Ares Capital-Barings BDC: One Of The Few Deals In The BDC Sector

Overview - The Business Development Company (BDC) sector has performed well in a higher interest rate environment, but many popular BDCs are trading at significant premiums to NAV [1] - Barings BDC (BBDC) focuses on middle market companies with EBITDA between $10M to$ 75M, generating income through a portfolio of debt investments, primarily first lien senior secured debt [1] Performance & Valuation - BBDC's total return remains positive due to its high dividend yield, but its price change lags behind peers like Main Street Capital and Ares Capital [2] - BBDC trades at a 3-year average discount to NAV of -16.4%, which is larger than usual for the sector [3][4] - The share price has nearly recovered to its pre-pandemic level of $10 per share, despite NAV growth over time [3] - The company's NAV increased slightly to$ 11.44 per share in Q1 2024, up from $11.28 in Q4 2023 [5] Dividend - BBDC's dividend yield is 10.8%, well-covered and increased over the last year and a half due to higher interest rates boosting interest income [2] - The dividend has grown at a CAGR of 10.33% over the last 5 years, with no cuts during the 2020 pandemic [16] - Q1 2024 NII was$ 0.28 per share, providing a dividend coverage of 108% [15] Portfolio & Strategy - BBDC's portfolio is highly diversified across industries, with 16% in finance and insurance, 15% in services, and 12% in high-tech industries [6] - The portfolio consists of 337 companies worth $2.53B, with a weighted interest coverage ratio of 2.2x, indicating resilience to elevated interest rates [6] - 66% of the portfolio is first lien senior secured debt, with 6% second lien debt, providing high repayment priority in case of bankruptcies [6] - 16% of the portfolio is equity exposure, which carries higher risk but also potential for higher returns [6] Risk Profile - BBDC's non-accrual rate is 0.3% of assets at fair value, significantly lower than peers like Golub Capital (1.5%) and Fidus Investment (3.1%) [7] - 21% of investments are rated 3-5 on BBDC's internal scale, indicating weaker credit quality, but 9% are rated 1, showing improvement [9] Financials - Q1 2024 NII was$ 0.28 per share, while net income per share was $0.41 [11] - Total investment portfolio at fair value increased slightly to$ 2,527.5M from $2,488.7M in the prior quarter [11] - Total investment income grew 4% YoY to$ 69,807, with operating expenses rising to $40,204 [14] - NAV grew 2.42% YoY to$ 11.44 per share in Q1 2024, up from $11.17 in Q1 2023 [14] Takeaway - BBDC is a high-quality BDC trading at a discount to NAV (-14.6%), making it an attractive entry point [18] - The company benefits from higher interest rates, with 87% of its debt investments in floating rate loans, leading to increased NII [13] - BBDC's portfolio construction and low non-accrual rate demonstrate improvements since the merger with Barings [18]