BARINGS BDC : Management's Discussion and Analysis of Financial Condition and Results of Operations. (form 10-Q)

The following discussion is designed to provide a better understanding of our
unaudited consolidated financial statements for the three and six months ended
June 30, 2020, including a brief discussion of our business, key factors that
impacted our performance and a summary of our operating results. The following
discussion should be read in conjunction with the Unaudited Consolidated
Financial Statements and the notes thereto included in Item 1 of this Quarterly
Report on Form 10-Q, and the Consolidated Financial Statements and notes thereto
and Management's Discussion and Analysis of Financial Condition and Results of
Operations contained in our Annual Report on Form 10-K for the year ended
December 31, 2019. Historical results and percentage relationships among any
amounts in the financial statements are not necessarily indicative of trends in
operating results for any future periods.
Forward-Looking Statements
Some of the statements in this Quarterly Report constitute forward-looking
statements because they relate to future events or our future performance or
financial condition. Forward-looking statements may include, among other things,
statements as to our future operating results, our business prospects and the
prospects of our portfolio companies, the impact of the investments that we
expect to make, the ability of our portfolio companies to achieve their
objectives, our expected financings and investments, the adequacy of our cash
resources and working capital, and the timing of cash flows, if any, from the
operations of our portfolio companies. Words such as "expect," "anticipate,"
"target," "goals," "project," "intend," "plan," "believe," "seek," "estimate,"
"continue," "forecast," "may," "should," "potential," variations of such words,
and similar expressions indicate a forward-looking statement, although not all
forward-looking statements include these words. Readers are cautioned that the
forward-looking statements contained in this Quarterly Report are only
predictions, are not guarantees of future performance, and are subject to risks,
events, uncertainties and assumptions that are difficult to predict. Our actual
results could differ materially from those implied or expressed in the
forward-looking statements for any reason, including the items discussed herein,
in Item 1A entitled "Risk Factors" in Part I of our Annual Report on Form 10-K
for the year ended December 31, 2019 and in Item 1A entitled "Risk Factors" in
Part II of our subsequently filed Quarterly Reports on Form 10-Q, including our
Quarterly Report on Form 10-Q for the quarter ended March 31 ,2020. Other
factors that could cause our actual results and financial condition to differ
materially include, but are not limited to, changes in political, economic or
industry conditions, the interest rate environment or conditions affecting the
financial and capital markets, including with respect to changes from the impact
of the Coronavirus ("COVID- 19") pandemic; the length and duration of the
COVID-19 outbreak in the United States as well as worldwide and the magnitude of
the economic impact of that outbreak; the effect of the COVID-19 pandemic on our
business prospects and the prospects of our portfolio companies, including our
and their ability to achieve our respective objectives; the effect of the
disruptions caused by the COVID-19 pandemic on our ability to continue to
effectively manage our business and on the availability of equity and debt
capital and our use of borrowed money to finance a portion of our investments;
risks associated with possible disruption due to terrorism in our operations or
the economy generally; and future changes in laws or regulations and conditions
in our operating areas. These statements are based on our current expectations,
estimates, forecasts, information and projections about the industry in which we
operate and the beliefs and assumptions of our management as of the date of this
Quarterly Report. We assume no obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise, unless we are required to do so by law. Although we
undertake no obligation to revise or update any forward-looking statements,
whether as a result of new information, future events or otherwise, you are
advised to consult any additional disclosures that we may make directly to you
or through reports that we in the future may file with the SEC, including annual
reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form
8-K.
Overview of Our Business
We are a Maryland corporation incorporated on October 10, 2006. On August 2,
2018, we entered into an investment advisory agreement, or the Advisory
Agreement, and an administration agreement, or the Administration Agreement,
with Barings LLC, or Barings, and became an externally-managed BDC managed by
Barings. An externally-managed BDC generally does not have any employees, and
its investment and management functions are provided by an outside investment
adviser and administrator under an advisory agreement and administration
agreement. Instead of directly compensating employees, we pay Barings for
investment and management services pursuant to the terms of the Advisory
Agreement and the Administration Agreement. Under the terms of the Advisory
Agreement, the fees paid to Barings for managing our affairs will be determined
based upon an objective and fixed formula, as compared with the subjective and
variable nature of the costs associated with employing management and employees
in an internally-managed BDC structure, which include bonuses that cannot be
directly tied to Company performance because of restrictions on incentive
compensation under the Investment Company Act of 1940, as amended, or the 1940
Act.
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When Barings became our external investment adviser in August 2018, they
initially focused our investments in syndicated senior secured loans, bonds and
other fixed income securities. Since that time, Barings has been transitioning
our portfolio to senior secured private debt investments in middle-market
businesses that operate across a wide range of industries. Barings' existing SEC
co-investment exemptive relief under the 1940 Act, or the Exemptive Relief,
permits us and Barings' affiliated private funds and SEC-registered funds to
co-invest in Barings-originated loans, which allows Barings to efficiently
implement its senior secured private debt investment strategy for us.
Barings employs fundamental credit analysis, and targets investments in
businesses with relatively low levels of cyclicality and operating risk. The
hold size of each position will generally be dependent upon a number of factors
including total facility size, pricing and structure, and the number of other
lenders in the facility. Barings has experience managing levered vehicles, both
public and private, and seeks to enhance our returns through the use of leverage
with a prudent approach that prioritizes capital preservation. Barings believes
this strategy and approach offers attractive risk/return with lower volatility
given the potential for fewer defaults and greater resilience through market
cycles.
We generate revenues in the form of interest income, primarily from our
investments in debt securities, loan origination and other fees and dividend
income. Fees generated in connection with our debt investments are recognized
over the life of the loan using the effective interest method or, in some cases,
recognized as earned. Our syndicated senior secured loans generally bear
interest between LIBOR plus 300 basis points and LIBOR plus 400 points. Our
senior secured, middle-market, private debt investments generally have terms of
between five and seven years. Our senior secured, middle-market, private debt
investments generally bear interest between LIBOR (or the applicable currency
rate for investments in foreign currencies) plus 450 basis points and LIBOR plus
650 basis points per annum. From time to time, certain of our investments may
have a form of interest, referred to as payment-in-kind, or PIK, interest, which
is not paid currently but is instead accrued and added to the loan balance and
paid at the end of the term.
As of June 30, 2020, the weighted average yield on the principal amount of our
syndicated senior secured loan portfolio (excluding non-accrual investments),
our middle-market senior secured private debt portfolio and our structured
product investments was approximately 4.5%, 6.2%, and 7.4%, respectively. As of
June 30, 2020, the weighted average yield on the principal amount on these three
portfolios (excluding non-accrual investments) on a combined basis was
approximately 5.5%. The weighted-average yield on the principal amount of our
outstanding investments (including equity and equity-linked investments and
short-term investments and excluding non-accrual investments) was approximately
5.3% as of June 30, 2020.
As of December 31, 2019, the weighted average yield on the principal amount of
our syndicated senior secured loan portfolio and our middle-market senior
secured private debt portfolio was approximately 5.4% and 7.0%, respectively. As
of December 31, 2019, the weighted average yield on the principal amount of
these two portfolios on a combined basis was approximately 6.2%. The
weighted-average yield on the principal amount of our outstanding investments
(including equity and equity-linked investments and short-term investments) was
approximately 5.8% as of December 31, 2019.
As of June 30, 2019, the weighted average yield on the principal amount of our
syndicated senior secured loan portfolio and our middle-market senior secured
private debt portfolio was approximately 5.6% and 7.4%, respectively. As of June
30, 2019, the weighted average yield on the principal amount of these two
portfolios on a combined basis was approximately 6.2%. The weighted-average
yield on the principal amount of our outstanding investments (including equity
and equity-linked investments and short-term investments) was approximately 6.0%
as of June 30, 2019.
COVID-19 Developments
The spread of the Coronavirus and the COVID-19 pandemic, and the related effect
on the U.S. and global economies, has had adverse consequences for the business
operations of some of our portfolio companies and has adversely affected, and
threatens to continue to adversely affect, our operations and the operations of
Barings, including with respect to us. Barings has taken proactive steps around
COVID-19 to address the potential impacts on their people, clients, communities
and everyone they come in contact with, directly or through their premises.
Protecting their employees and supporting the communities in which they live and
work is a priority. Having performed stress-testing on their systems and
processes, Barings is operating a 100% remote-working model across the United
States, Europe and Australia. Barings shifted to remote working and flexible
working arrangements in Asia at the end of January 2020, while maintaining
service levels to partners and clients. Barings' cybersecurity policies are
applied consistently when working remotely or in the office.
While we have been carefully monitoring the COVID-19 pandemic and its impact on
our business and the business of our portfolio companies, we have continued to
fund our existing debt commitments. In addition, we have continued to make and
originate, and expect to continue to make and originate, new loans, including
syndicated senior secured loans and senior secured private debt investments, as
Barings continues to transition our portfolio from syndicated senior secured
loans to senior secured private debt investments in middle-market businesses.
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We cannot predict the full impact of the COVID-19 pandemic, including its
duration in the United States and worldwide and the magnitude of the economic
impact of the outbreak, including with respect to the travel restrictions,
business closures and other quarantine measures imposed on service providers and
other individuals by various local, state, and federal governmental authorities,
as well as non-U.S. governmental authorities. As such, we are unable to predict
the duration of any business and supply-chain disruptions, the extent to which
COVID-19 will negatively affect our portfolio companies' operating results or
the impact that such disruptions may have on our results of operations and
financial condition. Depending on the duration and extent of the disruption to
the operations of our portfolio companies, we expect that certain portfolio
companies will experience financial distress and possibly default on their
financial obligations to us and their other capital providers. We also expect
that some of our portfolio companies may significantly curtail business
operations, furlough or lay off employees and terminate service providers, and
defer capital expenditures if subjected to prolonged and severe financial
distress, which would likely impair their business on a permanent basis. These
developments would likely result in a decrease in the value of our investment in
any such portfolio company.
The COVID-19 pandemic and the related disruption and financial distress
experienced by our portfolio companies may have material adverse effects on our
investment income, particularly our interest income, received from our
investments. In connection with the adverse effects of the COVID-19 pandemic, we
may need to restructure our investments in some of our portfolio companies,
which could result in reduced interest payments, an increase in the amount of
PIK interest we receive, or result in permanent impairments on our investments.
If we restructure a portfolio investment included in the borrowing base under
the February 2019 Credit Facility in certain ways, including but not limited to
a reduction in interest income received from any such investment or modification
of a loan to accrue certain levels of PIK interest instead of cash, then such
modifications could result in a reduction in the borrowing base under the
February 2019 Credit Facility. In addition, if a portfolio investment included
in the borrowing base under the February 2019 Credit Facility defaults on its
obligations or if any such portfolio investment is placed on non-accrual, then
there will be a reduction in the borrowing base under the February 2019 Credit
Facility. Any reduction in the borrowing base under the February 2019 Credit
Facility could have a material adverse effect on our results of operations,
financial condition and available liquidity. In addition, any decreases in our
net investment income would increase the portion of our cash flows dedicated to
servicing our existing borrowings under the February 2019 Credit Facility and
the Debt Securitization (each as defined below under "Liquidity and Capital
Resources"). As a result, we may be required to reduce the amount of our
distributions to stockholders.
We have had a significant reduction in our net asset value as of June 30, 2020
as compared to our net asset value as of December 31, 2019, which is primarily
the result of the impact of the COVID-19 pandemic. The decrease in net asset
value as of June 30, 2020 primarily resulted from an increase in the aggregate
unrealized depreciation of our investment portfolio resulting from decreases in
the fair value of some of our portfolio company investments primarily due to the
immediate adverse economic effects of the COVID-19 pandemic and the continuing
uncertainty surrounding its long-term impact, as well as the re-pricing of
credit risk in the broadly syndicated credit market. From March 31, 2020 to June
30, 2020, the Company did experience unrealized appreciation on our broadly
syndicated loan portfolio of $31.6 million which partially offset the $82.6
million of unrealized depreciation that occurred from December 31, 2019 to March
31, 2020.
As of June 30, 2020, we are permitted under the 1940 Act, as a BDC, to borrow
amounts such that our asset coverage, as defined in the 1940 Act, equals at
least 150% after such borrowing. In addition, the February 2019 Credit Facility
contains affirmative and negative covenants and events of default relating to
minimum stockholders' equity, minimum obligors' net worth, minimum asset
coverage, minimum liquidity and maintenance of RIC and BDC status, as well as
cross-default provisions relating to other indebtedness.
As of June 30, 2020, we are in compliance with our asset coverage requirements
under the 1940 Act. In addition, we are not in default under our credit facility
as of June 30, 2020. However, any increase in unrealized depreciation of our
investment portfolio or further significant reductions in our net asset value as
a result of the effects of the COVID-19 pandemic or otherwise increases the risk
of breaching the relevant covenants, including those relating to minimum
stockholders' equity, minimum obligors' net worth, and minimum asset coverage.
If we fail to satisfy the covenants in the February 2019 Credit Facility or are
unable to cure any event of default or obtain a waiver from the applicable
lender, it could result in foreclosure by the lenders under the credit facility,
which would accelerate our repayment obligations under the February 2019 Credit
Facility and thereby have a material adverse effect on our business, liquidity,
financial condition, results of operations and ability to pay distributions to
our stockholders.
We are also subject to financial risks, including changes in market interest
rates. As of June 30, 2020, approximately $1,053.9 million (principal amount) of
our debt portfolio investments bore interest at variable rates, which generally
are LIBOR-based (or based on an equivalent applicable currency rate), and many
of which are subject to certain floors. In addition, the Class A-1 2019 Notes
and the Class A-2 2019 Notes issued in connection with the Debt Securitization
have floating rate interest provisions, and the February 2019 Credit Facility
has a floating rate interest provision. In connection with the
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COVID-19 pandemic, the U.S. Federal Reserve and other central banks have reduced
certain interest rates and LIBOR has decreased. A prolonged reduction in
interest rates will reduce our gross investment income and could result in a
decrease in our net investment income if such decreases in LIBOR are not offset
by a corresponding increase in the spread over LIBOR that we earn on any
portfolio investments, a decrease in in our operating expenses, including with
respect to our income incentive fee, or a decrease in the interest rate of our
floating interest rate liabilities tied to LIBOR. See "Item 3. Quantitative and
Qualitative Disclosures About Market Risk" for an analysis of the impact of
hypothetical base rate changes in interest rates.
We will continue to monitor the situation relating to the COVID-19 pandemic and
guidance from U.S. and international authorities, including federal, state and
local public health authorities and may take additional actions based on their
recommendations. In these circumstances, there may be developments outside our
control requiring us to adjust our plan of operation. As such, given the dynamic
nature of this situation, we cannot reasonably estimate the impacts of COVID-19
on our financial condition, results of operations or cash flows in the future.
However, to the extent our portfolio companies are adversely impacted by the
effects of the COVID-19 pandemic, it may have a material adverse impact on our
future net investment income, the fair value of our portfolio investments, its
financial condition and the results of operations and financial condition of our
portfolio companies.
Relationship with Our Adviser, Barings
Our investment adviser, Barings, a wholly-owned subsidiary of Massachusetts
Mutual Life Insurance Company, is a leading global asset management firm and is
registered with the SEC as an investment adviser under the Investment Advisers
Act of 1940, as amended. Barings' primary investment capabilities include fixed
income, private credit, real estate, equity, and alternative investments.
Subject to the overall supervision of our board of directors, or the Board,
Barings' Global Private Finance Group, or BGPF, manages our day-to-day
operations, and provides investment advisory and management services to us. BGPF
is part of Barings' $251.7 billion Global Fixed Income Platform that invests in
liquid, private and structured credit. BGPF manages private funds and separately
managed accounts, along with multiple public vehicles.
Among other things, Barings (i) determines the composition of our portfolio, the
nature and timing of the changes therein and the manner of implementing such
changes; (ii) identifies, evaluates and negotiates the structure of the
investments made by us; (iii) executes, closes, services and monitors the
investments that we make; (iv) determines the securities and other assets that
we will purchase, retain or sell; (v) performs due diligence on prospective
portfolio companies and (vi) provides us with such other investment advisory,
research and related services as we may, from time to time, reasonably require
for the investment of our funds.
Under the terms of the Administration Agreement, Barings has agreed to perform
(or oversee, or arrange for, the performance of) the administrative services
necessary for our operation, including, but not limited to, office facilities,
equipment, clerical, bookkeeping and record keeping services at such office
facilities and such other services as Barings, subject to review by the Board,
will from time to time determine to be necessary or useful to perform its
obligations under the Administration Agreement. Barings will also, on our behalf
and subject to the Board's approval, arrange for the services of, and oversee,
custodians, depositories, transfer agents, dividend disbursing agents, other
stockholder servicing agents, accountants, attorneys, underwriters, brokers and
dealers, corporate fiduciaries, insurers, banks and such other persons in any
such other capacity deemed to be necessary or desirable. Barings is responsible
for the financial and other records that we are required to maintain and will
prepare all reports and other materials required to be filed with the SEC or any
other regulatory authority.
Stockholder Approval of Reduced Asset Coverage Ratio
On July 24, 2018, our stockholders voted at a special meeting of stockholders,
or the Special Meeting, to approve a proposal to authorize us to be subject to a
reduced asset coverage ratio of at least 150% under the 1940 Act. As a result of
the stockholder approval at the Special Meeting, effective July 25, 2018, our
applicable asset coverage ratio under the 1940 Act has been decreased to 150%
from 200%. As a result, we are permitted under the 1940 Act to incur
indebtedness at a level which is more consistent with a portfolio of senior
secured debt. As of June 30, 2020, our asset coverage ratio was 186.1%.
Portfolio Investment Composition
The total value of our investment portfolio was $1,034.0 million as of June 30,
2020, as compared to $1,173.6 million as of December 31, 2019. As of June 30,
2020, we had investments in 147 portfolio companies, 8 structured product
investments and four money market funds with an aggregate cost of $1,107.8
million. As of December 31, 2019, we had investments in 147 portfolio companies
and two money market fund with an aggregate cost of $1,192.6 million. As of both
June 30, 2020 and December 31, 2019, none of our portfolio investments
represented greater than 10% of the total fair value of our investment
portfolio.
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As of June 30, 2020 and December 31, 2019, our investment portfolio consisted of
the following investments:
                                                                      Percentage of                                          Percentage of
                                                                          Total                                                  Total
                                               Cost                     Portfolio                  Fair Value                  Portfolio
June 30, 2020:
Senior debt and 1st lien notes          $ 1,002,993,507                            91  %       $   930,685,483                            90  %
Subordinated debt and 2nd lien notes         17,505,684                             2               16,040,935                             2
Structured products                          11,519,473                             1               12,264,235                             1
Equity shares                                 1,028,125                             -                1,070,410                             -
Investments in joint ventures                16,658,270                             2               15,933,845                             2
Short-term investments                       58,046,476                             5               58,046,124                             6
                                        $ 1,107,751,535                           100  %       $ 1,034,041,032                           100  %
December 31, 2019:
Senior debt and 1st lien notes          $ 1,070,031,715                            90  %       $ 1,050,863,369                            90  %
Subordinated debt and 2nd lien notes         15,339,180                             1               15,220,969                             1
Equity shares                                   515,825                             -                  760,716                             -
Investment in joint venture                  10,158,270                             1               10,229,813                             1
Short-term investments                       96,568,940                             8               96,568,940                             8
                                        $ 1,192,613,930                           100  %       $ 1,173,643,807                           100  %


Investment Activity
During the six months ended June 30, 2020, we purchased $38.3 million in
syndicated senior secured loans, purchased $11.5 million in structured product
investments, made new investments in 12 middle-market portfolio companies
totaling $91.3 million, consisting of 12 senior secured private debt
investments, one subordinated debt investment and two minority equity
investment, made one new joint venture equity investment totaling $1.5 million,
made additional debt investments in 14 existing portfolio companies totaling
$19.0 million and made an additional investment in one joint venture equity
portfolio company totaling $5.0 million. We had 11 syndicated senior secured
loans repaid at par totaling total $43.6 million, had one middle-market
portfolio company loan repaid at par totaling $8.4 million, received $3.3
million of syndicated senior secured loan principal payments and received $3.1
million of middle-market portfolio company principal payments. In addition, we
sold $105.5 million of syndicated senior secured loans, recognizing a net
realized loss on these transactions of $16.4 million, and sold $30.8 million of
middle-market portfolio company debt investments to our joint venture. In
addition, one broadly syndicated loan investment was restructured. Under U.S.
GAAP, this restructuring was considered a material modification and as a result,
we recognized a loss of approximately $0.6 million related to this
restructuring. Lastly, we received $0.2 million in escrow distributions from
legacy portfolio companies, which were recognized as realized gains.
During the six months ended June 30, 2019, we purchased $3.6 million in
syndicated senior secured loans, made thirteen new middle-market debt
investments totaling $130.1 million, consisting of 12 senior secured private
debt investments and one second lien private debt investment, made one joint
venture equity investment totaling $5.2 million and made additional debt
investments in four existing portfolio companies totaling $6.9 million. We had
four portfolio company loans repaid at par totaling $26.6 million, received
$20.8 million of principal payments and sold $33.7 million of syndicated secured
loans and senior secured private debt investments, recognizing a net realized
loss on these transactions of $0.5 million. In addition, we received $0.5
million in escrow distributions from three portfolio companies, which were
recognized as realized gains.
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Total portfolio investment activity for the six months ended June 30, 2020 and
2019 was as follows:
                                 Senior Debt
Six Months Ended                 and 1st Lien           Subordinated debt           Structured              Equity                  Investments in            Short-term
June 30, 2020:                      Notes              and 2nd Lien Notes            Products               Shares                  Joint Ventures           Investments                Total
Fair value, beginning of
period                        $ 1,050,863,369          $   15,220,969            $           -          $   760,716                $   10,229,813          $  96,568,940          $ 1,173,643,807
New investments                   145,908,541               2,160,081               11,518,233              512,299                     6,500,000            403,971,410              570,570,564

Proceeds from sales of
investments                      (136,317,018)                      -                        -             (241,428)                            -           (442,510,852)            (579,069,298)

Loan origination fees
received                           (3,111,977)                (19,808)                       -                    -                             -                      -               (3,131,785)
Principal repayments received     (58,401,447)                      -                  (19,432)                   -                             -                      -              (58,420,879)
Payment in kind interest
earned                                198,839                       -                        -                    -                             -                      -                  198,839

Accretion of loan discounts           576,166                   9,299                   18,831                    -                             -                      -                  604,296
Accretion of deferred loan
origination revenue                 1,124,781                  16,932                        -                    -                             -                      -                1,141,713
Realized gain (loss)              (17,016,092)                      -                    1,841              241,428                             -                 16,979              (16,755,844)
Unrealized depreciation           (53,139,679)             (1,346,538)                 744,762             (202,605)                     (795,968)                  (353)             (54,740,381)

Fair value, end of period $ 930,685,483 $ 16,040,935

     $  12,264,235          $ 1,070,410                $   15,933,845          $  58,046,124          $ 1,034,041,032


                                     Senior Debt
Six Months Ended                     and 1st Lien          Subordinated debt           Equity           Investment in            Short-term
June 30, 2019:                          Notes              and 2nd Lien Notes          Shares           Joint Venture           Investments                Total

Fair value, beginning of period $ 1,068,436,847 $ 7,679,132

        $ 515,825          $           -          $  45,223,941          $ 1,121,855,745
New investments                       135,673,192              4,951,685                    -              5,162,299            317,480,389              463,267,565

Proceeds from sales of
investments                           (33,739,874)                     -             (468,819)                     -           (328,280,839)            (362,489,532)
Loan origination fees received         (2,271,606)              (148,551)                   -                      -                      -             

(2,420,157)

Principal repayments received         (44,447,323)            (2,980,874)                   -                      -                      -             

(47,428,197)

Accretion of loan discounts               114,594                      -                    -                      -                      -             

114,594

Accretion of deferred loan
origination revenue                       487,623                 55,878                    -                      -                      -                  543,501
Realized gain (loss)                     (548,570)                     -              468,819                      -                      -                  (79,751)
Unrealized appreciation
(depreciation)                         27,252,163                 91,288               67,833               (162,089)                     -               27,249,195

Fair value, end of period $ 1,150,957,046 $ 9,648,558

        $ 583,658          $   5,000,210          $  34,423,491          $ 1,200,612,963


Non-Accrual Assets
Generally, when interest and/or principal payments on a loan become past due, or
if we otherwise do not expect the borrower to be able to service its debt and
other obligations, we will place the loan on non-accrual status and will
generally cease recognizing interest income on that loan for financial reporting
purposes until all principal and interest have been brought current through
payment or due to a restructuring such that the interest income is deemed to be
collectible. As of June 30, 2020, the fair value of our non-accrual asset was
$1.8 million, which comprised 0.2% of the total fair value of our portfolio, and
the cost of our non-accrual asset was $10.1 million, which comprised 0.9% of the
total cost of our portfolio. As of December 31, 2019, we had no non-accrual
assets.
Our non-accrual asset as of June 30, 2020 was as follows:
Fieldwood Energy LLC
Effective with the quarterly payment due April 30, 2020, we placed our debt
investment in Fieldwood Energy LLC, or Fieldwood, on non-accrual status. As a
result, under U.S. GAAP, we no longer recognize interest income on our debt
investment in Fieldwood for financial reporting purposes. As of June 30, 2020,
the cost of our debt investment in Fieldwood was $10.1 million and the fair
value of such investment was $1.8 million.
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Results of Operations
Three and Six months ended June 30, 2020 and June 30, 2019
Operating results for the three and six months ended June 30, 2020 and 2019 were
as follows:
                                                     Three Months          Three Months          Six Months Ended          Six Months Ended
                                                         Ended                 Ended
                                                       June 30,              June 30,                June 30,                  June 30,
                                                         2020                  2019                    2020                      2019

Total investment income                             $ 16,139,764          $ 

19,601,688 $ 34,819,362 $ 37,941,446

Total operating expenses                               9,610,635            12,188,806                20,996,164                22,571,277
Net investment income                                  6,529,129             7,412,882                13,823,198                15,370,169

Net realized gains (losses)                          (16,514,997)               50,024               (16,817,369)                  (79,751)

Net unrealized appreciation (depreciation)            65,043,310             1,852,007               (54,352,743)               27,249,195

Loss on extinguishment of debt                          (306,202)              (85,356)                 (443,592)                 (129,751)
Benefit from (provision for) taxes                        (2,532)               17,493                    17,467                      (499)
Net increase (decrease) in net assets resulting
from operations                                     $ 54,748,708          $ 

9,247,050 $ (57,773,039) $ 42,409,363

Net increases (decreases) in net assets resulting from operations can vary
substantially from period to period due to various factors, including
recognition of realized gains and losses and unrealized appreciation and
depreciation. As a result, quarterly comparisons of net changes in net assets
resulting from operations may not be meaningful.
Investment Income
                                                           Three Months          Three Months          Six Months Ended          Six Months Ended
                                                               Ended                 Ended
                                                             June 30,              June 30,                June 30,                  June 30,
                                                               2020                  2019                    2020                      2019
Investment income:

Interest income                                           $ 15,295,679          $ 19,074,824          $     32,970,081          $     37,108,838

Dividend income                                                  2,603                 4,711                     2,603                     4,711

Fee and other income                                           650,433               519,970                 1,611,426                   821,027

Payment-in-kind interest income                                191,049                     -                   234,621                         -
Interest income from cash                                            -                 2,183                       631                     6,870
Total investment income                                   $ 16,139,764          $ 19,601,688          $     34,819,362          $     37,941,446


The change in investment income for the three and six months ended June 30,
2020, as compared to the three and six months ended June 30, 2019, was primarily
due to a decrease in LIBOR from June 30, 2019 to June 30, 2020 and a decrease in
the average size of our portfolio. These decreases were partially offset by
increases in fee income from June 30, 2019 to June 30, 2020 and the continued
rotation of our portfolio from syndicated senior secured loans to senior secured
private debt investments in middle-market businesses. As of June 30, 2019, we
had investments in 142 portfolio companies, which included 30 middle-market debt
investment, 111 syndicated senior secured loans and one joint venture equity
investment as compared to investments in eight structured product investments
and 147 portfolio companies as of June 30, 2020, which included 64 middle-market
debt investments, 81 syndicated senior secured loans and two joint venture
equity investments. The weighted average yield on our investments was 5.3% as of
June 30, 2020, as compared to 6.0% as of June 30, 2019.
Operating Expenses
                                                     Three Months         Three Months          Six Months Ended          Six Months Ended
                                                        Ended                 Ended
                                                       June 30,             June 30,                June 30,                  June 30,
                                                         2020                 2019                    2020                      2019

Operating expenses:
Interest and other financing fees                   $ 4,624,731          $  7,027,040          $     10,628,864          $     12,871,212
Base management fees                                  3,616,787             3,130,955                 7,529,160                 5,581,950

Compensation expenses                                         -               108,646                    48,410                   227,090
General and administrative expenses                   1,369,117             1,922,165                 2,789,730                 3,891,025
Total operating expenses                            $ 9,610,635          $ 12,188,806                20,996,164                22,571,277


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Interest and Other Financing Fees
Interest and other financing fees during the three and six months ended June 30,
2020 were attributable to borrowings under the August 2018 Credit Facility, the
February 2019 Credit Facility and the Debt Securitization (each as defined below
under "Liquidity and Capital Resources"). Interest and other financing fees
during the three and six months ended June 30, 2019 were attributable to
borrowings under the August 2018 Credit Facility, the February 2019 Credit
Facility and the Debt Securitization. The decrease in interest and other
financing fees for the three and six months ended June 30, 2020 as compared to
the three and six months ended June 30, 2019 was primarily attributable to the
decrease in average borrowings outstanding and the decrease in interest rates
associated with the February 2019 Credit Facility and the Debt Securitization as
a result of a decrease in LIBOR.
Base Management Fees
Under the Advisory Agreement, we pay Barings a base management fee quarterly in
arrears on a calendar quarter basis. The base management fee is calculated based
on the average value of our gross assets, excluding cash and cash equivalents,
at the end of the two most recently completed calendar quarters prior to the
quarter for which such fees are being calculated. See Note 2 to our unaudited
consolidated financial statements for additional information regarding the
Advisory Agreement and the fee arrangement thereunder. For the three and six
months ended June 30, 2020, the amount of base management fee incurred was
approximately $3.6 million and $7.5 million, respectively. For the three and six
months ended June 30, 2019, the amount of base management fee incurred was
approximately $3.1 million and $5.6 million, respectively. The increase between
periods was primarily due to the increase in the base management fee rate to
1.375% for the three and six months ended June 30, 2020, pursuant to the terms
of the Advisory Agreement, as compared to 1.125% for the three and six months
ended June 30, 2019.
Compensation Expenses
The compensation expenses for the six months ended June 30, 2020 and June 30,
2019 related to salaries, benefits and discretionary compensation. As of March
31, 2020, all of our employees had been terminated in connection with our
transition to an externally managed structure.
General and Administrative Expenses
On August 2, 2018, we entered into the Administration Agreement with Barings.
Under the terms of the Administration Agreement, Barings performs (or oversees,
or arranges for, the performance of) the administrative services necessary for
our operations. We are required to reimburse Barings for the costs and expenses
incurred by Barings in performing its obligations and providing personnel and
facilities under the Administration Agreement. See Note 2 to our unaudited
consolidated financial statements for additional information regarding the
Administration Agreement. For the three and six months ended June 30, 2020, the
amount of administration expense incurred and invoiced by Barings for expenses
was approximately $0.2 million and $0.6 million, respectively. For the three and
six months ended June 30, 2019, the amount of administration expense incurred
and invoiced by the Adviser for expenses was approximately $0.9 million and $1.4
million, respectively. In addition to expenses incurred under the Administration
Agreement, general and administrative expenses include Board fees, D&O insurance
costs, as well as legal and accounting expenses.
Net Realized Gains (Losses)
Net realized gains (losses) during the three and six months ended June 30, 2020
and 2019 were as follows:
                                                     Three Months          Three Months          Six Months Ended          Six Months Ended
                                                        Ended                  Ended
                                                       June 30,              June 30,                June 30,                  June 30,
                                                         2020                  2019                    2020                      2019

Net realized gain (losses):
Non-Control / Non-Affiliate investments            $ (16,597,865)         $ 

50,024 $ (16,755,844) $ (79,751)

Net realized losses on investments                   (16,597,865)               50,024               (16,755,844)                 (79,751)
Foreign currency transactions                             82,868                     -                   (61,525)                       -
Net realized gains (losses)                        $ (16,514,997)         $ 

50,024 $ (16,817,369) $ (79,751)

In the three months ended June 30, 2020, we recognized net realized losses
totaling $16.5 million, which consisted primarily of a net loss on our loan
portfolio of $16.7 million, partially offset by a net gain on foreign currency
transactions of $0.1 million, and by $0.1 million in escrow distributions we
received from legacy portfolio companies, which were recognized as realized
gains. In the six months ended June 30, 2020, we recognized net realized losses
totaling $16.8 million, which consisted primarily of a net loss on our loan
portfolio of $17.0 million and a net loss on foreign currency transactions of
$0.1 million, partially offset by $0.2 million in escrow distributions we
received from legacy portfolio companies, which were recognized as realized
gains.
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In the three months ended June 30, 2019, we recognized net realized gains
totaling $0.1 million, which consisted primarily of a net gain on escrow
payments received of $0.2 million, partially offset by a net loss on our
syndicated senior secured loan portfolio of $0.1 million. In the six months
ended June 30, 2019, we recognized a net realized loss totaling $0.1 million,
which consisted primarily of a net loss on our syndicated senior secured loan
portfolio of $0.5 million, partially offset by a net gain on escrow payments
received of $0.5 million.
Net Unrealized Appreciation (Depreciation)
Net unrealized appreciation (depreciation) during three and six months ended
June 30, 2020 and 2019 was as follows:
                                                      Three Months          Three Months         Six Months Ended          Six Months Ended
                                                          Ended                Ended
                                                        June 30,              June 30,               June 30,                  June 30,
                                                          2020                  2019                   2020                      2019

Net unrealized appreciation (depreciation):
Non-Control / Non-Affiliate investments              $ 63,416,644          $ 2,014,096          $(53,944,413)             $     27,411,284
Affiliate investments                                   3,037,255             (162,089)                 (795,968)                 (162,089)

Net unrealized appreciation (depreciation) on
investments                                            66,453,899            1,852,007               (54,740,381)               27,249,195
Foreign currency transactions                          (1,410,589)                   -                   387,638                         -
Net unrealized appreciation (depreciation)           $ 65,043,310

$ 1,852,007 $ (54,352,743) $ 27,249,195

During the three months ended June 30, 2020, we recorded net unrealized
appreciation totaling $65.0 million, consisting of net unrealized appreciation
on our current portfolio of $43.8 million, net unrealized depreciation related
to foreign currency transactions of $1.4 million and net unrealized appreciation
reclassification adjustments of $22.7 million related to the net realized losses
on the sales / repayments of certain syndicated secured loans. The net
unrealized appreciation on the Company's current portfolio of $43.8 million was
driven by broad market moves for liquid syndicated secured loans and structured
products totaling $31.6 million, broad market moves for middle-market debt
investments of $5.1 million, the credit or fundamental performance of
middle-market debt investments totaling $2.9 million, the impact of foreign
currency exchange rates on middle-market debt investments of $1.3 million, and
net unrealized appreciation on the Company's total equity and joint venture
investments of $3.0 million.
During the six months ended June 30, 2020, we recorded net unrealized
depreciation totaling $54.4 million, consisting of net unrealized depreciation
on our current portfolio of $77.8 million, net unrealized appreciation related
to foreign currency transactions of $0.4 million and net unrealized appreciation
reclassification adjustments of $23.0 million related to the net realized losses
on the sales / repayments of certain syndicated secured loans. The net
unrealized depreciation on the Company's current portfolio of $77.8 million was
driven by broad market moves for liquid syndicated secured loans and structured
products totaling $51.0 million, broad market moves for middle-market debt
investments of $20.4 million, the credit or fundamental performance of
middle-market debt investments totaling $5.3 million and net unrealized
depreciation on the Company's total equity and joint venture investments of $1.0
million.
During the three months ended June 30, 2019, we recorded net unrealized
appreciation totaling $1.9 million, consisting of net unrealized appreciation on
our current portfolio of $1.7 million and net unrealized appreciation
reclassification adjustments of $0.2 million related predominately to the net
realized losses on the sales / repayments of certain syndicated secured loans.
During the six months ended June 30, 2019, we recorded net unrealized
appreciation totaling $27.2 million, consisting of net unrealized appreciation
on our current portfolio of $25.5 million and net unrealized appreciation
reclassification adjustments of $1.8 million related predominately to the net
realized losses on the sales / repayments of certain syndicated secured loans.
Liquidity and Capital Resources
We believe that our current cash and cash equivalents on hand, our short-term
investments, sales of our syndicated senior secured loans, our available
borrowing capacity under the February 2019 Credit Facility (as defined below
under "Financing Transactions") and our anticipated cash flows from operations
will be adequate to meet our cash needs for our daily operations for at least
the next twelve months. This "Liquidity and Capital Resources" section should be
read in conjunction with "COVID-19 Developments" above.
Cash Flows
For the six months ended June 30, 2020, we experienced a net decrease in cash in
the amount of $3.5 million. During that period, our operating activities
provided $120.0 million in cash, consisting primarily of proceeds from sales of
portfolio investments totaling $239.7 million and sales of short-term
investments of $442.5 million, partially offset by purchases of portfolio
investments of $171.5 million and purchases of short-term investments of $404.0
million. In addition, our financing activities used $123.5 million of cash,
consisting primarily of net repayments under the August 2018 Credit Facility and
the
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February 2019 Credit Facility of $9.1 million, repayments of the Debt
Securitization of $91.8 million, share repurchases of $7.1 million and dividends
paid in the amount of $15.5 million. As of June 30, 2020, we had $18.5 million
of cash on hand.
For the six months ended June 30, 2019, we experienced a net increase in cash in
the amount of $0.5 million. During that period, our operating activities used
$32.7 million in cash, consisting primarily of purchases of portfolio
investments of $171.4 million and purchases of short-term investments of $317.5
million, partially offset by proceeds from sales of investments totaling $104.4
million and sales of short-term investments of $328.3 million. In addition, our
financing activities provided $33.2 million of cash, consisting primarily of net
proceeds from our $449.3 million term debt securitization, or the Debt
Securitization, of $348.3 million, partially offset by net repayments under the
August 2018 Credit Facility and the February 2019 Credit Facility of $284.5
million, purchases of shares in the share repurchase plan of $9.6 million,
financing fees of $8.2 million and dividends paid in the amount of $12.6
million. As of June 30, 2019, we had $12.9 million of cash on hand.
Financing Transactions
On July 3, 2018, we formed Barings BDC Senior Funding I, LLC, an indirectly
wholly-owned Delaware limited liability company, or BSF, the primary purpose of
which was to function as our special purpose, bankruptcy-remote, financing
subsidiary. On August 3, 2018, BSF entered into a credit facility, or the August
2018 Credit Facility (as subsequently amended in December 2018 and February
2020), with Bank of America, N.A., as administrative agent, or the
Administrative Agent and Class A-1 Lender, Société Générale, as Class A Lender,
and Bank of America Merrill Lynch, as sole lead arranger and sole book manager.
BSF and the Administrative Agent also entered into a security agreement dated as
of August 3, 2018, or the Security Agreement, pursuant to which BSF's
obligations under the August 2018 Credit Facility were secured by a
first-priority security interest in substantially all of the assets of BSF,
including its portfolio of investments, or the Pledged Property. In connection
with the first-priority security interest established under the Security
Agreement, all of the Pledged Property was held in the custody of State Street
Bank and Trust Company, as collateral administrator, or the Collateral
Administrator. The Collateral Administrator maintained and performed certain
collateral administration services with respect to the Pledged Property pursuant
to a collateral administration agreement among BSF, the Administrative Agent and
the Collateral Administrator. Generally, the Collateral Administrator was
authorized to make distributions and payments from Pledged Property based only
on the written instructions of the Administrative Agent.
The August 2018 Credit Facility initially provided for borrowings in an
aggregate amount up to $750.0 million, including up to $250.0 million borrowed
under the Class A Loan Commitments and up to $500.0 million borrowed under the
Class A-1 Loan Commitments. Effective February 28, 2019, we reduced our Class A
Loan Commitments to $100.0 million, which reduced total commitments under the
August 2018 Credit Facility to $600.0 million. Effective May 9, 2019, we further
reduced our Class A Loan Commitments under the August 2018 Credit Facility from
$100.0 million to zero and reduced our Class A-1 Loan Commitments under the
August 2018 Credit Facility from $500.0 million to $300.0 million, which
collectively reduced total commitments under the August 2018 Credit Facility to
$300.0 million. Effective June 18, 2019, we further reduced our Class A-1 Loan
Commitments, and therefore total commitments, under the August 2018 Credit
Facility from $300.0 million to $250.0 million. Effective August 14, 2019, we
further reduced our Class A-1 Loan Commitments, and therefore total commitments,
under the August 2018 Credit Facility from $250.0 million to $177.0 million.
Effective October 29, 2019, we further reduced our Class A-1 Loan Commitments,
and therefore total commitments, under the August 2018 Credit Facility from
$177.0 million to $150.0 million. Effective January 21, 2020, we further reduced
our Class A-1 Loan Commitments, and therefore total commitments, under the
August 2018 Credit Facility from $150.0 million to $80.0 million. Effective
April 23, 2020, we further reduced our Class A-1 Loan Commitments, and therefore
total commitments, under the August 2018 Credit Facility from $80.0 million to
$30.0 million. Finally, effective June 26, 2020, we further reduced our Class
A-1 Loan Commitments, and therefore total commitments, under the August 2018
Credit Facility from $30.0 million to zero. In connection with these reductions,
the pro rata portion of the unamortized deferred financing costs related to the
August 2018 Credit Facility was written off and recognized as a loss on
extinguishment of debt in our Consolidated Statements of Operations.
On February 21, 2020, we extended the maturity date of the August 2018 Credit
Facility from August 3, 2020 to August 3, 2021. On June 30, 2020, following the
repayment of all borrowings, interest, and fees payable thereunder and at our
election, the August 2018 Credit Facility was terminated, including all
commitments and obligations of Bank of America, N.A. to lend or make advances to
BSF. In addition, the Security Agreement was terminated and all security
interests in the assets of BSF in favor of the lenders were terminated. As a
result of these terminations, all obligations of BSF under the August 2018
Credit Facility and Security Agreement were fully discharged.
All borrowings under the August 2018 Credit Facility bore interest, subject to
BSF's election, on a per annum basis equal to (i) the applicable base rate plus
the applicable spread or (ii) the applicable LIBOR rate plus the applicable
spread. The applicable base rate was equal to the greater of (i) the federal
funds rate plus 0.5%, (ii) the prime rate or (iii) one-month LIBOR plus 1.0%.
The applicable LIBOR rate depended on the term of the borrowing under the August
2018 Credit Facility, which could be either one month or three months. BSF was
required to pay commitment fees on the unused portion of the August
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2018 Credit Facility. BSF could prepay any borrowing at any time without premium
or penalty, except that BSF could have been liable for certain funding breakage
fees if prepayments occurred prior to expiration of the relevant interest
period. BSF could also permanently reduce all or a portion of the commitment
amount under the August 2018 Credit Facility without penalty. See Note 5 to our
Unaudited Consolidated Financial Statements for additional information regarding
the August 2018 Credit Facility.
On February 21, 2019, we entered into a credit facility, or the February 2019
Credit Facility (as subsequently amended in December 2019), with ING Capital
LLC, or ING, as administrative agent, and the lenders party thereto. The initial
commitments under the February 2019 Credit Facility total $800.0 million. The
February 2019 Credit Facility has an accordion feature that allows for an
increase in the total commitments of up to $400.0 million, subject to certain
conditions and the satisfaction of specified financial covenants. We can borrow
foreign currencies directly under the February 2019 Credit Facility. The
February 2019 Credit Facility, which is structured as a revolving credit
facility, is secured primarily by a material portion of our assets and
guaranteed by certain of our subsidiaries. Following the termination of the
August 2018 Credit Facility on June 30, 2020 BSF became a subsidiary guarantor
and its assets will secure the February 2019 Credit Facility. The revolving
period of the February 2019 Credit Facility ends on February 21, 2023, followed
by a one-year repayment period with a final maturity date of February 21, 2024.
Borrowings under the February 2019 Credit Facility bear interest, subject to our
election, on a per annum basis equal to (i) the applicable base rate plus 1.25%
(or 1.00% if we receive an investment grade credit rating), (ii) the applicable
LIBOR rate plus 2.25% (or 2.00% if we receive an investment grade credit
rating), (iii) for borrowings denominated in certain foreign currencies other
than Australian dollars, the applicable currency rate for the foreign currency
as defined in the credit agreement plus 2.25% (or 2.00% if we receive an
investment grade credit rating), or (iv) for borrowings denominated in
Australian dollars, the applicable Australian dollars Screen Rate, plus 2.45%
(or 2.20% if we receive an investment grade credit rating). The applicable base
rate is equal to the greatest of (i) the prime rate, (ii) the federal funds rate
plus 0.5%, (iii) the Overnight Bank Funding Rate plus 0.5%, (iv) the adjusted
three-month applicable currency rate plus 1.0% and (v) 1%. The applicable
currency rate depends on the currency and term of the draw under the February
2019 Credit Facility. We pay a commitment fee of (x) 0.5% per annum on undrawn
amounts if the unused portion of the February 2019 Credit Facility is greater
than two-thirds of total commitments or (y) 0.375% per annum on undrawn amounts
if the unused portion of the February 2019 Credit Facility is equal to or less
than two-thirds of total commitments.
As of June 30, 2020, we were in compliance with all covenants under the February
2019 Credit Facility and had U.S. dollar borrowings of $265.0 million
outstanding under the February 2019 Credit Facility with a weighted average
interest rate of 2.438%, borrowings denominated in Swedish kronas of 12.8kr
million ($1.4 million U.S. dollars) with an interest rate of 2.25%, borrowings
denominated in British pounds sterling of £9.3 million ($11.5 million U.S.
dollars) with an interest rate of 2.375%, borrowings denominated in Euros of
€38.0 million ($55.0 million U.S. dollars) with an interest rate of 2.25% and
borrowings denominated in Canadian dollars of C$13.6 million ($10.0 million U.S.
dollars) with an interest rate of 2.78%. The borrowings denominated in foreign
currencies were translated into U.S. dollars based on the spot rate at the
relevant balance sheet date. The impact resulting from changes in foreign
exchange rates on the February 2019 Credit Facility borrowings is included in
"Net unrealized appreciation (depreciation) - foreign currency transactions" in
our Unaudited Consolidated Statements of Operations.
The fair values of the borrowings outstanding under the February 2019 Credit
Facility are based on a market yield approach and current interest rates, which
are Level 3 inputs to the market yield model. As of June 30, 2020, the total
fair value of the borrowings outstanding under the February 2019 Credit Facility
was $342.9 million. See Note 5 to our Unaudited Consolidated Financial
Statements for additional information regarding the February 2019 Credit
Facility.
On May 9, 2019, we completed a $449.3 million term debt securitization, or the
Debt Securitization. Term debt securitizations are also known as collateralized
loan obligations and are a form of secured financing, which is consolidated for
financial reporting purposes and subject to our overall asset coverage
requirement. The notes offered in the Debt Securitization, collectively, the
2019 Notes, were issued by Barings BDC Static CLO Ltd. 2019-I, or BBDC Static
CLO Ltd., and Barings BDC Static CLO 2019-I, LLC, our wholly-owned and
consolidated subsidiaries. BBDC Static CLO Ltd. and Barings BDC Static CLO
2019-I, LLC are collectively referred to herein as the Issuers. The 2019 Notes
are secured by a diversified portfolio of senior secured loans and participation
interests therein. The Debt Securitization was executed through a private
placement of approximately $296.8 million of AAA(sf) Class A-1 Senior Secured
Floating Rate 2019 Notes, or the Class A-1 2019 Notes, which bear interest at
the three-month LIBOR plus 1.02%; $51.5 million of AA(sf) Class A-2 Senior
Secured Floating Rate 2019 Notes, or the Class A-2 2019 Notes, which bear
interest at the three-month LIBOR plus 1.65%; and $101.0 million of Subordinated
2019 Notes which do not bear interest and are not rated. We retained all of the
Subordinated 2019 Notes issued in the Debt Securitization in exchange for our
sale and contribution to BBDC Static CLO Ltd. of the initial closing date
portfolio, which included senior secured loans and participation interests. The
2019 Notes are scheduled to mature on April 15, 2027; however the 2019 Notes may
be redeemed by the Issuers, at our direction as holder of the Subordinated 2019
Notes, on any
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business day after May 9, 2020. In connection with the sale and contribution, we
made customary representations, warranties and covenants to the Issuers.
The Class A-1 2019 Notes and Class A-2 2019 Notes are the secured obligations of
the Issuers, the Subordinated 2019 Notes are the unsecured obligations of BBDC
Static CLO Ltd., and the indenture governing the 2019 Notes includes customary
covenants and events of default. The 2019 Notes have not been, and will not be,
registered under the Securities Act of 1933, as amended, or the Securities Act,
or any state securities or "blue sky" laws and may not be offered or sold in the
United States absent registration with the Securities and Exchange Commission or
an applicable exemption from registration.
We serve as collateral manager to BBDC Static CLO Ltd. under a collateral
management agreement and we have agreed to irrevocably waive all collateral
management fees payable pursuant to the collateral management agreement.
During the three months ended June 30, 2020, $64.8 million of the Class A-1 2019
Notes were repaid. As of June 30, 2020, we had borrowings of $174.9 million
outstanding under the Class A-1 2019 Notes with an interest rate of 2.239% and
borrowings of $51.5 million outstanding under the Class A-2 2019 Notes with an
interest rate of 2.869%. The fair value determinations of the 2019 Notes were
based on market yield approach and current interest rates, which are Level 3
inputs to the market yield model. As of June 30, 2020, the total fair value of
the Class A-1 2019 Notes and the Class A-2 2019 Notes was $174.2 million and
$51.2 million, respectively. See Note 5 to our Unaudited Consolidated Financial
Statements for additional information regarding the Debt Securitization.
Share Repurchases
On February 25, 2019, we adopted a share repurchase plan, pursuant to Board
approval, for the purpose of repurchasing shares of our common stock in the open
market during the 2019 fiscal year, or the 2019 Share Repurchase Plan. The Board
authorized us to repurchase in 2019 up to a maximum of 5.0% of the amount of
shares outstanding under the following targets:
•a maximum of 2.5% of the amount of shares of our common stock outstanding if
shares traded below NAV per share but in excess of 90% of NAV per share; and
•a maximum of 5.0% of the amount of shares of our common stock outstanding if
shares traded below 90% of NAV per share.
The 2019 Share Repurchase Plan was executed in accordance with applicable rules
under the Exchange Act, including Rules 10b5-1 and 10b-18 thereunder, as well as
certain price, market volume and timing constraints specified in the 2019 Share
Repurchase Plan. The 2019 Share Repurchase Plan was designed to allow us to
repurchase our shares both during our open window periods and at times when we
otherwise might be prevented from doing so under applicable insider trading laws
or because of self-imposed trading blackout periods. A broker selected by us was
delegated the authority to repurchase shares on our behalf in the open market,
pursuant to, and under the terms and limitations of, the 2019 Share Repurchase
Plan. During the six months ended June 30, 2019, we repurchased a total of
969,789 shares of our common stock in the open market under the 2019 Share
Repurchase Plan at an average price of $9.95 per share, including broker
commissions.
On February 27, 2020, the Board approved an open-market share repurchase program
for the 2020 fiscal year, or the 2020 Share Repurchase Program. Under the 2020
Share Repurchase Program, we are authorized during fiscal year 2020 to
repurchase up to a maximum of 5.0% of the amount of shares outstanding as of
February 27, 2020 if shares trade below NAV per share, subject to liquidity and
regulatory constraints.
Purchases under the 2020 Share Repurchase Program may be made in open-market
transactions and include transactions being executed by a broker selected us
that has been delegated the authority to repurchase shares on our behalf in the
open market in accordance with applicable rules under the Exchange Act,
including Rules 10b5-1 and 10b-18 thereunder, and pursuant to, and under the
terms and limitations of, the 2020 Share Repurchase Program. There is no
assurance that we will purchase shares at any specific discount levels or in any
specific amounts. During the six months ended June 30, 2020, we repurchased a
total of 989,050 shares of our common stock in the open market under the 2020
Share Repurchase Program at an average price of $7.21 per share, including
broker commissions.
Distributions to Stockholders
We have elected to be treated as a RIC under the Internal Revenue Code of 1986,
as amended, or the Code, and intend to make the required distributions to our
stockholders as specified therein. In order to maintain our tax treatment as a
RIC and to obtain RIC tax benefits, we must meet certain minimum distribution,
source-of-income and asset diversification requirements. If such requirements
are met, then we are generally required to pay income taxes only on the portion
of our taxable income and gains we do not distribute (actually or
constructively) and certain built-in gains. We have historically met our minimum
distribution requirements and continually monitor our distribution requirements
with the goal of ensuring compliance with the
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Code. We can offer no assurance that we will achieve results that will permit
the payment of any level of cash distributions and our ability to make
distributions will be limited by the asset coverage requirement and related
provisions under the 1940 Act and contained in any applicable indenture and
related supplements. In addition, in order to satisfy the annual distribution
requirement applicable to RICs, we may declare a significant portion of our
dividends in shares of our common stock instead of in cash. As long as a portion
of such dividend is paid in cash (which portion may be as low as 10% of such
dividend, for dividends declared on or before December 31, 2020, and after that,
20% of such dividend under published guidance from the Internal Revenue Service)
and certain requirements are met, the entire distribution will be treated as a
dividend for U.S. federal income tax purposes. As a result, a stockholder
generally would be subject to tax on 100% of the fair market value of the
dividend on the date the dividend is received by the stockholder in the same
manner as a cash dividend, even though most of the dividend was paid in shares
of our common stock.
The minimum distribution requirements applicable to RICs require us to
distribute to our stockholders each year at least 90% of our investment company
taxable income, or ICTI, as defined by the Code. Depending on the level of ICTI
and net capital gain, if any, earned in a tax year, we may choose to carry
forward income in excess of current year distributions into the next tax year
and pay a 4% U.S. federal excise tax on such excess. Any such carryover income
must be distributed before the end of the next tax year through a dividend
declared prior to filing the final tax return related to the year which
generated such income.
ICTI generally differs from net investment income for financial reporting
purposes due to temporary and permanent differences in the recognition of income
and expenses. We may be required to recognize ICTI in certain circumstances in
which we do not receive cash. For example, if we hold debt obligations that are
treated under applicable tax rules as having original issue discount (such as
debt instruments issued with warrants), we must include in ICTI each year a
portion of the original issue discount that accrues over the life of the
obligation, regardless of whether cash representing such income is received by
us in the same taxable year. We may also have to include in ICTI other amounts
that we have not yet received in cash, such as (i) PIK interest income and (ii)
interest income from investments that have been classified as non-accrual for
financial reporting purposes. Interest income on non-accrual investments is not
recognized for financial reporting purposes, but generally is recognized in
ICTI. Because any original issue discount or other amounts accrued will be
included in our ICTI for the year of accrual, we may be required to make a
distribution to our stockholders in order to satisfy the minimum distribution
requirements, even though we will not have received and may not ever receive any
corresponding cash amount. ICTI also excludes net unrealized appreciation or
depreciation, as investment gains or losses are not included in taxable income
until they are realized.
Recent Developments
Subsequent to June 30, 2020, we made approximately $60.6 million of new private
debt commitments, of which $15.7 million closed and funded. The $15.7 million of
investments consist of two first lien senior secured debt investments with a
weighted average yield of 14.0%. In addition, we funded $5.7 million of
previously committed delayed draw term loans.
On August 3, 2020, we entered into a Note Purchase Agreement (the "Note Purchase
Agreement") with Massachusetts Mutual Life Insurance Company governing the
issuance of (i) $50,000,000 in aggregate principal amount of Series A senior
unsecured notes (the "Series A Notes") due August 2025 with a fixed interest
rate of 4.66% per year, and (ii) up to $50,000,000 in aggregate principal amount
of additional senior unsecured notes (the "Additional Notes" and, collectively
with the Series A Notes, the "August 2025 Notes") due August 2025 with a fixed
interest rate per year to be determined, in each case, to qualified
institutional investors in a private placement. An aggregate principal amount of
$25,000,000 of the Series A Notes is expected to be issued in September 2020
(subject to the satisfaction of customary closing conditions contained in the
Note Purchase Agreement) and will mature on August 4, 2025, and an aggregate
principal amount of $25,000,000 of the Series A Notes is expected to be issued
in December 2020 (subject to the satisfaction of customary closing conditions
contained in the Note Purchase Agreement) and mature on August 4, 2025, in each
case unless redeemed, purchased or prepaid prior to such date by us or our
affiliates in accordance with their terms. Interest on the August 2025 Notes
will be due semiannually. In addition, we are obligated to offer to repay the
August 2025 Notes at par if certain change in control events occur. The August
2025 Notes will be our general unsecured obligations that rank pari passu with
all outstanding and future unsecured unsubordinated indebtedness issued by us.
See "Part II. Item 5. Other Information" of this Quarterly Report on Form 10-Q
for more information.
On August 5, 2020 our Board declared a quarterly distribution of $0.16 per share
payable on September 16, 2020 to holders of record as of September 9, 2020.

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Critical Accounting Policies and Use of Estimates
The preparation of our unaudited financial statements in accordance with U.S.
GAAP requires management to make certain estimates and assumptions that affect
the reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses for the periods
covered by such financial statements. We have identified investment valuation
and revenue recognition as our most critical accounting estimates. On an ongoing
basis, we evaluate our estimates, including those related to the matters
described below. These estimates are based on the information that is currently
available to us and on various other assumptions that we believe to be
reasonable under the circumstances. Actual results could differ materially from
those estimates under different assumptions or conditions. A discussion of our
critical accounting policies follows.
Investment Valuation
The most significant estimate inherent in the preparation of our financial
statements is the valuation of investments and the related amounts of unrealized
appreciation and depreciation of investments recorded. We have a valuation
policy, as well as established and documented processes and methodologies for
determining the fair values of portfolio company investments on a recurring (at
least quarterly) basis in accordance with the 1940 Act and FASB ASC Topic 820,
Fair Value Measurements and Disclosures, or ASC Topic 820. Our current valuation
policy and processes were established by Barings and were approved by the Board.
Under ASC Topic 820, fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between a
willing buyer and a willing seller at the measurement date. For our portfolio
securities, fair value is generally the amount that we might reasonably expect
to receive upon the current sale of the security. The fair value measurement
assumes that the sale occurs in the principal market for the security, or in the
absence of a principal market, in the most advantageous market for the security.
If no market for the security exists or if we do not have access to the
principal market, the security should be valued based on the sale occurring in a
hypothetical market.
Under ASC Topic 820, there are three levels of valuation inputs, as follows:
Level 1 Inputs - include quoted prices (unadjusted) in active markets for
identical assets or liabilities.
Level 2 Inputs - include quoted prices for similar assets and liabilities in
active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the financial
instrument.
Level 3 Inputs - include inputs that are unobservable and significant to the
fair value measurement.
A financial instrument is categorized within the ASC Topic 820 valuation
hierarchy based upon the lowest level of input to the valuation process that is
significant to the fair value measurement. For example, a Level 3 fair value
measurement may include inputs that are observable (Levels 1 and 2) and
unobservable (Level 3). Therefore, unrealized appreciation and depreciation
related to such investments categorized as Level 3 investments within the tables
below may include changes in fair value that are attributable to both observable
inputs (Levels 1 and 2) and unobservable inputs (Level 3).
Our investment portfolio includes certain debt and equity instruments of
privately held companies for which quoted prices or other inputs falling within
the categories of Level 1 and Level 2 are generally not available. In such
cases, we determine the fair value of our investments in good faith primarily
using Level 3 inputs. In certain cases, quoted prices or other observable inputs
exist, and if so, we assess the appropriateness of the use of these third-party
quotes in determining fair value based on (i) our understanding of the level of
actual transactions used by the broker to develop the quote and whether the
quote was an indicative price or binding offer and (ii) the depth and
consistency of broker quotes and the correlation of changes in broker quotes
with underlying performance of the portfolio company.
There is no single technique for determining fair value in good faith, as fair
value depends upon the specific circumstances of each individual investment. The
recorded fair values of our Level 3 investments may differ significantly from
fair values that would have been used had an active market for the securities
existed. In addition, changes in the market environment and other events that
may occur over the life of the investments may cause the gains or losses
ultimately realized on these investments to be different than the valuations
currently assigned.
Investment Valuation Process
Barings has established a Pricing Committee that is, subject to the oversight of
the Board, responsible for the approval, implementation and oversight of the
processes and methodologies that relate to the pricing and valuation of assets
we hold.
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Barings uses internal pricing models, in accordance with internal pricing
procedures established by the Pricing Committee, to price an asset in the event
an acceptable price cannot be obtained from an approved external source.
Barings reviews its valuation methodologies on an ongoing basis and updates are
made accordingly to meet changes in the marketplace. Barings has established
internal controls to ensure its valuation process is operating in an effective
manner. Barings (1) maintains valuation and pricing procedures that describe the
specific methodology used for valuation and (2) approves and documents
exceptions and overrides of valuations. In addition, the Pricing Committee
performs an annual review of valuation methodologies.
Our money market fund investments are generally valued using Level 1 inputs and
our syndicated senior secured loans and structured product investments are
generally valued using Level 2 inputs. Our senior secured, middle-market,
private debt investments are generally valued using Level 3 inputs.
Independent Valuation Review
We have engaged an independent valuation firm to provide third-party valuation
consulting services at the end of each fiscal quarter, which consist of certain
limited procedures that we identified and requested the valuation firm to
perform (hereinafter referred to as the "Procedures"). The Procedures generally
consist of a review of the quarterly fair values of our middle-market
investments, and are generally performed with respect to each middle-market
investment at least once in every calendar year and for new investments, at
least once in the twelve-month period subsequent to the initial investment. In
addition, the Procedures will generally be performed with respect to an
investment where there has been a significant change in the fair value or
performance of the investment. Prior to the first quarter of 2020, the
Procedures were generally performed with respect to each investment every
quarter beginning in the quarter after the investment was made. In certain
instances, we may determine that it is not cost-effective, and as a result is
not in the stockholders' best interests, to request the independent valuation
firm to perform the Procedures on certain investments. Such instances include,
but are not limited to, situations where the fair value of the investment in the
portfolio company is determined to be insignificant relative to the total
investment portfolio.
The total number of senior secured, middle-market investments and the percentage
of our total senior secured, middle-market investment portfolio on which the
Procedures were performed are summarized below by period:
                                               Percent of total
                                 Total          investments at
For the quarter ended:         companies        fair value(1)

March 31, 2019                    18                 100%
June 30, 2019                     22                 100%
September 30, 2019                28                 100%
December 31, 2019                 38                 100%
March 31, 2020                    30                 62%
June 30, 2020                     33                 53%


(1)Exclusive of the fair value of new middle-market investments made during the
quarter for which the Procedures were not performed and certain middle-market
investments repaid subsequent to the end of the reporting period.
Upon completion of the Procedures, the valuation firm concluded that, with
respect to each investment reviewed by the valuation firm, the fair value of
those investments subjected to the Procedures appeared reasonable. Finally, the
Board determined in good faith that our investments were valued at fair value in
accordance with our valuation policies and procedures and the 1940 Act based on,
among other things, the input of Barings, our Audit Committee and the
independent valuation firm.
Valuation Techniques
Our valuation techniques are based upon both observable and unobservable pricing
inputs. Observable inputs reflect market data obtained from independent sources,
while unobservable inputs reflect our market assumptions. Our assessment of the
significance of a particular input to the fair value measurement in its entirety
requires judgment and considers factors specific to the financial instrument. We
determine the estimated fair value of our loans and investments using primarily
an income approach. Generally, an independent pricing service provider is the
preferred source of pricing a loan, however, to the extent the independent
pricing service provider price is unavailable or not relevant and reliable, we
may use broker quotes. We attempt to maximize the use of observable inputs and
minimize the use of unobservable inputs. The availability of observable inputs
can vary from investment to investment and is affected by a wide variety of
factors, including the type of security, whether the security is new and not yet
established in the marketplace, the liquidity of markets, and other
characteristics particular to the security.
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Market Approach
We value our syndicated senior secured loans and structured product investments
using values provided by independent pricing services that have been approved by
the Barings' Pricing Committee. The prices received from these pricing service
providers are based on yields or prices of securities of comparable quality,
type, coupon and maturity and/or indications as to value from dealers and
exchanges. We seek to obtain two prices from the pricing services with one price
representing the primary source and the other representing an independent
control valuation. We evaluate the prices obtained from brokers or independent
pricing service providers based on available market information, including
trading activity of the subject or similar securities, or by performing a
comparable security analysis to ensure that fair values are reasonably
estimated. We also perform back-testing of valuation information obtained from
independent pricing service providers and brokers against actual prices received
in transactions. In addition to ongoing monitoring and back-testing, we perform
due diligence procedures surrounding independent pricing service providers to
understand their methodology and controls to support their use in the valuation
process.
Income Approach
We utilize an Income Approach model in valuing our private debt investment
portfolio, which consists of middle-market senior secured loans with floating
reference rates. As independent pricing service provider and broker quotes have
not historically been consistently relevant and reliable, the fair value is
determined using an internal index-based pricing model that takes into account
both the movement in the spread of one or more performing credit indices as well
as changes in the credit profile of the borrower. The implicit yield for each
debt investment is calculated at the date the investment is made. This
calculation takes into account the acquisition price (par less any upfront fee)
and the relative maturity assumptions of the underlying asset. As of each
balance sheet date, the implied yield for each investment is reassessed, taking
into account changes in the discount margin of the baseline index, probabilities
of default and any changes in the credit profile of the issuer of the security,
such as fluctuations in operating levels and leverage. If there is an observable
price available on a comparable security/issuer, it is used to calibrate the
internal model. If the valuation process for a particular debt investment
results in a value above par, the value is typically capped at the greater of
the principal amount plus any prepayment penalty in effect or 100% of par on the
basis that a market participant is likely unwilling to pay a greater amount than
that at which the borrower could refinance.
Enterprise Value Waterfall Approach
In valuing equity securities, we estimate fair value using an "Enterprise Value
Waterfall" valuation model. We estimate the enterprise value of a portfolio
company and then allocate the enterprise value to the portfolio company's
securities in order of their relative liquidation preference. In addition, the
model assumes that any outstanding debt or other securities that are senior to
our equity securities are required to be repaid at par. Generally, the waterfall
proceeds flow from senior debt tranches of the capital structure to junior and
subordinated debt, followed by each class or preferred stock and finally the
common stock. Additionally, we may estimate the fair value of a debt security
using the Enterprise Value Waterfall approach when we do not expect to receive
full repayment.
To estimate the enterprise value of the portfolio company, we primarily use a
valuation model based on a transaction multiple, which generally is the original
transaction multiple, and measures of the portfolio company's financial
performance. In addition, we consider other factors, including but not limited
to (i) offers from third parties to purchase the portfolio company, (ii) the
implied value of recent investments in the equity securities of the portfolio
company, (iii) publicly available information regarding recent sales of private
companies in comparable transactions and (iv) when management believes there are
comparable companies that are publicly traded, we perform a review of these
publicly traded companies and the market multiple of their equity securities.
For certain non-performing assets, we may utilize the liquidation or collateral
value of the portfolio company's assets in our estimation of enterprise value.
Valuation of Investment in Jocassee
We estimate the fair value of our investment in Jocassee Partners LLC, or
Jocassee, using the net asset value of Jocassee and our ownership percentage.
The net asset value of Jocassee is determined in accordance with the specialized
accounting guidance for investment companies.
Valuation of Investment in Thompson Rivers
We estimate the fair value of our investment in Thompson Rivers LLC using the
net asset value of Thompson Rivers LLC and its ownership percentage. The net
asset value of Thompson Rivers LLC is determined in accordance with the
specialized accounting guidance for investment companies.
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Off-Balance Sheet Arrangements
In the normal course of business, we are party to financial instruments with
off-balance sheet risk, consisting primarily of unused commitments to extend
financing to our portfolio companies. Since commitments may expire without being
drawn upon, the total commitment amount does not necessarily represent future
cash requirements. The balances of unused commitments to extend financing as of
June 30, 2020 and December 31, 2019 were as follows:
                                                                                       June 30,
Portfolio Company                              Investment Type                           2020              December 31, 2019
ADE Holding(1)(2)                              Committed Capex Line                $   5,019,358          $               -
Anju Software, Inc.(1)                         Delayed Draw Term Loan                  1,981,371                  1,981,371
Arch Global Precision, LLC(1)                  Delayed Draw Term Loan                  9,360,435                  1,012,661

Armstrong Transport Group (Pele Buyer, LLC)(1) Delayed Draw Term Loan

              712,567                    712,567
Beacon Pointe Advisors, LLC(1)                 Delayed Draw Term Loan                    363,636                          -
Centralis Finco S.a.r.l.(1)(3)                 Acquisition Facility                    1,146,522                          -

Classic Collision (Summit Buyer, LLC)(1) Delayed Draw Term Loan

           11,793,854                          -
CM Acquisitions Holdings Inc.(1)               Delayed Draw Term Loan                  1,859,111                  1,859,111
Contabo Finco S.À R.L(1)(4)                    Delayed Draw Term Loan                    209,485                  1,013,849
Dart Buyer, Inc.(1)                            Delayed Draw Term Loan                  2,430,569                  4,294,503
DreamStart Bidco SAS(1)(5)                     Acquisition Facility                    3,290,175                          -
Heartland, LLC(1)                              Delayed Draw Term Loan                  8,729,695                  8,729,695
Heilbron (f/k/a Sucsez (Bolt Bidco
B.V.))(1)(6)                                   Accordion Facility                              -                  2,605,531
Jocassee Partners LLC(1)                       Joint Venture                          35,000,000                 40,000,000
Kene Acquisition, Inc.(1)                      Delayed Draw Term Loan                    322,928                  1,076,427
LAC Intermediate, LLC(1)                       Delayed Draw Term Loan                  2,731,482                  4,367,284
Options Technology Ltd.(1)                     Delayed Draw Term Loan                  2,918,447                  2,918,447

Premier Technical Services Group(1)(7) Acquisition Facility

            1,082,438                  1,297,915
Process Equipment, Inc.(1)                     Delayed Draw Term Loan                          -                    654,493

Professional Datasolutions, Inc. (PDI)(1) Delayed Draw Term Loan

                   -                  1,666,994
PSC UK Pty Ltd.(1)(8)                          GBP Acquisition Facility                  415,737                  1,010,706
Smile Brands Group, Inc.(1)                    Delayed Draw Term Loan                    422,242                    927,046
Springbrook Software (SBRK Intermediate,
Inc.)(1)                                       Delayed Draw Term Loan                  3,896,663                  3,896,663
The Hilb Group, LLC(1)                         Delayed Draw Term Loan                  2,099,113                  2,904,066
Thompson Rivers LLC(1)                         Joint Venture                           8,500,000                          -
Transit Technologies LLC(1)                    Delayed Draw Term Loan                  6,785,305                          -
Transportation Insight, LLC(1)                 Delayed Draw Term Loan                          -                  2,464,230
Truck-Lite Co., LLC(1)                         Delayed Draw Term Loan                  2,884,615                  3,205,128
Validity, Inc.(1)                              Delayed Draw Term Loan                          -          $         898,298
Total unused commitments to extend financing                                

$ 113,955,748 $ 89,496,985

(1)Represents a commitment to extend financing to a portfolio company where one
or more of the Company's current investments in the portfolio company are
carried at less than cost. The Company's estimate of the fair value of the
current investments in this portfolio company includes an analysis of the fair
value of any unfunded commitments.
(2)Actual commitment amount is denominated in Euros (€4,469,000) which was
translated into U.S. dollars using the June 30, 2020 spot rate.
(3)Actual commitment amount is denominated in Euros (€1,020,809) which was
translated into U.S. dollars using the June 30, 2020 spot rate.
(4)June 30, 2020 commitment amount is denominated in Euros (€186,516) which was
translated into U.S. dollars using the June 30, 2020 spot rate. December 31,
2019 commitment amount was denominated in Euros (€903,207) which was translated
into U.S. dollars using the December 31, 2019 spot rate.
(5)Actual commitment amount is denominated in Euros (€2,929,417) which was
translated into U.S. dollars using the June 30, 2020 spot rate.
(6)December 31, 2019 commitment amount was denominated in Euros (€2,321,187)
which was translated into U.S. dollars using the December 31, 2019 spot rate.
(7)June 30, 2020 commitment amount is denominated in British pounds sterling
(£876,042) which was translated into U.S. dollars using the June 30, 2020 spot
rate. December 31, 2019 commitment amount was denominated in British pounds
sterling (£979,743) which was translated into U.S. dollars using the December
31, 2019 spot rate.
(8)June 30, 2020 commitment amount is denominated in British pounds sterling
(£336,466) which was translated into U.S. dollars using the June 30, 2020 spot
rate. December 31, 2019 commitment amount was denominated in British pounds
sterling (£762,941) which was translated into U.S. dollars using the December
31, 2019 spot rate.
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