Barings BDC : IIIQ 2021 Credit Status

With the IVQ 2021 BDC earnings season right round the corner, the BDC Credit Reporter is updating the credit status of as many public BDCs as possible, using IIIQ 2021 data and any subsequent developments we are aware of.

Portfolio Metrics

In the case of Barings BDC (BBDC), total investment assets at cost amount to $1.632bn, and the fair market value to $1.654bn, a slight premium to par. The BDC portfolio at fair value has grown 10% in the first 9 months of 2021.

Unrated

There are 146 portfolio companies. Unfortunately, the BDC does not rate the credit status of its portfolio, only reporting on the number of non accruals. In its absence, the BDC Reporter has undertaken its own calculations of the value of underperforming companies.

Non Accrual (s)

As of September 30, 2021 there was 1 company non performing: Legal Solutions Holdings. See our November 22, 2021 article. This is what was said in the BBDC 10-Q on the subject:

In connection with the MVC Acquisition, we purchased our debt investment in Legal Solutions Holdings, or Legal Solutions. During the quarter ended September 30, 2021, we placed our debt investment in Legal Solutions on non-accrual status. As a result, under U.S. GAAP, we will not recognize interest income on our debt investment in Legal Solutions for financial reporting purposes. As of September 30, 2021, the cost of our debt investment in Legal Solutions was $10.1 million and the fair value of such investment was $11.0 million.

Barings BDC 10-Q IIIQ 2021 11/9/2021

Subsequent to quarter’s end, Carlson Travel was restructured, filed for bankruptcy and after one day exited court protection. The FMV of BBDC’s exposure was valued at $8.9mn. See our November 15, 2021 article.

Rest Of The Worst

The BDC Credit Reporter has identified 3 additional underperformers – all of which are performing (i.e. paying interest) and are rated CCR 3 on our 5 point rating scale. The companies are Accurus Aerospace ($20.9mn) ; Custom Alloy ($36mn) which is discussed further below and the MVC Private Equity Fund ($8.2mn).

The total FMV of the underperformers is $86mn, or 5.2% of the portfolio as a whole. Of the 5 companies, 3 are rated as Trending, which means they are expected to show meaningful changes in values or amounts outstanding at the next earnings release. These are Carlson Travel, Custom Alloy and Legal Solutions.

Credit Focus

Our greatest concern from a credit standpoint – in terms of value or income loss – is at Custom Alloy, whose value dropped sharply in the IIIQ 2021. This is what we wrote most recently on the subject:

This is a credit worth tracking as Custom Alloy accounts for 7% of BBDC’s total investment, and even more of its NII because of the high rates being charged. We have added the company to the Trending List and will be monitoring BBDC’s IVQ 2021 results with great interest for signs of any further weakening. We were encouraged, though, by a recent October 2021 news item that indicated the company is investing $8.1mn in a new facility to service a Navy contract. Maybe Custom Alloy’s troubles – whatever they are – are just a passing phase and – once again – the company will be removed from the underperformers list.

BDC Credit Reporter- Custom Alloy Corporation: IIIQ 2021 Update November 23, 2021

Solid

Both troubled Carlson Travel and Legal Solutions do not appear to be in danger of more than immaterial losses. The former consists principally of first lien debt which should remain fully valued in the recent restructuring and the latter is supported by a credit indemnification from the BDC’s manager, part of the MVC acquisition terms.

Follow Up

We will update BBDC’s credit status following its IVQ 2021 results for which a publication date has not yet been set.