Barings BDC Inc Hikes Payout for 5 Consecutive Years
Strong economic activity, lower inflation, and falling interest rates are the perfect combination for business development companies (BDCs) like Barings BDC Inc (NYSE:BBDC).
Here at Income Investors, we refer to BDCs as “Alternative Banks.”
Why?
Alternative Banks lend to businesses that are typically too small for big banks. Similar to bigger banks though, the majority of debt from alternative banks is in the form of floating-rate investments.
This provides Alternative Banks with real-time interest rate changes, which is going to generally be better than investments like fixed-rate bonds.
And, because of tighter bank lending rules, demand for BDCs and private credit is soaring, with the market for private credit jumping from $1.0 trillion in 2020 to $1.5 trillion at the start of 2024. By 2028, that figure is expected to reach $2.8 trillion. (Source: “Understanding Private Credit,” Morgan Stanley, June 20, 2024.)
And Barings is a top destination for a growing number of borrowers.
Barings BDC Inc is an externally managed BDC that primarily makes debt investments in middle market companies with earnings before interest, taxes, depreciation, and amortization (EBITDA) of $10.0 million to $75.0 million. (Source: “3rd Quarter 2024 Investor Presentation,” Barings BDC Inc, October 4, 2024.)
While some investors may think that bigger is better when it comes to BDCs, it isn’t always. Core middle market deals have lower leverage, tighter documentation, and better covenants than large corporate deals.
The default rate on investments under $100.0 million is just 1.33%. The default rate on deals of $250.0 million to $499.0 million is 5.14%, jumping to 5.47% on deals of $500.0 million or greater.
Barings’ investment objective is to generate income by investing directly in privately held middle-market companies that operate across a wide range of industries (manufacturing and distribution; business services and technology; transportation and logistics; and consumer product and services) to help businesses fund acquisitions, growth, or refinancing.
The BDC does this by investing in senior secured loans, first-lien debt, second-lien debt, mezzanine, equity, joint venture, and structured loans.
The various kinds of loans sound like a garden salad, with some ingredients that are more desirable than others. For instance, a BDC with a lot of “senior” debt stands first in line to get its money back. “Mezzanine” lenders get paid second. Meanwhile, “preferred” and “equity” investors usually receive only a fraction of their original investment back in the event of bankruptcy.
Of Barings’ $2.41-billion portfolio, 72% is made up of senior secured debt with 88% secured with floating rates. As of September 30, 2024, the weighted average portfolio yield was 11%.
Delivering “Attractive Returns”
For the third quarter ended September 30, the company reported total investment income of $70.9 million, up slightly from $70.8 million in the same prior-year period. (Source: “Barings BDC, Inc. Reports Third Quarter 2024 Results and Announces Quarterly Cash Dividend of $0.26 Per Share,” Barings BDC Inc, November 9, 2024.)
Barings also reported net investment income of $30.2 million, or $0.29 per share, down from $33.3 million, or $0.31 per share, in the third quarter of 2023. Its net assets from operations increased 20% to $22.0 million, or $0.21 per share.
Net asset value per share was $11.32, compared to $11.36 per share in the second quarter and $11.25 in the third quarter of last year.
During the quarter, Barings:
- Made 11 new investments, totaling $88.4 million
- Invested $36.6 million in existing portfolio companies
- Had 11 loans repaid, totaling $94.3 million, and received $17.6 million in portfolio company principal payments)
- Received proceeds related to the sale of equity investments totaling $5.9 million and recognized a net realized gain on such sales totaling $4.3 million
The company ended the quarter with cash and foreign currencies of $66.0 million and $347.8 million of borrowings outstanding under its senior secured credit agreement.
Commenting on the quarter, Eric Lloyd, Barings’ CEO, said, “We continue to deliver attractive returns by executing our disciplined investment strategy focused on Barings-originated, senior secured loans to competitively advantaged middle market companies that we have rigorously analyzed and conservatively underwritten.”
Quarterly Dividend Upheld at $0.26/Share
Some companies are good at providing dividends; then there are BDCs, which are designed to be dividend machines.
Because of their unique tax structure, BDCs can elect to be taxed as regulated investment companies. This exempts them from corporate income tax but only if they distribute at least 90% of their profits, typically dividends, to shareholders.
Thanks to strong net investment income, Barings is able to provide investors with a reliably growing, high-yield distribution. It declared a fourth-quarter dividend of $0.26 per share, or $1.04 on an annual basis, for a current yield of 10.45%. (Source: “Dividend History,” Barings BDC Inc, last accessed November 18, 2024.)
The BDC has actually raised its annual dividend for the last five consecutive years. Moreover, whereas some companies only increase their payouts on an annual basis, when times are good. Barings can do it multiple times. In 2021, it increased its distribution every quarter, and in 2022 and 2023, it raised its distribution twice.
A reliable, ultra-high-yield dividend is great, but it’s even better when it’s attached to a stock that is doing well. And BBDC stock has been outpacing the red-hot S&P 500 this year. On November 18, Barings stock hit a new record high of $10.04, putting it up 26% in 2024 and 24.5% on an annual basis.
Chart courtesy of StockCharts.com
The Lowdown on Barings BDC Inc
Barings BDC Inc is a BDC with a diversified funding mix secured mainly with floating rates and an average portfolio yield of 11%. In the third quarter, the company maintained its strong momentum with net investment income well above the dividend, strong credit metrics, and net asset value that is above where it was at the end of 2023.
According to management, this leaves Barings well positioned for what it expects to be a more active lending environment, particularly given its strong sponsor relationships and ample liquidity.