At this time, I would like to welcome everyone to the Barings BDC, Inc. Conference Call announcing Barings BDC's planned acquisition of MVC Capital Inc. All participants are in a listen only mode. A question and answer session will follow the company's formal remarks. Today's call is being recorded and a replay will be available approximately two hours after the conclusion of the call on the company's website at www.baringsbdc.com under the Investor Relations section.
Please note that this call may contain forward looking statements that include statements regarding the proposed acquisition of MVC Capital, including statements regarding the completion and timing of the transaction and Barings BDC's and the combined company's goals, beliefs, strategies, future operating results and cash flows. Although Barings BDC believes these statements are reasonable, actual results and events could differ materially from those projected in forward looking statements. These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the sections titled Risk Factors and Forward Looking Statements in Barings BDC's Annual Reports and Quarterly Reports as filed with the Securities and Exchange Commission and as will be disclosed in the party's joint proxy statement relating to the transaction. Barings BDC's and the combined company's actual results could differ materially from those expressed in any forward looking statements for any reason, including those listed in their respective SEC filings. Barings BDC assumes no obligation to update or revise any such forward looking statements unless required by law.
Please note that the past performance is not a guarantee of future results. At this time, I will turn the call over to Eric Lloyd, Chief Executive Officer of Barings BDC.
Thank you, Jessie, and good morning, everyone. First of all, I hope that all of you and your loved ones are healthy as we go through these challenging times, and we really appreciate you joining us for today's call, particularly on short notice. Now I'd like to welcome the Barings BDC shareholders, NBC Capital shareholders, analysts and everyone else on the call to discuss our agreement to merge with NBC Capital. I'd also like to thank Mike Tocars, the MVC Capital strategic review committee and the independent directors of MVC Capital and Barings BDC for all their efforts leading up to yesterday's announcement. On the call today, I'm joined by Barings BDC's President and Barings Co Head of Global Private Finance, Ian Fowler as well as BDC Chief Financial Officer, Jonathan Bach.
Please note that throughout this call, we'll be referring to the strategic acquisition deck that is posted on the Investor Relations section of our website. Ian and John will review the details of the transaction, but I'd like to start today with some high level comments about our announcement. Before discussing the transaction, we recognize that some of you on the call may not be familiar with Barings BDC or its investment adviser, Barings LLC, which would continue to manage the combined company following the merger. So I wanted to take a few minutes to explain who we are. Turn with me to Slide seven of the presentation, where we show a high level overview of Barings.
We have over 1,900 professionals across 16 countries worldwide. Importantly, Barings is a wholly owned subsidiary of MassMutual, and this relationship provides a level of platform support and long term stability that is unique in the BDC marketplace. Also, Barings is a deep and experienced credit manager with over 346,000,000,000 of investments under management worldwide as of 06/30/2020. We have a strong partnership between our liquid and illiquid credit teams that further differentiates our underwriting and sourcing with a perspective that reaches across all credit classes. Now turning to Slide eight, You can see the scale and depth in our credit across both private and public markets and across geographies.
And I would also point out our expertise in terms of workouts and special situations. I'll quickly summarize by saying we are a large, experienced global platform with the flexibility to provide financing up and down the capital stack. In addition, our unique ability to align with the interest of shareholders of Barings BDC, which we have continued to demonstrate since becoming its investment advisor two years ago, continues to drive long term shareholder returns. Starting on Slide nine, you will see two slides with data from our recent Barings BDC earnings presentation. In August 2018, following the sale of Triangle Capital Corporation's investment portfolio, Barings made a substantial investment in the BDC and externalized it.
Slide nine shows how this portfolio has evolved since Barings took over the cash pool, initially investing in BRELI syndicated loan portfolio to generate yield for shareholders, then beginning to rotate out of that portfolio into primarily directly originated middle market first lien senior secured loans. You can see the current portfolio on slide 10. It's a diverse portfolio of 95% senior secured first lien assets with middle market investments now comprising over 61 of the total portfolio. Despite the recent market volatility, the overall portfolio has performed well, and we believe Barings BDC is well positioned with the liquidity and capital structure to take advantage of the current market opportunities. In addition to our high quality investment portfolio and strong leverage position, Barings BDC recent investment grade rating of Baa3 by Moody's Investor Service enables us to further strengthen and diversify our liability structure.
Now let's turn to Barings BDC's strategic merger with MVC Capital, which begins on Slide 12 of the presentation. As you saw in yesterday's press release, Barings BDC has entered into a definitive agreement to merge with MVC Capital. We believe this combination provides many strategic and financial benefits to the combined company that remain consistent with our commitment to shareholder alignment, and I will walk through six of these anticipated benefits before we get into the details of the transaction. First, this transaction creates increased scale with the combined company expected to have more than $1,200,000,000 of assets on a pro form a basis. We expect that the overall size and enhanced diversity of the portfolio will put the combined entity in a stronger position to navigate the current market.
Second, this transaction is earnings accretive to investors as we estimate net investment income to be $0.18 to $0.20 per share in the first full quarter after close. That's compared to Barings BDC's $0.14 per share of net investment income for the 2020 and a consensus estimate of $0.16 per share for the 2021. As a result, we're optimistic that this transaction will serve as a potential catalyst for future dividend growth at Barings BDC. Third, this transaction provides the combined entity investment option value through an approximately 35% expansion of our equity base, an expected increase in investment and leverage capacity and improved access to unsecured debt capital markets. Pro form a for the transaction, we anticipate total debt to equity and net debt to equity to be approximately 0.9 times and 0.8 times respectively, which allows for robust liquidity and capital deployment in a time of market volatility and opportunity.
Fourth, this transaction highlights our commitment to shareholder alignment through the use of an upfront cash payment to MVC shareholders by Barings LLC and a credit support agreement or referred to as a CSA provided by Barings LLC that provides up to $23,000,000 in downside protection to investors and the combined company from the net cumulative unrealized and realized marks of the acquired MVC portfolio over the next ten years. This CSA is unique and critical element of the transaction, reducing the level of risk for both BDDC and MVC shareholders following the closing. Given its importance, Ian will discuss the strategic elements of the CSA in more detail shortly, and John will discuss the financial and accounting aspects so you can fully understand the mechanics and the benefits. Fifth, this transaction provides efficiencies and portfolio diversification through increased cost synergies and an expansion of portfolio obligors with the natural diversity and synergies that we expect to come from combining the two platforms into one. Finally, we expect this transaction to be accretive to net asset value per share long term as assets are repositioned into directly originated investments.
I want to emphasize that this transaction is not a change in strategy or direction for Barings BDC. The NBC Capital portfolio has junior debt and equity positions. However, we anticipate that over time, as these positions are realized, we will redeploy that capital into privately placed, directly originated, senior secured middle market investments consistent with the Barings BDC investment focus. As a related matter, although not a closing condition to the transaction and subject to Barings BDC's Board approval, we also announced that Barings BDC intends to seek shareholder approval in its merger proxy to amend its current investment advisory agreement with Barings LLC to lower the base management fee to 1.25% of gross asset, excluding cash, down from 1.375% currently, make certain conforming and definitional changes relating to the transaction and to reset the incentive fee cap commencement date to coincide with the first quarterly period ending after the closing date of the transaction. We believe that this further demonstrates our commitment to manager and investor alignment as Barings LLC will remain the largest shareholder of the combined company, owning approximately 21% of the combined company.
Let me conclude my comments by saying how excited we are for this combination, which we see as a mutually beneficial for both shareholder bases. We expect that all shareholders will receive benefits from the combination following the closing, namely from the expected earnings accretion, leading shareholder alignment demonstrated by the manager support and anticipated lower base management fees as well as the benefits of diversification and scale. Now I'd like to turn the call over to Ian to outline the details of the transaction.
Thank you, Eric, and good morning. Let's turn to Slide 13 of the presentation. In this transaction, MVC shareholders will receive book value consideration of 177,500,000.0 or $10.01 per share consisting of two components. One, cash of $7,000,000 or approximately $0.39 per share paid directly to the MVC shareholders by Barings LLC And two, 170,500,000.0 of Barings BDC common stock valued at its NAV per share as of June 30 at a fixed exchange rate of point nine four zero two four, Barings BDC share for every MVC Capital share. Additionally, as Eric indicated, in support of this transaction, 23,000,000 of unique credit support is being provided by Barings LLC in the form of a credit support agreement to limit potential net cumulative realized and unrealized losses on the acquired MVC Capital portfolio over the next ten years.
The CSA will be fair valued quarterly by independent third party and recorded on the Barings BDC balance sheet during the life of the CSA. CSA is designed to provide an offset to potential unrealized and realized losses on the legacy MVC assets. Now let's be clear as to what this means. Effectively, the first 23,000,000 of cumulative realized and unrealized losses on the MVC Capital portfolio during the ten years following the closing, if any, will be covered by Barings LLC. Thus, the downside exposure to the combined company shareholders is reduced.
Any upside from portfolio appreciation, however, will go entirely to the combined company shareholders. For reference, Barings BDC has purchased the MVC portfolio at approximately 61% of costs. And with the CSA, investors are protected from depreciation down to 54% of cost. In addition, in connection with the merger, Barings BDC has committed up to $15,000,000 in secondary market support post closing for shares of the combined company stock when such shares trade at a certain level below NAV. These accretive share repurchases will generally occur over a twelve month period post close pursuant to a share repurchase plan and subject to covenant and regulatory constraints.
Turn now to Slide 14. Here you can see the anticipated base fee reduction that Eric referenced, demonstrating another key element of shareholder alignment. In addition, from a financing perspective, no new sources of financing are required at close. Slide 14 also references the investment grade rating that Barings BDC received from Moody's last week as well as the 100,000,000 commitment from MassMutual for an unsecured debt private placement that we expect to draw down over the next twelve months. While the rating and unsecured debt commitment are not directly linked to this transaction, they are both important elements of our financing strategy that create the capital structure foundation to execute on market opportunities such as this transaction.
We anticipate closing the transaction with MVC Capital by the 2020, subject to shareholder approvals, regulatory approvals, and other customary closing conditions. Speaking of shareholder approvals, we're pleased to have the support of Leon Cooperman, Winfield Capital, and West Family Investments, the three largest current holders of MVC Capital stock. Barings BDC and MVC Capital expect to file the n 14 registration statement and proxy seeking the relevant approvals from their respective shareholders in the next month. Turning to Slide 15, we can look at the total consideration relative to MPC Capital's trading price from a graphical standpoint. MPC m v MPC shareholders are receiving total consideration of $8.21 in cash and stock at market value based on Monday's closing prices, representing a premium of 21% to the last closing price of $6.80.
Moving to slide 16. Let me discuss this transaction from a book value perspective for BBDC shareholders. Based on NBC's reported net asset value as of 04/30/2020, Barings BDC is acquiring the portfolio at 92% of net asset value. When you take into account the 23,000,000 credit support agreement from Barings LLC designed to provide protection to investors against potential net cumulative unrealized and realized losses on the MVC capital portfolio over the next ten years, Barings BDC investors will have downside NAV protection on MVC assets to 54% of their original costs. Now I'd like to turn the call over to Jonathan Bach to discuss the combined company investment highlights.
Thank you, Ian. And let's turn to Slide 17. We believe the combination of these two companies drives enhanced shareholder return and investment optionality to capitalize on the current volatile investment environment. As outlined below, we see several key benefits to the transaction ranging from expected shareholder accretion to increased shareholder scale with anticipated lower base management fees. But let me walk through each of these points in more detail.
Jump to slide 18. Like many BDC combinations, there are three initial elements of scale benefits that can occur. These include the platform benefits of scale ranging from increased hold sizes within the BDC to improved access to capital markets to cost synergies, which all could help drive improved returns on equity. We'd also expect the shares of a larger combined company to have more liquidity and be more attractive to institutional investors. Additionally, Barings BDC derives many benefits from its affiliation with Barings LLC, a leading global financial services firm with over $346,000,000,000 in AUM as of June 30.
Barings BDC gains valuable insight from the entirety of investment professionals working on our global platform who provide access to information, market knowledge, expertise, deal sourcing capital, and back office support and infrastructure all to this transaction, and that's alongside all our clients globally. Now furthermore, consistent with Barings' focus on driving strong shareholder returns, we believe it's important to outline another direct shareholder benefit post consummation of this transaction. Jump to slide 19. As Eric mentioned, Barings BDC intends to seek shareholder approval to amend its investment advisory agreement to lower its base management fee to 1.25% down from 1.375, make certain conforming definitional changes related to the transaction, and reset the incentive fee cap commencement date to coincide for the first quarterly period ending after the closing date of the transaction. Now Barron's BDC investors know our focus on proper incentives and their influence on investment outcomes.
A required spread an investor must originate to meet a dividend yield obligation. To that, notice how this anticipated lower base fee provides Barings BDC proper investment latitude to continue to focus on high quality assets while delivering an attractive investor return. Now jump to slide 20. As Ian discussed, this transaction further outlines Barings' commitment to investor alignment through a credit support provided by the CSA. The CSA is recorded as an asset on bearing BDC's balance sheet with a value that's determined by an independent third party each quarter.
And the two drivers is to this valuation are, one, the premium value associated with the credit protection over a ten year period, and two, the protection value provided to the extent the MVC portfolio is valued below our purchase price or we realize losses on the acquired MVC assets below our purchase price. At the closing of the transaction, we anticipate the premium value of the CSA to be a primary driver of CSA value. Now on a cash basis, Barings LLC will make a cash payment equal to the value of the CSA at the earlier of the end of the ten year CSA period or the date the assets in the MVC portfolio are exited in their entirety. As Ian indicated, if the value of the MVC investments increase over time, the combined company shareholders will receive that entire benefit of appreciation as the CSA could not result in any payment to Barings LLC, only a potential payment from Barings LLC. Now another important element to this transaction is the expected increase in investment optionality and the improved market opportunity.
Come to slide 21. At deal close, we expect net debt to equity to be approximately point eight times, with approximately 290,000,000 in available investment capacity if the company increased net leverage to 1.2 25x. This increased optionality provides capital both for offensive and defensive purchases. And, additionally, the market return the market opportunity set remains attractive. Lastly, I wanna speak to two remaining points of diversification and shareholder accretion.
Jump to slide 22. We expect to see improved diversification on the asset side of our balance sheet as assets by both dollars and count increased. We plan to match those assets with a diverse capital structure of secured debt, unsecured debt, and equity. Moreover, we believe MVC Capital's portfolio mix, which has historically had a heavier weighting in nonyielding equity investments, provides an attractive opportunity for us to reinvest proceeds from sales into directly sourced higher risk adjusted return assets with the potential to generate strong current yields. Currently, Barings BDC portfolio is heavily invested in senior secured debt.
Pro form a for the transaction, Barings BDC will have over 80% of its portfolio in first lien senior security secured assets. And over time, we would we would like the combined portfolio to more closely resemble our current mix. Additionally, our financing structure has been further diversified as a result of our investment grade rating and recently closed unsecured debt commitment, which we believe will provide a good match to the increase in junior debt and equity positions as a result of the MVC merger. The enhanced flexibility provides us improved ability to realize the value of MVC's portfolio throughout an economic cycle. Finally, let's jump to Slide 23.
We anticipate NII accretion to the 18¢ to 20¢ per share range or approximately 19¢ per share at the midpoint one quarter after deal close, driven by MVC's portfolio income and future leverage on the newly issued equity from this transaction. Moreover, we believe we can create meaningful value and meaningful future income growth by repositioning MVC's portfolio into higher yielding investments. We also expect the transaction to benefit from near term cost savings, both in the form of the anticipated base fee reduction and synergies on the combined g and a and interest expense base. And and so maybe before we open up the line for questions, let me conclude by saying how excited we are about this combination since we believe it's a win win for both shareholder bases. We expect that all of the shareholders will benefit from the larger, more scaled combined company with strong competitive advantages, shareholder alignment and the resources provided by Barings LLC.
We want to thank Mike Tocars, his team, and the MVC Capital Board for their confidence in us. And on behalf of the Barings BDC team, we appreciate your time and interest today. We will be happy to take your questions, and please understand that we might be limited in some of our answers due to the upcoming proxy filing. With that, operator, we're happy to take and open the line for questions.
Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please press you. Thank you. Our first question comes from Finian O'Shea with Wells Fargo Securities. Please proceed with your question.
Hi, guys. Thanks for having me on, and congratulations on the proposed, the announcement here. Just a couple of questions on the CSA. The first one that stands out to me is why ten years, assuming you've taken a a pretty good, look and degree of familiarity with these assets and, you know, you'll be pencils down to move them out. You know, just thinking about sort of the time the time value of this and how, you know, how much shareholders might value recuperated losses ten years down the road, you know, why not just any color you can give there.
Why wasn't it why wasn't it five or something like that?
Boss, you wanna hit that one?
Yeah. Sure. So, you know, so, Fin, the the the the short answer is is because you have longer duration equity in this portfolio, that that tied to the longer duration of the CSA. That being said, what we what we wanna make sure we outline is it's it's it's ten year or the earlier of the rotation out of those assets. And you could imagine that there's going to be a level of of heft and and speed in that rotation.
Clearly, there's market dependencies as a result because you wanna maximize shareholder value, but that's simply the reasoning because you have some longer duration securities that that need to be kind of viewed that way for for CSA purposes. Did that answer your question?
Yes. And just sort of a follow on there, assuming, yeah, that there'll be some perhaps small bit of equity throughout the duration. In terms of what today's shareholders might receive, you you know, presumably, you you guys have been quite acquisitive in your short history. I assume you wanna be much bigger in in ten years. And, you know, for those you know, I think there's a circumstance where today's shareholders or or at the at the finale of the transaction, you know, experience losses through the MVC assets and then end up sharing that CSA with a much larger shareholder base.
As far as I know, that's how, you know, things work with Fortiat companies. All shares have to be equal in all ways. Is there, you know I guess, before you put out the proxy, is there a way you can tie, the CSA benefits to, you know, shareholders today as opposed to those who might buy in at a bigger company in the year 2030.
I I might just continue that follow on by saying this. You know, really, this these are you know, no one no one particularly puts out a target for for in growth. At the end of the day, the the goal is to to to do attractive attractive transactions through a number of our teams to generate NAV NAV appreciation as well as just income growth and stability. So I wouldn't I wouldn't say that you could expect a lot more. Really, it's it's market dependent, but our point would be focusing on what we have today.
There's really no additional intentions of doing anything other than maximizing shareholder value, and we look forward to outlining that over time. And also, the half life of these assets, in in these environments, particularly if markets continue to reflate, also is much quicker, right, than maybe anticipated today or in a few months past.
I pinned it there. So I I kinda hit it, you know, kind of two ways on your first one. We put in there the 100% realization concept in there. John said the longer dated equity will to the extent the portfolio gets realized, we'll true it up then. And really just because we didn't want anybody questioning, you know, unrealized marks one way or the other when there's a, you know, point in time when there's a payment made that could disproportionately benefit one side or the other.
So we wanted to make sure there was time for the realizations, but I we hear you loud and clear on the on the on the time frame, which is why we put in if the portfolio is realized, we'll true it up then. And on the second one, you know, to your point, we looked into it. Our understanding right now is to your point that all shareholders have to be treated the same, so we couldn't see a mechanism by which we could do that. So if somebody knows the one, let us know. Mhmm.
But we we we were not able to determine one that was that worked for forty x funds and was able to provide that type of ring fencing to current shareholder base.
Sure. No. I I understand. There's no perfect way to do it. And just sort of a obvious question, I guess, on the incentive fee.
You know, I'm sure as you as, you know, we talked about, you know, this puts you in a favorable position from your BSL book. How do you kind of is there some workaround in that sense, or, you know, do you kind of view this as part of the trade off, you know, for, of course, the whole package that aligns you with the you know, ultimately aligns you with the MVC book. Just any, any color on how you how you, discuss that trade off there.
Yep. And so, this is Eric Boyd speaking, by the way. I'd say you just phrase it well. It's kind of the whole package. When we look at it, we believe going to a one and 1.25 base management fee, that's a that's a forever fee.
Right? That just doesn't go up. So we think that's a real benefit over the long term. Maintaining our 8% hurdle when, you know, there's plenty of people out there that are, you know, coming at lower hurdles than that. And through the math, we've shown to our shareholders, we've shown that, you know, we communicated an 8% target ROE and dividend, and we've said we're not gonna do, you know, any incentive fee till we get to that 8%.
We're not gonna take any incentive fee till we deliver what we told. We're maintaining the the three year look back in there, to your point, resetting it so it's all as of the end of the transaction. So everything's kinda trued up at at one point in time. And then offering the $23,000,000 of support on the portfolio, we feel like is a is a material part of shareholder support on that. So to your point, taking all those in in together combined with a $150,000,000 of equity that we have invested over 20% of the company, we think it still stands by kind of best in class shareholder alignment.
Our next question comes from Robert Dodd with Raymond James. A
few questions. I mean, the first one on the earnings accretion expectation. I mean, you laid out a little bit of the parameter. Can you, if feasible, break out how much of that would come from the lower management fee, which obviously, as as illustrated in the presentation, isn't required for the transaction to go forward? And then if any of that is MVC portfolio the discount accretion in into earnings from from buying the port the MVC portfolio below slightly below book.
John, you wanna tackle that?
Sure. So so, Robert, this will actually come come in the proxy. So I I wouldn't wanna speak too much about kind of the the added components, but I would say this. There is a hefty component of interest income that continues to come off of the MVC portfolio. Additionally, there is the offset the benefit that comes through the leverage into originated assets that comes off the under underlying equity base, I'd say, you know, that that mix does favor the the income component of the MVC's portfolio.
And from a an OID standpoint, there'll be some level of income contribution as a result of the discount. But the the way we the way we see it is that that effectively dissipates as we rotate out Mhmm. And can of those assets So you rather than see it more as kind of the the net the net benefit to to earnings henceforth and forever, you see the unreal the realized pops as a result of moving out of par what was purchased below it. So the proxy will break that out even more.
We did take a a high level of conservatism in trying to to to look at income on a go forward basis, but it'll all be in there for a very compelling late night proxy read.
Thank you for that. Yeah. I always need something to to read and and hopefully not put me to sleep. The the next question, on on the CSA, but related to that credit, when I look at we've put together, obviously, a look through the MVC portfolio, and I would I would see, you know, assets that I would consider high risk assets, be it energy, be it where the mark's already down, etcetera, somewhere in the in the 60,000,000 range, right, relative to the the CSA at 23. So two parts of that.
On the MBC book, as you were going through this process, how in this environment because, you know, it's it's due diligence is is is is tricky, and and due diligence is on on the existing book there is very high priority looking at an acquisition. How was that done by Barings rather than rather than inputs from from MVC and and what they have marked it at? But how did you guys do the due diligence on the existing assets in the book, to to get a handle that, bluntly, 23 would be enough?
Yep. So, Robert, this is Eric. I'll I'll take that, and then Ian and and John can jump in. So taking a step back, when you look at this portfolio, and you try and put it in a couple buckets, I think there are a couple unique parts of it relative to most BDCs. There's both US and European assets in here.
As we referenced in the past, we have a very large European credit team, here at Barings. So that allowed us people on the ground that were able to underwrite those credits in those jurisdictions where we have experience, both Europe and in The US. As you referenced also, they they have a larger component of private equity than we have typically done in our BDC. However, when you look at bearings overall, we have an excess of $5,000,000,000 of AUM in private equity. And so we're able to access those professionals that have experience in private equity as part of the diligence.
So it's not just the BDC team or the debt team in The US. It's really using our European debt team as well as our private equity teams that bring in all that experience to bear when we evaluate these assets. So I think that's the first thing, which is it's a firm level approach. Then secondly, on a more tactical level as to how do we do due diligence. As you can imagine, it is more challenging than not, right, than it has been in the past.
Mhmm. Given our geographic footprint, we are able to, you know, drive by certain properties where they, you know, may have operations and the like just because of a more dispersed employee base that we have. But the frank of matter is a lot of it was very virtual. A lot of it very, very much database driven. Mike and his team was very forthcoming with information with our team, and I think there was really good robust dialogue around every single one of the assets and, you know, what what they are seeing and what they were getting from their portfolio companies providing us that information so we could underwrite those companies in this environment.
I think lastly, then getting to purchase price and and kinda you mentioned the the discount. Wanna make sure it's highlighted that the $23,000,000 kicks in at the level below our purchase price. So it's not the first 23,000,000 of losses from cost.
Mhmm.
The original cost of NBC, it's from our think of it as our basis in there. And so the purchase was around 61% of cost from NBC, and this 23,000,000 really protects down to about 54% of original cost. And so we do believe that the balance of that purchase price as a percentage of cost with the due diligence we're able to do on the assets, with the scope and scale of bearings and the diversity of our investment capabilities put us in a unique position to really make sure we had our arms wrapped around these assets.
Got it. I I appreciate that, Eric, and that that color. If I can, one more. On on the the the CSA valuation, obviously, every quarter, you're gonna value the portfolio as as you do. Every quarter sort of fair value that.
On the CSA, obviously, John, you pointed out there's a premium component as well, which I assume is is some kind of, blockshaws or insurance model. And, lastly, you sure know something about insurance. So who is going to value the CSA? I mean and, basically, who's gonna come up with the premium val the premium value of the inputs to the premium calculation? Is that going to be a third party every quarter based on the other fair the fair value of the various assets?
Or what's the precise mechanics of that?
So so you already answered it. So so the the premium value, it it's very much an an insurance style policy. So what would happen is we'll we've engaged and we'll continue to engage a third party valuation firm that takes our inputs on the credits, right, our you know, the the the same valuation process we use across the entirety of the firm, and then they effectively run, you know, option pricing models just to generate the value of that option or protection. And so you can imagine it it won't you know, the the there's there's value in the protection even if it has not been exercised. Right?
And so you can expect a a positive value on a on an initial basis. But we we would our our job is to make sure that we provide all of the credits, all of the agreements, the performance, and then they completely independently determine the CSA value. And so and it'll continue to be like that every quarter we have it.
Got it. Thank you. Those are all my questions. I appreciate it. I look forward to reading the proxy.
Thanks, Robert.
Thank you. Our next question comes from Bryce Rowe with National Securities. Please proceed with your question.
Thanks. Good morning, everyone. Wanted to ask maybe Ian or Eric, a follow-up to one of Robert's questions there around portfolio due diligence. And you look at MVC's portfolio and not only is there more leaning towards junior positions and equity, but there's pretty significant concentration within the portfolio. So maybe you guys could speak to several of the larger investments or speak to the level of concentration and how you plan to tackle and extract as much value as you can at this point.
So this is Eric. I'll take a first crack at it and then turn it to Ian to the extent he has things. As far as specific assets, we've been advised not to get into to that until the proxy is filed and and the like, but I'll give you some concept that's kinda how we thought about it. So if you think of of the of the debt instruments that are in there, they do have a higher component of pick relative to cash than what we have had historically in in the BDC. That being said, as a firm, we've been investing in mezzanine debt for over twenty five years, and we have people on our team here on our investment team that work for Ian that have decades of experience investing in mezzanine debt.
And so working through those situations, whether they're cash or pick. And so junior capital is not something that's new to us in any way. It's just not something we've historically put in the BDC for the reasons we referenced earlier that we just feel like a a more first lien senior secured long term portfolio is is a better portfolio for a BDC, but our experience is there around that. If you think of a of a leverage of, let's just call it, you know, one and a quarter times, you know, plus or minus on the equity base, and you think of what the the pro form a portfolio looks like, You think of assets where they have a meaningful amount of pick. It's basically plus or minus 5% of the portfolio or so as we sit here today.
Who knows as that evolves over the course of the next quarter or two? So we look at that as very manageable relative to cash distributions, and, again, something we have a lot of experience with. And then secondarily, again, using that same leverage profile, there's not a position in the portfolio pro form a for the deal as modeled that's greater than two and a half percent of the portfolio. And so although it's more concentrated certainly in in their book given their size, when you roll them all together, we still feel like there's a really good strong level of diversification. Ian or John, you wanna add anything?
Bryce, the only thing I would add is, you know, in terms of our direct lending platform today, we we actually have, over 600,000,000 in in junior capital investments in lower middle market companies, very similar DNA to the, NBC portfolio. And so we we have the knowledge, as Eric said, the experience underwriting junior capital investments with this type of company profile. You know, we we scrubbed the the internal valuations, which we thought were good. We, conducted third party due diligence. We had access to all the financials and deal teams.
And and for any investments in that portfolio that that sort of fell out of our direct lending scope, we were able to lever the the Barings platform. So at the end of the day, we're we're comfortable with the assets, and I think we've demonstrated our conviction around that with the $23,000,000 of our own money through the CSA.
Got it. That's helpful. And then maybe this might be a question for John, but obviously you've got this share repurchase mechanism in here to support in secondary market after the deal closes. And you talk about specific levels of NAV. Is that comparable to to to the the program as it's set up now, or are there different, you know, targeted levels in terms of price to NAV that that would be associated with with this program?
No. I mean, prior prior views would be a good way to
think about it. You know? So if
you if you think about how how we've historically bought equity in the past Mhmm. I think you you you saw a line of demarcation at around point nine. I mean, clearly, you know, haven't laid out specifics, would ask you to look at the proxy. But can say, we'd continue to execute in a similar fashion to how we've done it in the past.
Got it. And, John, I would assume with this ongoing transaction is part of the reason we haven't seen much repurchase activity, you know, since, I guess, since the first quarter earnings call in early May.
So, yeah, you you would you would imagine correctly. There's just that when you have a a level of, you know, no certainty over a a close, etcetera, you're prohibited from doing that.
Thank you all. Appreciate the time.
Yes. Thanks for dialing in.
Thank you. Our next question comes from Kyle Joseph from Jefferies. Please proceed with your question.
Hey, good morning, guys. Thanks for having me on and taking my questions. First question is just the impetus for the acquisition. You guys have prided yourself on a boring is beautiful strategy. And, Eric, I recognize you said this is not necessarily a strategy shift, but, you know, had you guys been in the market looking at other portfolios?
Was this kind of a a one off deal that was was too good to pass up? Can you just give us a sense for how the how the deal came to fruition?
Yep. So I'd say we're always looking if there's something that's for sale in the marketplace as a as a business at Barings. As you can imagine, just given the scale of our business at North Of 340,000,000,000 on a global footprint, we see various m and a opportunities. We I do believe in in that the BDC space is one that could benefit from consolidation over time. And so it is something that we have made clear to, you know, financial institutions and intermediaries out there that it's something we're interested in doing because we do believe that it is a space that could benefit from it.
And we do believe the way we've set up the transaction, both the original transaction on TCAP and this one, is showing a unique way of aligning the manager and the shareholder that we think is a approach that will work going forward in in in many ways. This particular transaction, you know, the the MVC team, I don't wanna speak for them as to exactly the process they ran. You know, I think we'll refer to a lot of that in the proxy, but I think it's fair to say it was it was a tight process. And I think it's one that they saw benefit of us as a purchaser, and we saw benefit of this portfolio given the particularly the the the the unlevered nature of the of the BDC as it sits today. In many cases, in these situations, it's a more leveraged situation, which creates its own level of challenges.
So it's really the combination of those factors, I think, made it attractive for us.
Got it. And and then in terms of the portfolio, you know, obviously, the long term goal is to rotate it into kind of more of your your core asset base. But but as as you look at the portfolio, did you see some opportunities where you could invest capital in these companies and potentially increase the value before rotating them, or is the goal to kind of rotate them as quickly as possible? How do you envision that?
Yep. So that's a great question, Kyle. We we really look at it as not something that we feel like or would look to have to monetize in the short term given the leverage nature that we referenced earlier. Pro form as we modeled it, we're at kinda point eight on a net leverage basis, point nine on a gross basis. So we feel very good about our ability to, you know, put incremental capital in there to the extent it makes sense.
So we're under no pressure to sell any assets in the short term. If it makes sense to monetize an investment, we'll do that. But if it also makes sense to invest more capital in there because we believe that the long term accretion to the existing capital as well as the new capital is more favorable, absolutely something we'll consider and we've done in our platform for for many years. You know, we scheduled out each of the investments as to kinda how we think of potential hold periods and the like and feel very comfortable about where we are as from a from a at close and then really over the years ahead.
Got it. And then one last one for me as it relates to the remaining BSLs. How should we think about prioritizing which assets to rotate, whether it's the MVC portfolio or the or the BSLs, or is that really just gonna be driven by what the market gives you guys?
Yeah. Really driven by what the market gives us. Kinda, as we said, going in when we when we funded under BSLs, we weren't going to force sales at at, you know, irrational times in order just to fund directly originated assets. You know, as you've seen, you know, we we continue to deleverage over the course of the of the year from a by selling BSLs. And I think the leverage profile that we're sitting at for for the deal where they, again, gives us that flexibility that we could sell VSLs if it makes sense.
We could increase leverage up to a prudent level from the point eight times, point nine times net and gross. And that flexibility, I think, is really important. We refer to it in here as kinda investment, activity optionality value. And I think in the market that we're in today, that option value is is really attractive. You know, I don't know what the next six or twelve months are gonna be, but I do think that that, you know, being in the the leverage position we're in will be good.
And as we see opportunities to sell VSLs, you know, at or near our cost, I mean, that is something that we focus on because, you know, we do believe that that option value is is meaningful at this time.
Got it. Thanks very much for answering my questions and for all the color you provided in in the slide deck. Appreciate it. Makes my job easier.
You got it. You got it, Kyle. Thanks for your time.
Thank you. The next question comes from Ryan Lynch with KBW. Please proceed with your question.
Hey. Good afternoon. Thanks for taking my questions. I just have a couple, I think, quick ones. What do you anticipate your weighted average portfolio yield being post close of this transaction?
Obviously, these portfolios are significantly different. MVC's portfolio has a significantly higher portfolio yield. So what do you anticipate the portfolio yield combined pro form a of the yielding transactions post close?
Yes. Ryan, it will go up. I'd say that this is a point where the flag gets thrown as it relates to a reference in the proxy because at the same time, we also are taking the the the yield inputs that are coming from their portfolio as of I think their quarter ended 07/31. So all all coming in the combined proxy out shortly, but you can imagine higher spread on this portfolio would give an upward bias to to to yields overall.
Okay. And then when you guys for
your
your, you know, NOI accretion on Slide 23, first quarter post close of 19¢, Were there any assumptions baked into there for activity that BBEC would be making in the third and fourth quarter to get to those numbers? Or is it basically just assuming if you yeah. Go.
Yeah. Sure. So so, for example, Ryan, if you if you look just, you know, the the charts on '23, I think you see roughly 16,000,000 in total revenue. You can see something certainly a little bit higher as it relates to total revenue for for BBDC with kind of the shaded box being the MVC contribution. So so, clearly, there is a a level of accretion that occurs naturally.
One difference would be, though, is that is that while it occurs naturally, it would not occur to the same extent had this portfolio been a part and NBC been a part of our value proposition.
Okay. Then one on just that that same slide, you know, you you gave, you know, a nice illustration here. One of the questions that I have was just on the expense side. Again, this may, you know, come out during the proxy, that that's fine. But it looks like expenses were actually going down post close, and and I was having difficulty reconciling that just because the overall leverage really is gonna be changed.
You said it's about one times net leverage today versus one times net leverage post close. So so that really shouldn't change at all. G and a should probably go up a little bit given the higher
Sure. Portfolio.
And then the management fees, while while the the the overall rate gets is lowered, just the larger portfolio looks like the absolute management fees would would go up. So I'm not really sure how the the expenses, you know, on this this slide go down to 9.3 from the current quarter's 9.6.
Sure. I can I can give you a few? So on the on the management fee side, clearly, there's the the the lower base certainly helps. But, also, lower LIBOR as it as it has been and is coming through in both the revenue and the expense basis is also lowering the interest expense overall. So that's not just a spread expense.
That's pure dollars. That's one that that that's another item for for the decrease. So you'd see that plus the fact that, you know, we do keep g and a tight from from you know, on a relative basis. So kinda all in, it's more close to the same. And then the the earnings accretion comes from the increase in revenues as you're bringing on the portfolio.
But the LIBOR is a component, and we can break up that offline if you'd like.
Okay. And, Bhak, the investment grade rating benefited in the in the credit agreement that we have with ING too as a as part of that too, Ron. So in the I've got the investment grade rating, there is benefit there.
Yep. It's at 25 bips. So once we were rated IG, the cost of our largest credit facility, which was at l $2.25, has now fallen to l 200 with l still going down.
Yep. Okay. Makes sense. And then just one last one for me. Will the proxy give any sort of guidance on the the the valuation of of the CSA, or is that just too early?
I what I'm just trying to get a sense of is that that's obviously the 23,000,000. You know, that that's a big number that's meaningfully accretive, you know, if you guys put that on your balance sheet closer to '23 number. But, you know, you you know, it's gonna be fair value, so I'm not sure if it's gonna start closer to that zero number and work its way up. Or I'm just trying to get, you know, understanding of it's gonna be closer to that 23 or closer to to the zero number and and change over time. Obviously, it gets fluctuate depending on how the MVC's portfolio moves and estimation of how it is.
You you know, this is all subject to subject to to to continue review both by auditors and and third party valuation folks. But you can imagine that it certainly wouldn't be zero because there there's value Right? Yep. And and it probably shouldn't be 23,000,000 because there's many outcomes where where the CSA is is not even capitalized or paid on based on the discount at which the assets are purchased.
I I'd say you can you can, for starters, look at around a $5,000,000 level, but but also know that that can be subject to bias upwards depending on what we receive from our third party valuation firms as well as as well as the review on their work from from our from our from regulators and and auditors. So still TBD, but just wanted to give you an anchor there if that works.
Of course. Okay. Appreciate the the the comments, and congrats on the announcement.
Thanks, Ron, and thanks for dialing in on your time.
Thank you. Our next question comes from Christopher Nolan from Ladenburg Thalmann. Please proceed with your question.
Hey, guys. Most of a lot of MVC's revenues are generated from the second lien investments. If those are going to run off over time, is it conceivable that the accretion from this deal actually starts to go
down beyond the I think
it was a twelve month horizon that you indicated earlier?
I I think there's two two components in that is if they get paid off, right, repurchasing the portfolio at roughly 61% of cost without getting into an asset by asset attribution. Right? But using that as a a proxy, if they get paid off, there's an there is a gain, right, on on on that those assets. So that's an that that's a positive for everybody involved. From a income perspective, there then we have to get into kind of the mix of cash and pick.
And so from a overall interest rate environment, the answer is yes. You would expect that as we sell the the second lien were to be paid off at par, and we reinvest that primarily in a first lien asset, that that will come at a lower overall interest rate. But that doesn't mean that the cash interest rate would be lower. In in a number of cases, you can think of a second lien that has a let's just use a number, five or 6% cash and a five or 6% PIK component. And if that gets monetized or realized at par after a discount purchase, you might reinvest that in a LIBOR plus six hundred first lien asset, and we believe that the same cash interest rate would be there on a on a higher, more first lien portfolio, which on a risk adjusted basis, we think could be attractive.
Great. Okay. Thank you. Congratulations on the deal. That's it for
me. Thanks.
Thank you. We have reached the end of our question and answer session. I'd like to pass the floor over to mister Lloyd for any additional closing comments.
Just really wanna thank everybody, for joining the call today. I know it's short notice to to join. We hope everybody stays healthy and positive out there, and we look forward to filing our proxy and answering some of the specific questions that were asked here. So thank you, everybody, for your support.
Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation, and you may disconnect your lines at this time.