Operator: Greetings. At this time, I would like to welcome everyone to the Barings BDC, Inc. Conference Call for the quarter ended June 30th, 2026. [Operator Instructions] Today's call is being recorded, and a replay will be available approximately 2 hours after the conclusion of the call on the company's website under the Investor Relations section. At this time, I'll turn the call over to Albert Perley, Head of Investor Relations for Barings BDC.
Albert Perley: Please note that this call may contain forward-looking statements that include statements regarding the company's goals, beliefs, strategies, future operating results and cash flows. Although the company believes these statements are reasonable, actual results could differ materially from these projected and forward-looking statements. These statements are based on various underlying assumptions and are subject to numerous uncertainties and risks, including those disclosed under the sections titled Risk Factors and Forward-Looking Statements in the company's quarterly report on Form 10-Q for the quarter ended June 30th, 2026, and in other filings made with the Securities and Exchange Commission. Barings BDC undertakes no obligation to update or revise any forward-looking statements unless required by law. I will now turn the call over to Tom McDonnell, Chief Executive Officer of Barings BDC.
Thomas McDonnell: Thanks, Albert, and good morning, everyone. On the call today, I am joined by Barings BDC's President and Co-Portfolio Manager, Matt Freund; and BBDC's Chief Financial Officer and Chief Operating Officer, Elizabeth Murray. I will begin with a brief overview of the quarter and then frame how we are viewing the market. Matt will follow with a more detailed discussion of the private credit environment and credit performance. Elizabeth will then walk through our financial results. Second quarter was a strong quarter for BBDC. We generated net investment income of $0.28 per share and outearned our quarterly dividend of $0.26 per share. We believe that earnings power reflects the durability of the portfolio, the benefit of our floating rate asset base and the value of disciplined capital deployment. Net asset value per share was $10.94 as of June 30 compared to $11.02 as of March 31. The modest decline in NAV was driven primarily by net unrealized depreciation on select investments that were on our watch list in the prior quarter. These were partially offset by net realized gains and over-earning the dividend, all of which Elizabeth will discuss in greater detail momentarily. Overall, while NAV was down modestly, the underlying earnings profile of the portfolio remains strong and credit quality remains stable. We are active on the deployment front during the quarter. BBDC originated $262 million of investments and had $167 million of sales and repayments, resulting in net originations of approximately $95 million. The investment portfolio increased to approximately $2.46 billion at fair value, and the weighted average yield on debt and other income-producing securities increased to 10.2% as of quarter end, up from 10.1% in the prior quarter. The most significant structural accomplishment during the quarter was the termination of the legacy Sierra credit support agreement. That termination freed approximately $67 million for redeployment into income-producing assets, while a new smaller and more targeted CSA was put in place. We view this as a meaningful step in simplifying BBDC's balance sheet and continuing the transition away from legacy acquired assets toward a more fully Barings originated portfolio. Credit performance remains a key area of focus across the private credit market. For BBDC, credit quality was improved quarter-over-quarter. Nonaccruals not covered by the CSA represented only 0.2% of the portfolio at fair value and total nonaccruals represented 0.6% of the portfolio at fair value. Stepping back, private credit continues to face a significant amount of public attention. Investor focus remains high around redemption activity in non-traded perpetual BDCs, AI-related disruption in software, geopolitical volatility and the path of interest rates. We welcome a more rigorous discussion of these issues. We have always believed that private credit is not a monolithic asset class. Manager selection matters, underwriting matters, portfolio construction matters and workout experience matters. One of the themes we have been focused on this year has been the expectation of manager dispersion, which we believe continues to unfold. The past several years have rewarded capital formation and scale. The next stage of the cycle should reward disciplined underwriting, strong documentation, funding flexibility and the ability to manage through idiosyncratic credit issues. We believe BBDC is well positioned in that environment. Our strategy remains consistent. We focus on middle market issuers, senior secured investments, defensive sectors and directly originated opportunities where Barings can influence structure, documentation and outcomes. That discipline is particularly important as investors begin to look beyond headline yields and focus more deeply on the sustainability of earnings and the resiliency of portfolio companies. With that overview, I will turn the call over to Matt to discuss market backdrop and BBDC portfolio in more detail.
Matthew Freund: Thanks, Tom. The second quarter continued to be defined by a disconnect between headlines and fundamentals. The headlines around private credit remain noisy. We saw continued scrutiny of non-traded perpetual BDC redemptions, renewed focus on software exposure and AI disruption, heightened political uncertainty and ongoing investor debate about timing and magnitude of future rate cuts. At the macro level, conditions were not meaningfully changed from the prior quarter. While renewed tariff concerns and Middle East conflicts contributed to volatility, the operating backdrop for most of our core middle market borrowers remained manageable. The most important change from our perspective is that private credit behavior is becoming more rational. Capital remains available, but less aggressively so. Redemption activity in perpetual BDCs and more deliberate institutional pacing are reducing the marginal capital chasing new deals. That has begun to translate into better lender economics in parts of the market. New issue spreads have widened modestly, fee levels have improved and lenders are becoming more selective. This is important for BBDC. We have been saying for several quarters that slower capital formation could ultimately improve the deployment environment for disciplined lenders, and we are beginning to see that dynamic emerge. Public reports indicate that direct lending activity broadly declined during the quarter, driven by fewer mega deals and large corporate financing. At the same time, our core middle market issuance pipeline remains strong, where Barings has long-standing sponsor relationships and an established origination platform. Let me spend a moment on software and AI because this remains one of the thematic topics we expect investors to focus on. AI-related concerns have clearly affected market perception of certain software credits. However, we think it's important to distinguish between broad headline risk and actual credit impairment. Our underwriting framework remains focused on business model durability across all industries. We are most comfortable with businesses that exhibit market leadership, high switching costs, granular customer bases and acyclical demand drivers. When evaluating software specifically, we are focused on issuers with specific domain knowledge, data moats, purpose-built workflows and end markets with heightened security, liability, regulatory and privacy requirements. Given our avoidance of ARR lending historically, our portfolios are under-indexed to software, but we continue to see compelling opportunities in this vertical as some lenders with large software portfolios are avoiding this sector entirely. The portfolio experience to date supports the importance of selectivity. To date, stresses attributable to AI have been concentrated within issuers that were already under pressure, as Tom previously alluded. A chief example of this dynamic is reflected in our biggest unrealized appreciation during this quarter in FinThrive, a preferred equity position. Separate from this position, the risk rating migration during the quarter was largely modest. Our primary areas of stress in the portfolio, characterized by risk ratings 4 and 5, were substantially unchanged at 6% of the portfolio during the quarter compared to the immediately preceding period. That said, we do not want to minimize the amount of work required to drive optimal outcomes to our underperforming positions. We are actively managing specific credits and continue to focus on maximizing recoveries, preserving optionality and protecting shareholder value. Looking ahead, our origination outlook is constructive but selective. We do not view this as a market in which discipline should be relaxed, quite the opposite. Elevated investor scrutiny, changing funding flows and greater credit dispersion are creating a better environment for lenders who can be patient and selective. Our focus remains on core middle market first lien loans, global private finance opportunities and capital solution strategies with attractive co-investment opportunities where the Barings platform can create incremental value. We also continue to see potential long-term opportunities for market dislocation. As some managers face redemption pressures or funding constraints, well-capitalized platforms should be better positioned to provide liquidity. As previously referenced, the termination of the Sierra CSA and resulting availability of capital deployment improves our ability to participate in that environment. In summary, the quarter showed improved earnings, a better deployment environment and continued progress in simplifying the BDC story. With that, I will now turn the call over to Elizabeth.
Elizabeth Murray: Thanks, Matt. As Tom and Matt highlighted, Barings BDC delivered another quarter of solid operating performance despite continued market volatility and ongoing investor focus on the private credit sector. The quarter was highlighted by earnings that exceeded our dividend, the successful termination of the legacy Sierra credit support agreement and continued balance sheet flexibility. Turning first to our results. Net asset value per share at June 30 was $10.94 compared to $11.02 at March 31, 2026. The sequential decrease in NAV was primarily driven by net realized and unrealized losses on investments, partially offset by strong net investment income during the quarter. While NAV declined modestly, we believe the overall portfolio continued to demonstrate resilience, and credit performance across the broader portfolio remains generally stable. Net investment income for the quarter benefited from continued portfolio growth as well as elevated dividend income from certain portfolio investments. As a result, we generated NII of approximately $0.28 per share, exceeding our quarterly dividend of $0.26 per share by roughly $0.02. Importantly, we continue to maintain significant undistributed taxable spillover income of approximately $0.84 per share. Reflecting our earnings strength and confidence in the portfolio, our Board declared a third quarter dividend of $0.26 per share, unchanged from the prior quarter. We believe our substantial spillover income, industry-leading incentive fee hurdle and diversified income streams positions us well to support shareholder distributions through varying market environments. As always, we will continue to evaluate dividend levels relative to portfolio earnings power, base rate expectations and overall market conditions. Moving to portfolio valuations and realized activities. We recorded net realized losses during the quarter, primarily associated with restructuring activity and legacy portfolio investments. During the quarter, we completed restructuring involving EMI Porta, Holdco and Medical Solutions. While these transactions resulted in net losses, the associated unrealized marks previously taken on these investments largely offset the impact to NAV. One of the most notable developments during the quarter was the successful termination of the legacy Sierra credit support agreement, as was mentioned by both Tom and Matt. As a reminder, the Sierra CSA was originally established in connection with the Sierra acquisition and provided important downside protection throughout the wind down of that legacy portfolio. During the quarter, the agreement was terminated and Barings made a final settlement payment of approximately $67 million. The transaction generated a realized gain of approximately $22.6 million, which was largely offset by unrealized depreciation recognized as the value of the contract converged to its ultimate settlement amount. Just as importantly, the termination of the legacy agreement significantly simplifies the company's balance sheet and removes the complex legacy structure that has existed since the Sierra acquisition. While only a small number of Sierra investments remain, we simultaneously entered into a new credit support agreement with a notional amount of approximately $11 million, providing targeted protection on the remaining positions while materially reducing the overall size and complexity of the arrangement. Turning to the balance sheet. We ended the quarter with net leverage, which is defined as regulatory leverage net of unrestricted cash and net unsettled transactions, of 1.18x, essentially unchanged from the prior quarter and comfortably within our target range of 0.9x to 1.25x. Our liability structure also remains a competitive advantage. Approximately 80% of our debt capital structure remains unsecured, which is among the highest levels in the public BDC sector and provides meaningful operational flexibility. Although we expect that percentage to decline modestly as we approach upcoming maturities, we remain very comfortable with our current funding profile and believe it positions us favorably relative to peers. As many investors are focused on, our next significant debt maturity is the $350 million unsecured notes due in November 2026. We have been proactively evaluating multiple refinancing alternatives and remain in active dialogue with debt capital market participants. Given our substantial liquidity, access to both secured and unsecured finance markets and long-standing presence as an issuer in the public debt market, we believe we have several attractive options available to address the maturity. We expect to remain opportunistic and seek to refinance the maturity in a manner that preserves balance sheet flexibility while supporting attractive risk-adjusted returns for shareholders. In closing, we believe the second quarter demonstrated the strength of the Barings BDC platform. We generated earnings in excess of the dividend, successfully terminated the legacy Sierra CSA, maintained leverage within our target range and preserved significant liquidity as we prepare for upcoming capital market activity. Supported by a high-quality portfolio, conservative balance sheet and robust earnings profile, we believe BBDC remains well positioned to navigate changing market conditions and continue creating long-term value for shareholders. With that, I'll turn the call back to the operator for the Q&A session.
Operator: [Operator Instructions] Our first question comes from the line of Merrill Ross with Compass Point.
Merrill Ross: You spoke clearly about overlooked investments in dislocated sectors. But based on your long experience in the core middle market, are there any sectors where you don't think that current pricing adequately compensates you for risk?
Matthew Freund: Merrill, really appreciate you dialing in and asking -- sorry, getting us started this morning. And so I would say that more broadly speaking, I think that there are industries that we have historically avoided and will continue to avoid just based on cyclical considerations. And in a broad kind of volatile macroeconomic environment, that probably doesn't come as any surprise. So thinking about things that have any derivative exposure to oil and gas, logistics-related industries, and other industries that are going to be kind of subject to the whim of volatility that's outside of our control are probably going to be lower on our list of priorities, but that's not a deviation from past practice. One observation I would make is that where we're seeing a really heightened degree of competition is actually in the lowest ends of the market. And so consider that to be issuers with EBITDA between, call it, $5 million and $15 million of underlying cash flows. And so I think that as we are reviewing opportunities in real time, the competitive landscape in that segment of the market, perhaps ironically, is extraordinarily competitive. And we continue to focus on what we define as the core area of our deployment strategies at $15 million to $75 million, but consistent with the industry verticals that we've historically targeted.
Operator: Our next question comes from the line of Ethan Kaye with Lucid Capital Markets.
Ethan Kaye: Looks like deal activity was quite strong this quarter. We saw pretty muted, I think, numbers at some larger cap peers. I think some of that ostensibly has to do with capacity. But I'm wondering if there's kind of other factors you can point to that supported activity in 2Q and the pipeline going forward?
Thomas McDonnell: Yes. Thanks, Ethan, for the question. Yes, I think that, one, it speaks to the strength of our platform and what we've done there. And I think that, that is really a big driver. Our origination team is -- pipeline is quite full. So I think we've seen lots of good opportunities. I think we have been selective on that. So what you're seeing on deployment, I think it is really of a high quality, and we continue to see opportunities come through on that front through our group on that side. I would also say that in our Capital Solutions group, we've seen quite robust activity. I think really the interesting thing there is we see quite a bit less competition on those deals, and we're getting compensated at 200 to 300 basis points wider than some of the private credit deals for what we view as equivalent risk. So I think a key differentiator in our platform is the Cap Solutions group, combined with what we do in our core GPF group, is really providing us with uplift as we look at pipeline, and it clearly showed in deployment in the second quarter.
Ethan Kaye: Great. And then one quick follow-up on that. Do you have a sense of what share of, I guess, commitments this quarter were from new borrowers versus incumbent borrowers?
Matthew Freund: Yes. About 1/3 were going to relate in this particular quarter, I believe, related to existing relationships and about 2/3 would have been new issue relationships.
Operator: [Operator Instructions] Our next question comes from the line of Heli Sheth with Raymond James.
Heli Sheth: So obviously, a more active M&A market this quarter. Any further insight into what we should expect in terms of pacing of both repayments and originations? Can we expect them to just ramp from here? Or are there any catalysts that may drive more activity down the line?
Thomas McDonnell: Yes. I guess I'll start with that and turn it to Matt. We've seen the pipeline, as I mentioned, it is robust. And so one of the things we do is obviously how we model things is try to really get a view on what we think repayments are. We have a good view into that. We also have, I think, a fairly robust pipeline that I think what you've seen in the second quarter feels like it is carrying into the third quarter. Much past that, difficult to say. In terms of the M&A pickup, there's been a lot of talk about that. I don't know necessarily that that's what's really driving this. I think it may be for us, a little platform-specific, but there will be a point where that breaks loose. But right now, I think we're in a good position with what we see on the GPF side and Cap Solutions side, and I think we see it that way.
Matthew Freund: Yes, Heli, I would say that for largely deployed portfolios, particularly on a granular basis, the activity on both repayments and deployment is going to move largely in lockstep. And so as we see activity refinance out or perhaps monetize out of the portfolio, presumably, that's being accompanied by an opportunity that we're also reviewing. And so I think that our outlook remains optimistic that we'll continue to see more turnover of the broad portfolios because it has been a little bit more muted over the course of the past few years. But that has been a pretty consistent expectation that has disappointed quarter in and quarter out. And so I think that while we have some confidence that we will continue to see an improvement in transaction velocity and activity, the narrative really hasn't changed from an overall hold duration perspective in private equity portfolios.
Heli Sheth: Got it. Appreciate the color. And then just switching to software. I think you mentioned that a lot of lenders are starting to avoid the sector just because of their large software exposure already. Are you seeing anything different in terms of spreads or pricing there given that?
Matthew Freund: Yes. Yes. There is a definitive software premium that exists for managers who are underwriting new software issuance. There's undoubtedly a dynamic there.
Thomas McDonnell: Yes. I would say we're not avoiding that, but we're certainly getting a pricing premium for the few that we've looked at and have committed to. So we're not out of the market for that. In fact, I think it actually represents a good relative value opportunity given what we see in pricing and some of the underlying companies that we're taking a look at in doing that. So we're going to be obviously very selective, but I do believe for -- there is an opportunity there, frankly. And so I think the pricing, just because of the noise in the greater software ecosystem is allowing us that opportunity, and we will take advantage of that.
Operator: Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to Mr. McDonnell for any final comments.
Thomas McDonnell: All right. Thank you, operator, and thank you to all who participated today. I look forward to deepening our engagement with investors and advancing our strategic priorities with the full BDC leadership team. BBDC is strongly positioned for the future, and we remain focused on delivering consistent value for our shareholders.
Operator: Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.
