One of the undercovered stories of the current crisis is the impact of the fast decline in loan prices on many BDCs off-balance sheet joint ventures. Typically these JVs consisted of a curated portfolio of relatively liquid and lower risk first lien loans and are highly leveraged in order to create a superior yield and income stream. To avoid having to consolidate these assets on their balance sheets BDCs have taken on joint venture partners who provide a portion of the junior capital and divide up voting duties between them. This allows the BDCs to treat the joint ventures as unconsolidated subsidiaries and – in almost every case – leverage up the vehicle’s balance sheet with secured third party debt at generous advance rates given the perceived liquidity and quality of the collateral.
Barings BDC (BBDC) has had one such JV since 2019 with the State of South Carolina Retirement Systems (“SCRS”). The long term goal is ambitious given that BBDC committed $50mn in equity capital and its partner $500mn. At March 31, 2020, though, BBDC had actually advanced only $10.1mn and SCRS $100mn, both in the form of equity capital. The JV had $358mn in portfolio assets, suggesting third party debt must be around $248mn. The JV’s assets are a motley crew according to BBDC’s 10-Q: ” As of March 31, 2020, Jocassee had $67.4 million in senior secured private middle-market debt investments, $186.4 million in U.S. syndicated senior secured loans, $43.7 million in European syndicated senior secured loans, $21.3 million in structured product investments, $7.3 million in an equity investment and $31.8 million in a short-term investment“.
In the IQ 2020, BBDC wrote down its investment in the JV by (37%) due to a drop in portfolio value that seems to have exceeded (10%). According to the 10-Q, no income was received. As a result we have downgraded Jocassee Partners from performing status (CCR 2) to CCR 4. Although there’s a good chance the book value of the portfolio and of BBDC’s equity investment may rise in the future, we’re projecting there will be losses of some kind, which is why we’ve leapfrogged from CCR 2 to CCR 4.
As far as we can tell the two partners seem to be prepared to continue growing the portfolio. Just in the IQ 2020 BBDC sold $69mn in assets to the JV and on its conference call BBDC’s management indicated new investments were being made: “We completely reevaluate the opportunities in areas such as European credit, structured credit, and continue to make investments in these areas that all have attractive risk-adjusted return profiles in this environment“.
The public record is light on the balance sheet of the JV or who its secured lender might be and – unlike many other BDCs – no portfolio list has been made available. This makes the BDC Credit Reporter’s assessment more difficult than usual for a JV, but we expect to be able to offer quarterly updates for many periods to come. Unlike many of its BDC peers BBDC does not seem to have any plans to bring those JV assets back onto their own balance sheet.