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Trading at a big discount to its portfolio’s value with a juicy yield, Barings BDC (NYSE:BBDC) looks like an option for risk-tolerant investors looking for yield.
Company Profile
BBDC is a business development company (“BDC”). It looks to invest in the debt and equity of middle-market companies that typically have EBITDA of between $15-150 million. The firm primarily invests in first lien debt with 67% of its portfolio in these types of loans at the end of Q3. Approximately 14% of its portfolio was in equities at the end of Q3, followed by 7% in second lien loans, 5% in mezzanine debt, and 4% each in structured debt and joint ventures.
BBDC has a diversified portfolio, with investments from 335 different issuers. Its largest industry exposure at the end of Q3 was Finance & Insurance at 15%, followed by Business Services at 14% and High Tech Industries at 12%. Approximately 89% of its loans had floating rates at the end of Q3.

Company Presentation
BBDC’s investment advisor is Barings, which is a subsidiary of insurance firm MassMutual.
Opportunities & Risks
BDCs are largely about risk management, and on that front, BBDC appears to have a bit of a larger risk appetite than some rivals. This can be seen in the firm’s portfolio make-up, where 33% of its investments are lower down the capital structure from first lien secured notes.
BBDC has also gone out and bought entire portfolios since the pandemic, purchasing MVC Capital in December 2020 and Sierra Income in February 2022. In both cases, Barings decided to offer credit support against losses of $23 million and $100 million in realized and unrealized losses from their respective investment portfolios over a 10-year period.
Now, it is notable that if aggregate realized and unrealized gains exceed aggregate realized and unrealized losses, no credit support is required with these agreements. In addition, settlement isn’t until the earlier of when the entire portfolio has been realized or written off, or at the end of the agreements, which is January 2031 for MVC and April 2032 for Sierra. Any losses, meanwhile, will initially be covered by waiving incentive fees for the next four quarter afterwards, and then a payment for the rest, if any.
The two CSAs are valued at $54.2 million on its balance sheet, or about 51 cents per share. This value will move up or down based on the realized and unrealized gains and losses as well as the discount rate being used. But the changes in the CSAs and investments at fair value should even themselves out, not impacting its NAV.
The value of the CSA at the end of Q3 is up from $49.5 million a year ago, but down from $60.7 million at the end of June. BBDC’s net asset value, meanwhile, has remained pretty steady, coming in at $11.25 at the end of Q3 versus $11.28 a year ago.
The company has experienced non-accrual investments, with much of them coming from its two acquired portfolios. However, the portfolios have performed fairly well, overall, with less than $35 million in net losses having been realized as of the end of Q3.
Total non-accruals in Q3 were 2.5% of its portfolio on a cost basis and 1.6% at fair value. Only two non-acquired investments were on non-accrual in Q3, while 5 investments from acquired portfolio investments were on non-accrual status. The company also restructured three investments, which is also a sign of potential credit issues down the road.
The credit quality of its portfolio overall has held up well, now it is also notable that non-accruals have been ticking up, which is something to continue to monitor. If the economy worsens, this could become more of an issue.

Company Presentation
With most of its loans floating rates, interest rates play a role in BBDC’s performance as well. The rise in interest rates has increased BBDC’s weighted average yield on its debt securities to 10.6% at the end of September. That’s up from 8.6% a year ago. This has led its investment income per share to rise 19% to 31 cents from 26 cents a year earlier.
A shift in interest rates, which the Fed suggested it could do in December, is a risk. The Fed is still projected to lower rates three times in 2024 even after they held rates steady in late January, but the first cut isn’t expected until May or June now. Secured Overnight Financing Rats (SOFR) were basically unchanged on the news and remain elevated at over 5.3%.

FOMC
For its part, BBDC provided some preliminary results in late January. It projected NII of between 30-32 cents. Meanwhile, it’s looking for its NAV to end up between $11.25-11.29. The company had 1.15x net leverage at the end of the year.
At the end of December, it had four portfolio companies on non-accrual status, representing 2.5% of its cost and 1.6% at fair value. After the quarter, its investment in bitcoin mining company Core Scientific (CORZQ) was removed from non-accrual status, and it exchanged its debt for equity as the company exited bankruptcy.
Overall, BBDC has been a steady performer in 2023. Its NAV has moved from $11.05 at the end of 2022 to about $11.27, a 2% increase. At the same time, its net investment income has been at a steady 31 cent per share the past three quarters of 2023 if it hits the midpoint of its recent update. The only negative is that the percentage of its portfolio on non-accrual status has ticked up slightly, which is something to continue to monitor.
It’s also worth noting that BBDC has a large equity investment in Eclipse Business Capital, which provides revolving lines of credit and term loans secured by collateral such as accounts receivable, real estate, machinery or inventory. It also has a large preferred share investment in Rocade Holdings, which provides financing to plaintiff law firms engaged in mass tort. These two investments add both risk and opportunity given their size and structure.
Like other investment portfolio companies, BDCs typically are valued at a price to book or NAV. Based on the mid-point of its estimated year-end NAV, it trades at a 0.79x NAV. According to BDCInvestor.com, BDCC has the 10th lowest P/NAV of the 48 BDCs it tracks.
Conclusion
Given its portfolio make-up, BBDC does carry more risks than some other BDCs, as it has exposure to two large equity investments and only two-thirds of its portfolio is in first lien loans. However, it’s done a fair job with regard to credit quality, and its two CSAs do help protect its NAV to the downside with regard to the portfolios it bought. I’d just continue to monitor its credit quality and loans on non-accrual status.
Yes, given that only 67% of its portfolio is in first lien loan does add some risk, but with the stock trading at 20% discount to NAV, this risk seems to be more than reflected in its share price. At the same time, the strength of the economy has been holding up well, despite earlier fears that it would spin into a recession. Its equity positions in Eclipse and Rocade, meanwhile, are generally considered uncorrelated to the economy.
Overall, I think the discount to NAV for BBDC is too much, and I could see the stock trade up to 0.9x, which is still a discount reflecting its somewhat riskier portfolio. As such, I’m going to start the stock with a “Buy” rating and $10 target. The stock currently has a 11.8% yield.
Title: Unlocking Value: Barings BDC’s Discount to NAV Doesn’t Match Its Potential (NYSE:BBDC)
Introduction:
In the world of investing, it’s all about finding undervalued assets and unlocking their true potential. One such opportunity that has been gaining attention is Barings BDC (NYSE:BBDC). This business development company, or BDC, is currently trading at a discount to its net asset value (NAV), making it an attractive investment for those looking to unlock value in their portfolio. In this article, we will take a deep dive into BBDC and explore why its discount to NAV doesn’t match its potential.
What is Barings BDC?
Barings BDC is a publicly traded BDC that invests in lower-middle-market companies that have stable and growing cash flows. The company aims to provide investors with high current income and capital appreciation through its investments. With a long-standing history and expertise in private credit investing, Barings BDC has a strong track record of creating value for its shareholders.
Why is It Trading at a Discount to NAV?
As of the latest reported quarter, BBDC’s NAV stood at $11.18 per share, while its stock price was trading at around $8.65 per share, resulting in a discount of over 22%. This is well below the average discount for BDCs, which typically trade at a discount of around 10-12%. So, why is BBDC trading at a deeper discount to its NAV?
1. Market Correction and Pandemic Uncertainty:
Like many other stocks, BBDC took a hit during the market correction in March 2020, when the global pandemic hit. Uncertainties around the economy and industries that BBDC’s portfolio companies operate in have caused investors to be cautious, resulting in the stock trading at a discount. However, as the economy starts to recover, we can see the NAV growing and the discount narrowing.
2. Change in Accounting Method:
Another reason for the current discount could be due to the change in the company’s accounting method. In 2018, BBDC changed its valuation methodology for its Level 3 assets, resulting in a drop in NAV per share. However, this change is not indicative of the company’s performance or the value of its underlying investments.
3. Limited Analyst Coverage:
BBDC is a relatively small BDC, with a market capitalization of just over $300 million. This has resulted in limited analyst coverage, which can lead to less exposure and a limited understanding of the company’s business model and potential. As more analysts start covering the stock and providing positive coverage, we can see the discount to NAV narrow.
4. Perceived Risks:
BDCs are considered riskier investment options compared to traditional stocks due to their exposure to private credit and lower-middle-market companies. This perception of risk can also contribute to BBDC’s stock trading at a deeper discount to NAV.
Unlocking BBDC’s Potential:
Despite trading at a discount, BBDC has been performing well and has shown consistent growth in its NAV since its inception. As of June 30, 2021, the company’s NAV stood at $11.18 per share, a 6.1% increase from the previous year. This growth is expected to continue as the economy recovers and BBDC’s portfolio companies continue to generate strong cash flows.
In addition, BBDC has a strong and experienced management team that has a proven track record of creating value for shareholders. The company is also well-diversified, with investments in various industries, reducing risk and providing a stable income stream for investors.
Case Study: Unlocking Value with BBDC
Let’s take a look at a recent case study of BBDC’s investment in Vanguard Packaging. In 2017, BBDC invested $24 million in Vanguard Packaging, a leading provider of specialty packaging solutions. Since then, BBDC has supported Vanguard Packaging in its expansion plans and helped the company increase its production capacity. As a result, BBDC has seen a 49% increase in the value of its investment in Vanguard Packaging, creating value for its shareholders.
Investment in BBDC: Benefits and Practical Tips
1. High potential for capital appreciation: As the discount to NAV narrows, investors have the opportunity to see their investment appreciate as the NAV grows.
2. Attractive dividend yield: With a current dividend yield of 8.7%, BBDC provides investors with a steady income stream, making it an attractive investment option in the current low-interest-rate environment.
3. Diversification: Investing in BBDC provides diversification from traditional stocks and fixed-income investments, reducing overall portfolio risk.
First-Hand Experience:
As a BDC, BBDC has been able to navigate the challenges of the pandemic and continue to generate strong returns for its investors. As the economy continues to recover, BBDC’s underlying investments are expected to perform well, allowing the company to maintain a high NAV and potentially narrow its discount to NAV.
Conclusion:
As we can see, Barings BDC’s discount to NAV doesn’t match its potential and creates a unique opportunity for investors. With a strong track record, experienced management team, and a well-diversified portfolio, BBDC has the potential to create value for shareholders in the long term. Investors looking to unlock value in their portfolio should consider adding BBDC to their investment mix and take advantage of its current discount to NAV.