeploy capital into the most attractive middle market opportunities across the Barings franchise.

Given the size of the portfolio and the illiquid nature of the underlying positions, our ability to rotate the portfolio takes quarters, not months, but we are continuing to see the benefits of this effort. Turning to an overview of our current portfolio, constituting first-lien securities. 75% consists of secured investments, with approximately 70% of investments. Interest coverage within the portfolio remains strong, with weighted average interest coverage this quarter of 2.4x, above industry averages and consistent with the prior quarter. We believe strong interest coverage demonstrates the merits of our approach of focusing on leading companies in defensive sectors and thoroughly underwriting their ability to weather a range of economic conditions. The portfolio remains highly diversified.

The top two positions within the portfolio, Eclipse Business Capital and Rocade Holdings, being strategic platform investments. These investments provide BBDC shareholders with access to differentiated, compelling opportunities to invest in asset-backed loans and litigation funding—two specialized areas we believe provide attractive total returns and diversification benefits. Turning to the portfolio quality, risk ratings exhibited stability during the quarter, as our issuers exhibiting the most stress, classified as risk rating 4 and 5, were 7% on a combined basis and unchanged from the immediately preceding quarter.

Non-accruals, excluding the assets that are covered by the Sierra CSA, accounted for 0.2% of assets on a fair value basis versus 0.4% of assets on a fair value basis in the immediately preceding quarter. During the quarter, we exited one non-accrual investment, removed one asset from non-accrual status that was restructured, and moved one additional asset onto non-accrual. We remain confident in the credit quality of the underlying portfolio. We expect BBDC’s differentiated reach and scale, coupled with its core focus on middle market credit and unmatched alignment with shareholders, to continue driving positive outcomes in the quarters and years to come. As previously noted, BBDC is a through-the-cycle portfolio designed to withstand a variety of macroeconomic conditions.

With that, I would now like to turn the call over to Elizabeth.

Elizabeth A. Murray: Thanks, Matt. As both Tom and Matt said, BBDC continues to deliver strong, consistent earnings, maintain exceptional credit quality, and provide attractive risk-adjusted returns for our fellow shareholders. Turning to our results for the fourth quarter, NAV per share ended the year at $11.09, which was essentially flat compared to the third quarter at $11.10, representing less than a 0.1% decrease quarter over quarter. The slight quarter-over-quarter movement reflects a combination of modest realized losses of $0.05 per share, offset by $0.02 per share of unrealized appreciation, $0.01 per share from share repurchases, and continued stable earnings generation from the portfolio, over-earning the dividend for the fourth quarter by $0.01 per share.

The net realized loss on the portfolio was driven primarily by the loss on the exit of our investments in Ruffalo and Avanti and the restructuring of our investments in Eurofence, partially offset by the sale of our equity investments in Jones Fish and CJS Global. These exits and restructures were predominantly reclassed from net unrealized depreciation. The valuation of the Sierra credit support agreement increased by approximately $7,700,000 from $52,800,000 in the third quarter to $60,500,000 as of December 31. This increase was primarily driven by the sales, repayment, and return of capital within the underlying portfolio of the remaining Sierra investments, as well as updated assumptions around the maturity profile.

During the fourth quarter, the Sierra portfolio generated approximately $24,300,000 of sales and repayments, along with a $21,900,000 return of capital distribution from the Sierra JV. At year-end, we had 12 positions remaining in the portfolio with a value $70,000,000 of repayments of approximately $32,000,000, down from 16 positions and $79,000,000 as of September 30. On a year-over-year basis, we reduced the Sierra portfolio by roughly 75%, including sales and return of capital. In addition, during the year, we completed the early termination of the MVC credit support agreement, resulting in a one-time $23,000,000 payment from Barings to BBDC. This strategic action reduced structural complexity within the BDC and further concentrated our portfolio with income-producing assets.

We reported net investment income of $0.27 per share for the quarter versus NII of $0.32 per share in the prior quarter and $0.28 per share for 2024. For the year, net investment income was $1.12 per share compared to $1.24 per share for 2024. Net investment income was primarily driven by recurring interest income across our diversified senior secured portfolio, complemented by contributions from our joint ventures and our platform investments in Eclipse and Rocade. The decrease in net investment income year over year was primarily due to sales and repayments on the portfolio and declining base rates. It is important to note that net investment income exceeded our regular dividend of $1.04 per share.

Our net leverage ratio, which is defined as regulatory net leverage, net of unrestricted cash and net unsettled transactions, was 1.15x at quarter end, down from 1.26x as of September 30, well within our long-term leverage target of 0.90x to 1.25x. This reflects our intentional positioning to support origination activity and planned asset transfers to our Jocassee joint venture. Our capital structure continued to strengthen in 2025 as we repaid $112,500,000 of private placement unsecured notes, completed the annual extension of our corporate revolver in November, and further diversified our funding sources with the issuance of $300,000,000 senior unsecured notes in September. More broadly, our funding profile remains strong and thoughtfully aligned with our disciplined approach to asset-liability management.

Our liabilities are well diversified by duration, seniority, and structure, with an industry-leading share of unsecured debt in our capital structure at roughly 84% of our outstanding debt balances. Liquidity remains robust and well diversified, supported by undrawn capacity on our revolving credit facility and incremental flexibility from our joint venture with Jocassee. Near-term maturities remain limited, and our continued access to a broad set of funding positions us to proactively navigate refinancing needs while maintaining balance sheet strength. Subsequent to quarter end, on February 26, we will fully repay $50,000,000 of private placement notes at par, including accrued and unpaid interest. Now on to capital allocation.

Our net investment income for the quarter of $0.27 per share covered our regular dividend of $0.26 per share. As previously mentioned, the Board continued its strong focus on returning capital to shareholders and declared a first quarter dividend of $0.26 per share, representing a 9.4% distribution yield on NAV. Looking ahead to 2026, we expect the declining base rates reflected in the trajectory of the forward SOFR curve will likely put downward pressure on net investment income, and as a result, our regular dividend may decrease from current levels. While our earnings profile remains resilient and benefits from our industry-leading 8.25% hurdle rate, low base rates naturally reduce the income generated on our floating rate portfolio.

Even so, our diversified portfolio of senior secured investments, well-laddered capital structure, and disciplined underwriting continue to provide meaningful support to earnings. In addition, we currently hold spillover income of approximately $0.80 per share, representing about three quarters of our regular dividend and offering flexibility as rates normalize. Taken together, although a lower regular dividend in 2026 is possible given the rate backdrop, the durability of our earnings and the strength of our balance sheet positions us well to navigate this transition and continue delivering attractive risk-adjusted returns. Share repurchase activity continued during the year and contributed $0.02 per share to NAV. We repurchased over 450,000 shares in the fourth quarter for a total of over 700,000 shares for 2025.

In addition, the Board authorized a new $30,000,000 share repurchase plan for 2026, underscoring our commitment to enhancing shareholder value. Stepping back, 2025 was a year of steady earnings, strong liquidity, and active portfolio rotation. Despite lower base rates, we continue to produce durable NII, maintain solid credit performance, and execute on our balanced approach to capital allocation, including consistent dividends and meaningful share repurchases. As we look ahead to 2026, we remain confident in the resilience of the portfolio and the strength of our platform. We are well positioned to continue delivering attractive risk-adjusted returns for our shareholders. With that, I will turn the call back to the operator for questions.

Operator: Thank you. We will now be conducting a question-and-answer session. Our first question today is coming from Finian O’Shea from Wells Fargo Securities. Your line is now live.

Finian Patrick O’Shea: Hey, everyone. Good morning. I will start with, I guess, Tom, some interesting opening remarks on initiatives—anything you are—you find yourself working on in terms of the accelerating existing initiatives part? And then also on the new ones, to improve ROE as you outlined—any sort of heavy lifting or big changes we might anticipate there?

Tom McDonald: Yes. Thanks, Fin. So yes, a number of initiatives that we have undertaken here. I think in part, really, they are a continuation of what the team has already done. So as you know, we have got many assets on the balance sheet, legacy assets that have come over from some of the integration of the other companies we have acquired. So my focus has been really on trying to accelerate exits of those. Many of those, as you know, do not earn interest. So as we can redeploy some of those proceeds into interest-earning assets and accelerate our exit from those, obviously, that is an immediate enhancement for ROE. So that has been a big focus of mine.

I think within the CSA, another area where we have tried to make an effort to wind down the assets there to the extent that we can. We know that the CSA has clearly been a story for us for quite some time. I think it has been very beneficial for shareholders in protecting them from losses, but that thing is beginning to grow in size. And so as you know, earlier this year, we did terminate one of those.

And so while we cannot guarantee anything, it is our effort—going to be a strong effort of ours as a team—to make sure we address that in a timely manner and again to try to have some sort of an event around that where we could potentially realize proceeds there and again redeploy those into interest-earning assets. Along the same lines, we continue to wind down some of the JVs that—some of them have been problematic for us. We are focused on Jocassee, obviously, as a JV that has worked to our benefit. We continue to believe that is actually a great partnership and look to continue to potentially expand that one as well.

So those are a couple of the initiatives. I would say initiatives we do not have to take, but exist, that I think are going to be very shareholder-friendly, ROE-friendly, are going to be the hurdle rate, as you know, is quite high relative to our peers. And I think as base rates come down, that is going to be an immediate benefit to our earnings and ROE. So those are a couple of the initial ones. I would also like to point out, as you all know, I have been here at Barings for twenty-plus years. There are just many other parts of Barings, other private asset things that we can consider.

Clearly, our core is always going to be GPF in this strategy, but there are a number of things I think that we can explore that we have expertise in across the platform at Barings. And so I think that we will bring some of those to bear as potential investment opportunities as we continue to look to enhance ROE and to shareholders.

Finian Patrick O’Shea: Okay. A lot there. Yes. Interesting on expanding Jocassee. Would that look any different? Because we have had some discussions with investors, and there is a view that you sort of do not get enough of the pie there. You are—is it something like 9% of the equity, and the partner also gets the equity-like return. It is not a preferred return. And it looks like something that could be better. That is not to say it is bad. It is doing what it is supposed to do at mid-teens, but it looks like the person you want to be is the account that gets that for free.

So is there a way that this might tilt more return toward BDC shareholders?

Tom McDonald: Yes. No, I think that—I do not know that we increase the percentage ownership, but I certainly think we can increase our investment there in direct activity down there. So—and therefore, increase absolute dollars back in—in sort of form of the dividend. So as we consolidate the other JVs and wind those down, and they are virtually at this point wound down, I think we redirect investment into that entity. And again, we share all the same risk at the BDC level as we do down at Jocassee, and you will get the benefit of the leverage down there and the enhanced return to shareholders. So I think that will be a focus as we move forward.

And I think it has been very successful for us over time. And we continue to believe it will be.

Finian Patrick O’Shea: Appreciate that. Thanks. I will do one final sort of market question. I am not sure if the esteemed Joseph Mazzoli is microphone-eligible, but a lot of news in the non-traded BDC market. It feels like the ground is shaking again this week. Anything you all are seeing or feeling on the ground of private retail investor sort of reluctance or hesitation or jitters on that sort of product format?

Tom McDonald: Yes. So Joe is not mic’d up, but I will certainly take that. We are working hand in hand on that as a team as well. And so—so obviously, the headlines have not been our friends really for four months now, and clearly news this week is not helping on that front at all. So for us, it is up to us to really reach out to investors and be a little more front-footed as we address some of the issues in the market. And I think we have done a good job with that. Our flows there have been good. We have not seen any material degradation in the pace of flows relative to what we saw last year.

So we continue to believe that is the case moving forward in the first couple of months of this year. I guess everybody will see it at the end of the first quarter here on what redemptions might look like. But as of now, we are just sort of fighting the battle of the headlines, and we do believe that is what it is.

And so, you know, I think everybody here is knowledgeable about the space and truly understands private credit, understands that it is a very viable—and I think we are in a good position there, but it is on us really to get that message out and to make sure that we alleviate investor concerns on that front.

Elizabeth A. Murray: Thanks, Tom.

Tom McDonald: Welcome.

Operator: Thank you. Our next question today is coming from Casey Alexander from Compass Point. Your line is now live.

Casey Alexander: Yes, morning. And Matt, I appreciate your comments trying to bring some relative perspective to the software market. I do have a follow-up question to that I am actually going to direct to Tom because, Tom, you have a long history in the liquid credit markets. And an issue that you know investors continue to raise and would like to hear some commentary on is that in the liquid credit markets, the average price for a software loan is actually trading, in recent reports, around 90.

And so I would like to hear how much you think that matters and how much you think that influences Barings and the third-party independent valuation firms when they go to mark the books at the end of the first quarter. Is that a relevant comp? Does it come into it? How much does it influence it? And what should investors expect?

Tom McDonald: Yes, that is a great question. So I believe that in the broadly syndicated loan space, the predominant player there are CLOs. And CLOs are very ratings-sensitive. They are also somewhat price-sensitive. But the reality is there has just been so much noise around it that I think people are just sort of hitting the sell button where they can. In a $2,000,000–$3,000,000 position, you have four or five people doing that—immediately you are going to see a two- to three-point backup in that loan. It will be a perfectly good credit. There will be no issues with it. Reasonable leverage, good cash flow. The businesses, in our opinion, are good.

We have got a great analyst that covers that up there. So I think that a lot of that has to do with, not necessarily forced selling, but repositioning ahead of potential downgrades. I do not even see that really as something that is coming in the near term. We are going to have to see multiple quarters of results to see if some of the negative headlines come to fruition. Our personal belief is that it does not happen. The way that we across the Barings platform underwrite software is the recurring nature. It has got to be sort of vertically integrated enterprise value stuff. It is sort of really integral to companies’ core operations.

And so where we are invested is in companies like that. So unfortunately, the headlines just force people into that sort of sell mode—sell first and sort of ask questions later—especially if it is only a $2,000,000 to $3,000,000 position, as many CLOs sort of have. And then so that then leads to who is going to buy that. And so with all the headlines, folks do not necessarily want to back up the truck on names like that, that are trading at a two- or three- or four-point discount. It just does not really make sense from a three-year DM perspective that they would look at on buying.

And then also just increasing software exposure becomes more of a story that managers have to tell their investor base. So with that, you get the price gap when you see sellers move in like that. And again, not based on fundamentals, in my opinion, because it just does not warrant that. So how does that translate into our space? I do not know necessarily that it does, because these are broadly syndicated loans—again, they are liquid, but only to a certain point and to a certain depth. And then you begin to see prints that do not make sense. So I do not know how that is going to translate into valuation.

You know, again, with our platform and the way that we look at it, you know, we do not see any need at all and do not view there to be any reason for us on our software exposure to be making any marks down associated with that. So we feel pretty good about our exposure. There will clearly be a knock-on effect from that. It is the topic of the hour, if you will, and what is going on in the space.

But again, we believe that it is overblown, and people are just reacting to headlines, and it is our job to get in front of that with our investors and make sure that they understand the stability of the underlying credits in our portfolio, particularly as it relates to software.

Casey Alexander: Well, that is a great answer. Thank you for that. My follow-on would be, in the past, when the liquid credit markets have offered a better risk-adjusted rate of return than the directly originated markets have, Barings has been willing to step into that market and try to take advantage of it to create, you know, some positive NAV accretion as some of those opportunities present themselves. Is that something that you are watching, thinking about? Is that a possibility at some point down the road if the mismatch between the liquid credit markets and the directly originated private credit markets gets too wide?

Tom McDonald: Yes. Yes. Absolutely. We would consider that. We do a lot of work with the high yield team. I obviously came from that group, and so a lot of respect for the team up there. And so they do a lot of work around this, and we will step into it where we think there is opportunity there. And so that is something that is clearly on our screen. And, you know, the way we approach BSLs, we will be very tactical about it. And so I do think there is an opportunity there as we need to see some of this air pocket in some of the names or if there is a general sell-off in BSLs.

You know, we do know what sort of the top picks up there are. And so you can move in there, take very little credit risk, and just take advantage of the volatility. And so considering those names. And so you could see us potentially do that. It is a strategy that we are considering as we see that spacing or, you know, see the market evolve in terms of pricing there. Thank you for taking my questions.

Casey Alexander: All right. Thank you.

Operator: Thank you. Our next question today is coming from Robert Dodd from Raymond James. Your line is now live. Hi, good morning, everyone. Congrats on the quarter. You are one of the few green names on my screen today. On the two kind of like strategic initiatives. I mean, you talked about ideally liking to crystallize the Sierra CSA as well. But I mean, where would you like—if that—if you did, right, in the not too distant future, what are the areas that you would like to put that cap—I mean, obviously, you are talking about, you know, putting more into Jocassee.

That is an equity—strategic equity—effectively, you know, Eclipse and Rocade have been great, but they do up as equity. They are income producing. Very different thing from what normal equity is. I mean, how would you like to allocate incremental capital across the different types of strategies you have done between straight lending, some strategic equity? I mean, what is kind of the vision for the mix over the next, you know, couple of years, so to speak?

Tom McDonald: Yes. So I mean, again, across the platform at Barings, you know, we have got great origination everywhere. I think we have leaned into sort of our capital—the complexity piece of private credit—and got excellent returns there. You referenced Rocade and Eclipse; those are two. We continue to work with the group there. I am actually on that investment committee as well. And so there are some really interesting risk-adjusted return investment opportunities on that platform that we will continue to do. I think that is definitely one area we will look to do that. As you know, I am a big believer in diversification in credit.

So as more opportunities come there, I think you could see us diversify holdings in some of those names that have the complexity premium and very interesting opportunities there that come at 200–300 basis points wider on spread than what you can get right now in private credit. So that would be sort of one area of focus. As well, across the platform, sort of the asset-based lending opportunities, I think, that we may have as well could be interesting, as well as being tactical, right, because we see more volatility in the space. Clearly, the BSL piece would be an area where we could see some interesting opportunities. I think BB CLOs is an opportunity for us.

So I think what you will see us do is be just a little more tactical in areas like that. And then again, always focused on the core of our GPF assets. But I think looking at a number of the origination platforms here on the private credit side at Barings, there is just a lot of opportunity for us—so we will continually evaluate where those stack up relative to GPF spreads and opportunities there. So there is a lot of choices we can make along that.

And so that is part of my focus—one of the strategic initiatives, again, is to utilize the entire Barings origination platform to find the best risk-adjusted return opportunities and put them to work here.

Robert Dodd: Got it. Got it. Thank you. And then flipping to software, if I can. I mean, the average liquid bid is 90, but that is not a uniformed number, right? I mean, you know, it is—it is—you know, there is a lot trading higher than that. There are a few trading much lower than that, for example. When you look at your book, you know, the 14% that you said is software. I mean, obviously, you have avoided the types of—or tried to avoid the types of—business that are particularly vulnerable to AI displacement, and those are the ones that are trading with the—the ones that the market is concerned about.

The ones in the liquid market—those are the ones that trade in the big discounts. How much exposure, if any, do you have to the same kind of businesses the liquid market has really, you know, taken out behind the woodshed, so to speak? I mean, obviously, I think it is low. You have been avoiding it, but do you have any?

Tom McDonald: Yes. No. We do not. We do not have any that are—you are talking about the liquid loans that are trading now in the low 80s. Those are the ones that are more highly levered names that are clearly—the ability for AI to disrupt some of those models is much more evident. And I think those are the ones. So there has been massive dispersion. So good high-quality names in software in syndicated are probably in the mid-90s at this point to 98 and just trading because they are associated with software. And then the ones that actually have real credit concerns, as you mentioned, are in the mid-80s and even lower.

And so those are the ones that have been legacy investments for quite some time and have been sitting around four or five years. Many of them have already faced or are facing LME-type events. And so then you will see the trading price really gap down significantly. So we do not have exposure to those on the GPF platform. We have—AI has not come along as something that is a risk that recently we identified. It has been something that has been a core part of the underwriting for the team going back years now.

So I think that is always something that has been considered, and we just do not have anything on our radar screens that would indicate that we have issues like that, where AI is an immediate disruptor and therefore will have future impacts on quarterly earnings, EBITDA, etcetera. So we feel pretty good about our investments in that space within the 14% exposure we have there.

Robert Dodd: Got it. One more if I can, to make Elizabeth’s life maybe more awful. Any consideration to shift throughout this categorization to GICS? I mean, GICS is increasingly becoming standard. Most BDCs use it. The fact that you do not does make it harder to compare between BBDC and, you know, most of the—universes—the liquid loan markets even disclose in GICS categories now. I mean, so yes, Moody’s has been your industry categorization for a long time, but would there be value in your view to actually switching to what is becoming more the industry standard?

Elizabeth A. Murray: Yes, Robert. Thanks for the question. And it is something that we have been talking about internally. Again, especially with the software piece, right? I know Matt kind of alluded to it in his commentary. So it is something that we are constantly looking at and discussing, especially from an SEC reporting perspective. But thank you for your question.

Operator: Okay. Thank you. We have reached the end of our question-and-answer session. I would like to turn the floor back over for any further or closing comments.

Tom McDonald: Okay. Thank you, operator, and thank you to all who participated today. As I begin my tenure as CEO, I look forward to deepening our engagement with investors and advancing our strategic priorities with the full BDC leadership team. BBDC is strongly positioned for the future, and we remain focused on delivering consistent value for our shareholders. Thank you.

Operator: 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.

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