Barings BDC, Inc. 2026 Q2 Earnings Call

Please note that this call may contain forward-looking statements that include statements regarding the company's goals, beliefs, strategies, future operating results and cash flows. Although the company believes these statements are reasonable, actual results could differ materially from these projected and forward-looking statements. These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the sections titled risk factors and forward-looking statements in the company's quarterly report on Form 10-Q for the quarter ended June 30, 2026, and in other filings made with the Securities and Exchange Commission. Barings BDC undertakes no obligation to update or revise any forward-looking statements unless required by law. I will now turn the call over to Tom McDonald, Chief Executive Officer of Barings BDC.

Thanks, Albert, and good morning, everyone. On the call today, I am joined by Barings BDC's President and Co-portfolio Manager, Matt Freund, and BBDC's Chief Financial Officer and Chief Operating Officer, Elizabeth Murray. I will begin with a brief overview of the quarter and then frame how we are viewing the market. Matt will follow with a more detailed discussion of the private credit environment and credit performance. Elizabeth will then walk through our financial results. Second quarter was a strong quarter for BBDC. We generated net investment income of $0.28 per share and outearned our quarterly dividend of $0.26 per share. We believe that earnings power reflects the durability of the portfolio, the benefit of our floating rate asset base, and the value of disciplined capital deployment. Net asset value per share was $10.94 as of June 30, compared to $11.02 as of March 31.

The modest decline in NAV was driven primarily by net unrealized depreciation on select investments that were on our watch list in the prior quarter. These were partially offset by net realized gains and overearning the dividend, all of which Elizabeth will discuss in greater detail momentarily. Overall, while NAV was down modestly, the underlying earnings profile of the portfolio remained strong and credit quality remained stable. We were active on the deployment front during the quarter. BBDC originated $262 million of investments and had $167 million of sales and repayments, resulting in net originations of approximately $95 million. The investment portfolio increased to approximately $2.46 billion at fair value, and the weighted average yield on debt and other income-producing securities increased to 10.2% as of quarter end, up from 10.1% in the prior quarter.

The most significant structural accomplishment during the quarter was the termination of the legacy Sierra Credit Support Agreement. That termination freed approximately $67 million for redeployment into income-producing assets, while a new, smaller and more targeted CSA was put in place. We view this as a meaningful step in simplifying BBDC's balance sheet and continuing the transition away from legacy-acquired assets toward a more fully Barings-originated portfolio. Credit performance remains a key area of focus across the private credit market. For BBDC, credit quality was improved quarter-over-quarter. Non-accruals not covered by the CSA represented only 0.2% of the portfolio at fair value, and total non-accruals represented 0.6% of the portfolio at fair value. Stepping back, private credit continues to face a significant amount of public attention.

Investor focus remains high around redemption activity in non-traded perpetual BDCs, AI-related disruption in software, geopolitical volatility, and the path of interest rates. We welcome a more rigorous discussion of these issues. We have always believed that private credit is not a monolithic asset class. Manager selection matters, underwriting matters, portfolio construction matters, and workout experience matters. One of the themes we have been focused on this year has been the expectation of manager dispersion, which we believe continues to unfold. The past several years have rewarded capital formation and scale. The next stage of the cycle should reward disciplined underwriting, strong documentation, funding flexibility, and the ability to manage through idiosyncratic credit issues. We believe BBDC is well-positioned in that environment. Our strategy remains consistent. We focus on middle-market issuers, senior secured investments, defensive sectors, and directly originated opportunities where Barings can influence structure, documentation, and outcomes.

That discipline is particularly important as investors begin to look beyond headline yields and focus more deeply on the sustainability of earnings and the resiliency of portfolio companies. With that overview, I will turn the call over to Matt to discuss market backdrop and BBDC portfolio in more detail.

Thanks, Tom. The second quarter continued to be defined by a disconnect between headlines and fundamentals. The headlines around private credit remain noisy. We saw continued scrutiny of non-traded perpetual BDC redemptions, renewed focus on software exposure and AI disruption, heightened political uncertainty, and ongoing investor debate about timing and magnitude of future rate cuts. At the macro level, conditions were not meaningfully changed from the prior quarter. While renewed tariff concerns and Middle East conflicts contributed to volatility, the operating backdrop for most of our core middle-market borrowers remained manageable. The most important change from our perspective is that private credit behavior is becoming more rational. Capital remains available, but less aggressively so. Redemption activity in perpetual BDCs and more deliberate institutional pacing are reducing the marginal capital chasing new deals. That has begun to translate into better lender economics in parts of the market.

New issue spreads have widened modestly, fee levels have improved. Lenders are becoming more selective. This is important for BBDC. We have been saying for several quarters that slower capital formation could ultimately improve the deployment environment for disciplined lenders. We are beginning to see that dynamic emerge. Public reports indicate that direct lending activity broadly declined during the quarter, driven by fewer mega deals and large corporate financings. The same time, our core middle market issuance pipeline remains strong, where Barings has longstanding sponsor relationships and an established origination platform. Let me spend a moment on software and AI, because this remains one of the thematic topics we expect investors to focus on. AI-related concerns have clearly affected market perception of certain software credits. We think it's important to distinguish between broad headline risk and actual credit impairment.

Our underwriting framework remains focused on business model durability across all industries. We are most comfortable with businesses that exhibit market leadership, high switching costs, granular customer bases, and atypical demand drivers. When evaluating software specifically, we are focused on issuers with specific domain knowledge, data moats, purpose-built workflows, and end markets with heightened security, liability, regulatory, and privacy requirements. Given our avoidance of ARR lending historically, our portfolios are under-indexed to software. We continue to see compelling opportunities in this vertical as some lenders with large software portfolios are avoiding this sector entirely. The portfolio experience to date supports the importance of selectivity. To date, stresses attributable to AI have been concentrated within issuers that were already under pressure, as Tom previously alluded. A chief example of this dynamic is reflected in our biggest unrealized appreciation during this quarter in FinDrive, a preferred equity position.

Separate from this position, the risk rating migration during the quarter was largely modest. Our primary areas of stress in the portfolio, characterized by risk ratings 4 and 5, were substantially unchanged at 6% of the portfolio during the quarter compared to the immediately preceding period. We do not want to minimize the amount of work required to drive optimal outcomes to our underperforming positions. We are actively managing specific credits and continue to focus on maximizing recoveries, preserving optionality, and protecting shareholder value. Looking ahead, our origination outlook is constructive but selective. We do not view this as a market in which discipline should be relaxed. Quite the opposite. Elevated investor scrutiny, changing funding flows, and greater credit dispersion are creating a better environment for lenders who can be patient and selective.

Our focus remains on core middle market first lien loans, global private finance opportunities, and capital solution strategies with attractive co-investment opportunities where the Barings platform can create incremental value. We also continue to see potential long-term opportunities for market dislocation. Some managers face redemption pressures or funding constraints, well-capitalized platforms should be better positioned to provide liquidity. As previously referenced, the termination of the Sierra CSA and resulting availability of capital deployment improves our ability to participate in that environment. The quarter showed improved earnings, a better deployment environment, and continued progress in simplifying the BDC story. I will now turn the call over to Elizabeth.

Thanks, Matt. As Tom and Matt highlighted, Barings BDC delivered another quarter of solid operating performance despite continued market volatility and ongoing investor focus on the private credit sector. The quarter was highlighted by earnings that exceeded our dividend, the successful termination of the legacy Sierra Credit Support Agreement, and continued balance sheet flexibility. Turning first to our results, net asset value per share at June 30th was $10.94 compared to $11.02 at March 31st, 2026. The sequential decrease in NAV was primarily driven by net realized and unrealized losses on investments, partially offset by strong net investment income during the quarter. While NAV declined modestly, we believe the overall portfolio continued to demonstrate resilience, and credit performance across the broader portfolio remained generally stable. Net investment income for the quarter benefited from continued portfolio growth, as well as elevated dividend income from certain portfolio investments.

We generated NII of approximately $0.28 per share, exceeding our quarterly dividend of $0.26 per share by roughly $0.02. Importantly, we continue to maintain significant undistributed taxable spillover income of approximately $0.84 per share. Reflecting our earnings strength and confidence in the portfolio, our board declared a third quarter dividend of $0.26 per share, unchanged from the prior quarter. We believe our substantial spillover income, industry-leading incentive fee hurdle, and diversified income streams positions us well to support shareholder distribution through varying market environments. As always, we will continue to evaluate dividend levels relative to portfolio earnings power, base rate expectations, and overall market conditions. Moving to portfolio evaluations and realized activities. We recorded net realized losses during the quarter, primarily associated with restructuring activity and legacy portfolio investments. During the quarter, we completed restructuring involving EMI Porta Holdco and Medical Solutions.