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Barings BDC, Inc. (NYSE:BBDC)
Q3 2020 Earnings Call
Nov 10, 2020, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Operator

At this time, I would like to welcome everyone to the Barings BDC, Inc., conference call for the quarter ended September 30, 2020. [Operator instructions] Today's call is being recorded, and a replay will be available approximately two hours after the conclusion of the call on the company's website, at www.baringsbdc.com under the investor relations section. 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 those projected in 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 annual report on Form 10-K for the fiscal year ended December 31, 2019, and quarterly report on Form 10-Q for the quarter ended September 30, 2020. Each is filed with the Securities and Exchange Commission. Barings BDC undertakes no obligation to update or revise any forward-looking statements unless required by law. At this time, I will turn the call over to Mr.

Eric Lloyd, chief executive officer of Barings BDC. Ladies and gentlemen, please stand by. We need to bring Mr. Lloyd back online.

Mr. Lloyd, please go ahead.

Eric Lloyd -- Chief Executive Officer

Thank you. And I guess this goes with 2020. We start conference calls with challenging situations like this. So, apologize for that.

I got dropped. Thank you, Donna. Good morning, everyone. We appreciate you joining us for today's call.

And I hope you and your families are doing well and staying healthy and positive during these times. Please note that throughout today's call we'll be referring to our third-quarter 2020 earnings presentation that's posted on our investor relations section of our website. On the call today I'm joined by Barings BDC's president and Barings' co-head of global private finance, Ian Fowler; Tom McDonnell, managing director and co-portfolio manager; Bryan High, Barings' head of US special situations and co-portfolio manager; and the BDC's chief financial officer, Jonathan Bock. Ian and Jon will review details of our portfolio and third-quarter results in a moment, but I'll start off with a few high-level comments about the quarter.

Turn with me to Slide 5 of the presentation. We've shown this slide in the last several quarters to provide a sense of the volatility of broadly syndicated loan prices and the correlation to BDC equity prices. In the third quarter, broadly syndicated loan prices continued to increase, with spreads down over 100 basis points. BDC equity prices, however, remained relatively flat quarter over quarter, largely driven by factors such as select dividend reductions and increased non-accruals for some companies.

Jumping to our third-quarter financial highlights, on Slide 6. Barings BDC's net asset value per share improved by $0.74 in the quarter, a 7.2% increase, to $10.97. Unrealized appreciation on our investment portfolio was the primary driver of this increase, as market- and credit-driven improvements continued to help reverse some of the unrealized depreciation we experienced in the first quarter. As of September 30, our total investment portfolio was carried at 98.3% of cost, compared to 87.4% 6 months ago, at March 31.

We had no nonaccrual assets at the end of the quarter, as all of our investments remain current on both interest and principal payments. While at some point every direct lender, including us, will experience non-accruals, I am especially pleased with this portfolio's performance during this trying year, which I view as a testament to both our original underwriting and our ongoing portfolio management of our investment teams. Our net investment income per share was $0.17, up from $0.14 per share in the second quarter and above our third-quarter dividend of $0.16 per share. We continue to take advantage of market conditions to rotate out of our initial BSL portfolio and redeploy that capital into higher-yielding middle market and cross-platform investments.

Total sales and repayments of 252 million included 210 million from our initial BSL portfolio, which was redeployed into 145 million of new originations with a weighted-average, all-in spread of 921 basis points. The investment pipeline has remained very healthy in Q4, as Jon will discuss in more detail later, and we now expect by the end of the year to have largely completed our rotation from our initial BSL portfolio into primarily a middle market portfolio. Based on these results and expectations for the coming quarter, we announced yesterday that our board increased our fourth-quarter dividend payable in December to $0.17 per share. Turning to Slide 7, you'll see some additional financial highlights for the quarter.

Jon will go through the details of the financials shortly, but I do want to make one key point. You can see on the first line of Slide 7 that our investment portfolio increased 82 million for the quarter. This increase, however, included a 153 million increase in our short-term cash investments from BSL sales that were used to repay debt after quarter-end. Thus, our true investment portfolio actually decreased 70 million during the quarter as a result of our portfolio rotation that I referenced earlier.

Despite this decrease in portfolio size, you can see that our total investment income actually increased slightly during the quarter, even with continued downward pressure on LIBOR, the rotation out of initial BSLs into higher-yielding middle market and cross-platform investments. Those drove an increase in total investment income and better positions the portfolio for continued growth, going forward, while still maintaining a high-quality, predominantly first lien portfolio. Slide 8 outlines the key strengths of Barings' platform that helped facilitate this portfolio rotation. Barings BDC is uniquely positioned within the broader Barings global fixed income franchise to focus primarily on middle market direct lending, but also take advantage of Barings' wide investment frame of reference to participate in a differentiated deal flow across both public and private markets to find the most attractive risk-adjusted returns in different market cycles and periods of volatility.

This multichannel origination strategy has enabled Barings BDC to grow its cross-platform investments over the last six months as a complement to the middle market direct lending portfolio and, as I mentioned previously, increase our dividend to $0.17 per share for the fourth quarter. It is this large, experienced and global platform that we believe will continue to drive long-term shareholder returns. I'll wrap up my comments by providing a brief update on our planned merger with MVC Capital. The transaction has progressed in accordance with our original timeline, as we have filed our preliminary and amended proxy statements with the SEC.

We still expect the shareholder meetings to approve the transaction to be held in December, with a targeted closing date for the merger in mid to late December. We encourage all of our shareholders to review the BDC's registration statement on Form N-14 and the definitive proxy materials once made publicly available on our website and on the SEC's EDGAR page. I'll now turn the call over to Ian to provide an update on the market and our investment portfolio.

Ian Fowler -- Co-Head of Global Private Finance

Thanks, Eric, and good morning, everyone. Focusing first on the broader market, please turn to Slide 10 of the presentation. As you would expect, middle market activity is down in the US this year compared to 2019, with a focus on add-on acquisitions. This is where Eric's comments of a wide frame of reference are of particular importance.

If there's a limited universe of quality transactions in the market, firms with the ability and experience to execute across investment types will be in the best position to take advantage of the quality opportunities. Jump to Slide 11. The Credit Suisse B leveraged loan index continued to tighten in the third quarter and is now back inside middle market levels. As we saw an increase in activity, direct lending spreads were generally within a 25 basis point range across the different subsectors relative to the second quarter.

Switching gears to the Barings BDC portfolio, on Slide 12, we show a summary of our investment activity for the third quarter. So we are on the same page, let me define cross-platform investments. We are categorizing investments here that take advantage of the breadth of the Barings investment platform, including items such as opportunistic liquid loan and bond investments, special situation investments and structured products that would include CLOs and asset-backed securities. Relative to a slow second quarter, the third quarter was much more active in terms of both middle market and cross-platform investments.

Net new middle market investments totaled 53 million, with gross fundings of 96 million partially offset by sales and repayments of 43 million. New investments included seven new platform investments totaling 80 million and 16 million of follow-on investments and delayed-draw term loan fundings. We also had 50 million of additional cross-platform investments and continued the rotation out of our initial BSL portfolio. Slide 13 provides a bridge of our portfolio from June 30 to September 30, which includes increases in the values of our portfolio investments that Jon will describe in more detail shortly.

At a high level, I will say that, over all, our portfolio has performed well during the pandemic, and you can see some of the key components of this if you turn to Slide 14. Here, you can see an enhanced view of our total investment portfolio at September 30, including key portfolio characteristics such as revenue contribution and certain credit statistics. The goal of this slide is to provide further details on the three primary components of our portfolio, which are our initial BSL portfolio, our middle market portfolio and our cross-platform investments. Here are a few high-level points of note.

Our initial BSL portfolio, which at one point totaled roughly 1.2 billion, is now down to 96 million, with further reductions expected in the fourth quarter. In terms of our core portfolio, we were invested in roughly 758 million of private middle market assets at quarter-end, which included 92 million of unfunded commitments and 186 million of cross-platform investments, which included the remaining 42 million of unfunded commitments to our joint venture investments. The 906 million funded total portfolio was spread across 125 portfolio companies and 28 industries, as we continue to focus on diversification within our portfolio. As Eric mentioned, we have no investments on nonaccrual status.

And just as importantly, we had no material modifications to the cash payment terms of our debt investments. For any lender, it is ultimately the conversion of investment income into cash that is key, which is why I want to draw your attention to the income contribution section of this chart. Here, you can see that only 2% of our revenue consisted of PIK interest, with no restructured PIK investments for our portfolio companies facing liquidity challenges and unable to pay their cash interest. In addition to the strong performance of the current investment portfolio, I believe it is worthwhile to outline the premium spread on our new investments relative to liquid credit benchmarks.

Jump to Slide 15. As many investors have become accustomed to Barings, they understand we as a team seek attractive illiquidity and complexity premium across our wide investment frame of reference. This enhanced diversification drives improved investor outcomes and allows us to remain disciplined in not over-allocating to one core market. As outlined here, Barings BDC deployed 145 million at an all-in spread of 921 basis points, which represents a 372 basis point spread premium to comparable liquid middle market indices at the same risk profile.

Diving deeper into our core middle market segment across Europe and North America, we averaged a 207 basis point spread relative to liquid market indices. And within the cross-platform investment category, you can see the incremental premium that this asset category provides, with premiums ranging from 500 to almost 1,200 basis points. We've discussed the benefits of our wide investment frame of reference, and Slide 16 provides a graphical depiction of relative value across the BBB, BB and B asset classes. It continues to show the relative value opportunities that can exist for investors at different levels of credit risk and how the value of choice across markets provides a meaningful benefit to BDC investors, leading to the actual results I outlined on the prior slide.

Our top 10 investments are shown on Slide 17, with no investment exceeding 3.1% of the total portfolio and the top 10 representing only 24% of the total portfolio. Our portfolio remains diverse and with limited exposure to any single investment or industry. With that, I'll turn the call over to Jon to provide additional color on the financial results. Jon?

Jonathan Bock -- Chief Financial Officer

Thanks, Ian. On Slide 19, you can see the bridge of the company's net asset value per share since last quarter, showing an increase of $0.74 per share. While our net investment income outpaced our dividend by $0.01 per share, the primary driver of the increase was net unrealized appreciation on our investment portfolio and foreign currency transactions of $1.17 per share. This appreciation included $0.59 per share reclassed adjustment to more than offset the $0.43 per share net realized loss on investments in foreign currency.

These net realized losses were driven primarily by sales of investments in our initial BSL portfolio, with roughly 80% of those losses coming from the complete exit of positions in Fieldwood Energy and Men's Wearhouse. You can see a further breakdown of our net unrealized appreciation on both a dollar and per share basis on Slide 20. The $1.17 per share of net unrealized appreciation, which equates to approximately 56 million, included an appreciation of approximately 17 million on our middle market investment portfolio, of which 14 million was attributable to lower spreads in the broader market for middle market debt investments and $1 million of which was attributable to underlying credit or fundamental performance. Both our cross-platform investments and our initial BSL portfolio saw appreciation of 7 million, and we had 28 million of reclassification adjustments I mentioned that more than offset the 21 million of net realized losses we incurred in the quarter.

I'd like to point out that Slide 20 provides a further breakdown of the values of our cross-platform investments into special situations, opportunistic liquidity, structured products and our joint venture investments as we continue to look for ways to increase the clarity and transparency around our investment portfolio. Slides 21 and 22 show our income statement and balance sheets for the last five quarters. As we've discussed, our net investment income per share increased to $0.17 for this quarter. In addition to the total investment income elements that Eric mentioned, I'd like to point out that our fee income included only 91,000 of nonrecurring fee income.

So our growth in net investment income for the quarter was not driven by onetime fees that will go away in future quarters. We also saw a 0.9 million decrease in our interest expense for the quarter as a result of lower LIBOR and the lower spread on our senior credit agreement due to the investment-grade credit rating we received in the third quarter. From a balance sheet perspective, on Slide 22, the high level of short-term investments driven by sales within our initial BSL portfolio was fully used to repay our debt securitization on October 15. We also issued 50 million in our first series of unsecured notes during the quarter.

This 50 million issuance was the first series of draws under our 100 million unsecured debt commitment we announced in early August. Our debt-to-equity ratio at September 30 was 1.32 times, or 0.74 times, after adjusting for cash, short-term investments and unsettled transactions. Details on each of our borrowings are shown on Slide 23, which shows our debt profile for each of the last two quarters, as well as pro forma for certain financing activities that occurred subsequent to quarter-end. In addition to the full repayment of both classes of CLO notes in October, last week we completed a new $175 million unsecured debt issuance, comprised of 62.5 million of five-year notes with a coupon of 4.25% and 112.5 million of seven-year notes with a coupon of 4.75%, for a blended coupon of 4.57%.

As part of this new issuance, the remaining 50 million commitment from our August unsecured debt issuance was reduced to 25 million. And following both issuances, we now have total unsecured debt outstanding of 225 million, split evenly between five-year and seven-year maturities, with an additional commitment to purchase up to 25 million of unsecured debt. This diverse liability structure better positions Barings to take advantage of the wide investment frame of reference across the Barings platform and provides more flexibility during periods of market volatility. Jump now to Slide 24.

Barings BDC has available borrowing capacity under our $800 million senior secured corporate credit facility, which was further enhanced by the 175 million unsecured note offering, as well as our remaining 25 million unsecured debt commitment. The chart on Slide 24 outlines the impact of using this available liquidity on our net leverage, including the impact of funding our unused capital commitments. While Barings BDC does not have any revolver exposure, we have 92.4 million of delayed-draw term loan commitments to our portfolio companies, as well as 41.9 million of remaining commitments to our joint venture investments. This table shows how we have the available capacity to meet the entirety of the commitments if called upon, while maintaining cushioning against our regulatory leverage limit.

Slide 25 updates our paid and announced dividends since Barings took over as the advisor to the BDC. As Eric mentioned, we announced yesterday that our fourth-quarter 2020 dividend will be $0.17 per share, an increase of $0.01 per share compared to the third quarter. I'll wrap up with two final points, starting on Slide 27, which summarizes our new investment activity so far during the fourth quarter and our investment pipeline. We've been active since October 1, with approximately 155 million of new commitments, of which approximately $131 million have been closed and funded.

Of these new commitments, 98% are in first lien senior secured loans, and the weighted-average origination margin, or DM-3, was 8.2%. We've also funded approximately 9 million of previously committed delayed draw term loans. The current Barings Global Private Finance investment pipeline is approximately 2.4 billion on a probability-weighted basis and is predominantly first lien senior secured investments. As a reminder, this pipeline is estimated based on expected closing rates for all deals in our investment pipeline.

And finally, I believe it's important to highlight the incentives point that we've discussed on previous calls. As many of you know, Barings seeks to ensure that its incentive fee structure provides the adequate latitude to make the right loan in the right structure throughout credit cycles. And this is a concept we often like to outline as investment math, whereby we seek to answer an important question asked by LPs, what do you need to lend at in order to generate the ROE promised? As a part of the MVC transaction, Barings is seeking to lower its base management fee to 1.25%, down from 1.375%. As one compares this investment math relative to that of other fee structures, it becomes clear that Barings BDC can sufficiently prosecute its 8% targeted ROE at NAV, while maintaining the freedom to invest in lower-spread collateral relative to other examples posted here.

In our view, this high degree of investor alignment, when combined with our wide frame of reference, can lead to a superior investor outcome over time, as it limits the requirement to stretch for yield and income only to see NAV degradation in the future. Also related to the MVC merger, as we continue to work toward the closing we have not made any share repurchases under our repurchase plan for 2020. And as a reminder, in connection with the merger Barings BDC has committed up to $15 million in share repurchases following the closing of the transaction. Now as 2020 challenges will follow us and follow the market into 2021, we look forward to meeting those challenges with enhanced liquidity, a quality investment portfolio and a strong origination outlook centered on investment discipline in a multichannel origination approach with a very wide investment frame of reference.

And with that, Operator, we'd like to open up the line for questions.

Questions & Answers:


Operator

[Operator instructions] Our first question is coming from Finian O'Shea, of Wells Fargo. Please go ahead.

Finian O'Shea -- Wells Fargo Securities -- Analyst

Hi, everyone. Sorry about that. Thanks. I appreciate, everybody, the opportunistic strategy breakout.

And now, it looks like you'll have more of an unsecured debt profile. So, I guess, first question, for Eric, does this mean we'll see a shift in strategy or perhaps a more fluid strategy on the origination side? Obviously, the BDC started out mostly oriented to middle market, but it looks like you've started to get opportunistic in the volatility this year, which is obviously great, and now we're seeing more clear language. So any just high level on what this means for how we look at the BDC, going forward.

Eric Lloyd -- Chief Executive Officer

Thanks, Finn. So those of you who joined us almost two years ago now, a little over two years ago, when we were able to execute on the Triangle transaction, we were new to the BDC space. And I said at that time on our initial calls that the first job of order was, frankly, to establish credibility with our shareholder base, with the analyst community and within the industry and do what we say we're going to do. And the focus then and continues to be the core part of the portfolio to be directly originated first lien senior secured loans.

To Jon's point, we think the fee structure allows us to do that at levels that are very sound from a credit perspective, as evidenced by the lack of -- we have no non-accruals in our portfolio right now in the BDC, while also kind of preserving the return that we're targeting for investors. That being said, as we've kind of evolved over the course of the past quarters, we've tried to share at times kind of the insights into Barings and the platform. You saw some European deals, if you go back a year ago, and then we've started to introduce some of our other capabilities into the BDC from an investor return perspective. That's not intended to be in any way, shape or form a shift in strategy.

But I do think when you think of the 30% bucket that we have, it is our obligation as a manager to make sure that we're looking for the best risk-adjusted returns across our wide spectrum of investment capabilities we have at Barings and bring those to bear for our investors, of which obviously at Barings we're by far the largest investor in the BDC. So no shift in strategy. We're still going to say, we call it, boring is beautiful. The core of the portfolio is going to be directly originated first lien senior secured, but you will continue to see some portion of that 30% bucket do what I believe we're being paid to do, which is find the best risk-adjusted returns we can, particularly in parts with market volatility, and we're agnostic to wherever that comes within Barings.

This is a Barings BDC, not just our private finance platform.

Finian O'Shea -- Wells Fargo Securities -- Analyst

Sure. That's very helpful. And another one on platform verticals, on middle market Europe. That appears to have been very robust this quarter.

A lot of that was sold down to the JV. I'm just trying to get a feel if, was that for the BDC's appetite, or was that to create space for MVC? I know they have Europe as well. But just on a higher level on allocation, how does the BDC and JV fit in line? Like, are they both equals in claiming allocation to Europe deals, or does the BDC get its fill and then the JV gets its fill of that? Any color on how we can think of where Europe fits in for, I guess, essentially the BDC shareholders.

Jonathan Bock -- Chief Financial Officer

Sure, Finn. So we'll start with kind of a high-level view of where we believe the joint ventures can make quite a deal of sense. So to manage the 30% bucket it's always important to realize that the JV is about diversification of return across a wide investment frame, not over-levering middle market or over-levering BSL investments in order to generate a risk-return to try to solve a problem. And so what happens is when the BDC participates, the BDC participates in Europe and US loans on the exact same frame as all our clients.

But remember, the BDC cannot hold a vast majority of European loans because of a result of the 30% limitation. So what you'll see is there is a level of diversification or, we'll call it, loan transfers or sell-downs to the joint venture so that the BDC can still have exposure to the space but, at the end of the day, not end up over-allocating the 30% bucket into, let's say, just a few names across Europe. It's nice to have a very diversified portfolio. So on a go-forward basis, Finn, you referenced the transfers.

Those would have been European loans that were done in a previous, say, two quarters ago, and then they were effectively transferred down. And you can expect to see transfers in the future kind of keeping to the view that the BDC, while it wants to have some level of European exposure, it does always make sure to watch that diversity level appropriately. So from a participation perspective, it all starts with the BDC, is what gets onboarded inside the BDC and then gets transferred down to the JV as both the partners agree if it's an attractive opportunity to transfer down. And so really it's about diversification.

It's about maintaining what we saw at least in this quarter was, as Ian had outlined, an attractive DM, but also making sure that diversification widely occurs both in the joint venture and in the BDC portfolio itself in that 30% bucket.

Finian O'Shea -- Wells Fargo Securities -- Analyst

Can you remind us of the JV's target leverage profile?

Jonathan Bock -- Chief Financial Officer

I think when we announced the transaction nearly a year and a half ago, there was an expectation of roughly two times across the equity position. Note that this is a JV that the BDC participates in with roughly a $50 million capital investment and our JV partner at roughly 500 million in equity.

Finian O'Shea -- Wells Fargo Securities -- Analyst

OK that's helpful. Thank you everybody.

Operator

Thank you. Our next question is coming from Robert Dodd, of Raymond James. Please go ahead.

Robert Dodd -- Raymond James -- Analyst

Hi, guys. Good morning, and congratulations on the quarter and also on the disclosures. Some of the things, incredibly helpful to us and I think investors. I particularly like the restructured PIK line.

It's zero for you, but that element is something that's extremely difficult to tease out of a schedule of investments, but provides a really compelling picture for your portfolio in contrast to some others out in the market. But then just on the spreads, etc., that you saw, you're seeing, on chart 14, if I look at the middle market, the average spread for the middle market business is 536. At the end of '19, it was 528. So it's only moved up very modestly, while leverage, obviously, has ticked up.

The leverage in that portfolio was 4 7 at the end of '19. It's 5 2 now, in the context of what's going on on chart 15, where your deployments were at 730, meaningfully higher spreads. Can you walk us through kind of the change there in terms of spreads to leverage and how that relates to kind of the much wider spreads you saw in the deployments for Q3? Because those are at 200 basis points wide of your average for the quarter. Just trying to get a feel of risk, leverage, pricing, etc., and how that's playing out.

Ian Fowler -- Co-Head of Global Private Finance

Robert, it's Ian. I'll start and Eric or Jon can jump in. So a couple of things going on here. First of all, as you look at the portfolio and you look at Europe versus US, typically in Europe the deals are bilateral deals.

So there's one tranche of debt, and typically that debt is a little higher than the US market. But at the same time, the OID and the spreads could be higher as well. So on a relative value basis, it can be a very attractive investment. And then in terms of the US market, the way I would look at it is in this market any company that, certainly in the third quarter and now, that's getting financed and attracting new capital is a high-quality company.

It's COVID-light or COVID-green. It's performed well, and it's underwrite-able through a recovery that we yet don't know what that geometry is going to look like. And so if you look at the -- and you're right, if you look at the spread, the spread is pretty much flat in the US, a little different than Europe. The leverage has actually come down about a quarter of a turn-ish.

But what has changed in the North American market is the OID. And that really reflects the fact that in this market with scarce deal flow, sponsors are trying to take deals off the table, whether they're proprietary in nature or it's a limited auction, and it's highly competitive. And so, sponsors are looking for financing partners that can provide capital and reliability and responsiveness to help them take those deals off the table. And so they're paying more for those deals through the OID.

So if you're an agent, if you're leading these transactions, you're benefiting from that higher OID. And you can see on that portfolio chart that our OID is around 3%, which was definitely higher than pre-COVID. You add on to that in North America a slightly lower leverage, better documentation and really high-quality deals. And so, you get to a point where you can look at a very attractive investment opportunity.

And you can look at it in terms of on a relative value to the liquid market. We talked about that illiquidity premium. Or you can break it down to return by turn of leverage and look at it from that perspective, as well.

Robert Dodd -- Raymond James -- Analyst

Got it. I appreciate that. If I can, kind of tying on to that, the Slide, I guess, 27, originations since -- in Q4 since. The DM-3s and spreads are not the same thing.

But at 8.2%, that seems to be holding in pretty well, given where spreads were in Q3. Can you give us any color for those Q4 originations so far? Is any of that the really high spread opportunistic stuff that you did in Q3 that we see on Slide 15, or is that more of the middle market type deals where you're still finding opportunities to capture quite attractive spreads and DM margins even in Q4, even with competition coming back?

Ian Fowler -- Co-Head of Global Private Finance

I'll start with the middle market, and then I'll let Eric and Jon jump in. We continue to see the deals that we are working on continue to be attractive from that perspective. Now, obviously, there's a lot of capital out there. And so, our expectation is that with this competition you're going to see some of those returns compress over time.

I think the other thing that you want to be focused on is, and I mentioned this earlier, once you get through a dislocation it's really the high-quality businesses that can attract new capital. Clearly, there are companies coming out of the woodwork here that maybe aren't so high-quality in nature that are going to be looking for financing. So you want to make sure you pick the right ones. And so what we're not going to do is start taking undue risk in looking for that return and take on too much risk for that return.

So we're going to stay disciplined. And I think we're in a really good spot because as we went through the whole COVID situation, while other platforms were dealing with capital issues and liquidity issues, we didn't have any of those issues. So the market saw us as a stable and reliable source of capital. And quite frankly, we're getting a lot of portfolio companies and new platform opportunities coming to us because of what some of these sponsors saw during the market.

And in a couple of cases, we've actually replaced existing agents. So I see it continuing. We're extremely busy right now in terms of the pipeline, but nothing lasts forever. So we expect things to get back to a fairly competitive environment.

And Eric and Jon, I don't know if you want to add anything to that.

Eric Lloyd -- Chief Executive Officer

I think, Ian, you answered it very well. The only thing, just specifically, Robert, that does refer to, not exclusively, but very much our core directly originated middle market business. So think of those deals that were funded in October. Those were probably August type of initial due diligence in transactions, given how time goes.

And so, as Ian said, nothing lasts forever. So I'd say it's more competitive today than it was in August, but we're still finding some really attractive opportunities.

Robert Dodd -- Raymond James -- Analyst

Got it. Got it. I appreciate that. And one more, if I can.

Obviously, your leverage pro forma for cash or short-term investments in these deployments, obviously, is in a pretty good spot. The MVC deal, if it's approved by shareholders, would delever you even more. And even in the context of that leverage, obviously, earnings are very good and drove an increase of dividend. So given the deals that you have managed to -- or the attractive spreads you've got with this leverage profile, has there been any thought to either maybe even targeting staying at a lower leverage, given that if you can produce the earnings at a lower leverage that's lower risk, all-in.

Any thoughts on that?

Eric Lloyd -- Chief Executive Officer

So we started at the beginning of this and I think one of our first calls I referenced how managing the liability side of our balance sheet was going to be something we focused on and hopefully would be a differentiator for us. And I think what you've seen with our cost of capital, our unsecured issuances that you've seen here, staggering out those maturities have all been positive. When we looked at the pipeline we saw coming in really that August/September time frame and the strength of the pipeline that we saw for October type of closings and, as Jon referenced, the probability-weighted pipeline that exists now, going forward, combined with the return or the strength of the liquid market, we really viewed it as a time to, frankly, sell a lot of our liquid collateral at that time that had added some volatility to our underlying NAV and move -- and so sell that. That created the cash, which makes the net leverage, to your point, at an attractive level.

We saw the pipeline coming through. We said all along -- buying optionality on whether it be unsecured credit, if you go back to our original revolver, we ended up taking more revolver capacity than we initially went out for to buy that optionality. And so, to the extent that we can generate the appropriate return for shareholders at a lower leverage is something we'll absolutely evaluate. Really, for us, it's about maintaining that optionality and that flexibility to make sure that when the market opportunity is there that we have the leverage capacity to take advantage of it for benefit of shareholders.

Robert Dodd -- Raymond James -- Analyst

I appreciate that. Thank you. And congrats on the quarters.

Operator

Our next question is coming from Ryan Lynch, of KBW. Please go ahead.

Ryan Lynch -- KBW -- Analyst

Hey, good morning. Thanks for taking my questions. I know this is just 1 quarter of data that we're looking at, but I really appreciate the breakdown of the investments in the middle market versus cross-platform. But this quarter, two-thirds of your originations were kind of in the middle market and one-third were in that cross-platform.

That feels pretty high, but do you think you're going to sustain that type of breakdown, or is it just given this uncertain economic time is creating increased deal activity in that cross-platform? And any sort of long-term breakdown, of course it depends on the market environment, but do you have any sort of long-term breakdown of what percentage of that cross-platform strategy you would like to make as a percentage of your portfolio, just given that's a much higher-yielding strategy?

Eric Lloyd -- Chief Executive Officer

Ryan, it's Eric. It really is just what the market opportunity provided us. It wasn't a huge volume quarter if you look at the middle market relative to the cross-platform, but we saw some good opportunities in the cross-platform investments, and we thought to capitalize on them. If you look at the October number that we referenced there, you'd see that be a much, much higher percentage of directly originated first lien senior secured.

And as I look at Q4, I would think of it as kind of the core stuff that we told you we were going to do over time. So we don't have a target. We don't look at it and say we want 25% of it to be that. We look at it and say -- you've got to manage the 30% bucket.

We don't want to get right up against it too much from a percentage basis. So if you think of that, the core part of the portfolio, I'd say, is kind of always going to be kind of 75%-plus of what we do. But I do that when we see those opportunities, and one of the benefits I think Barings brings to the shareholders is between our really deep liquid team in US and Europe, our structured credit team, our private and public ABS teams, we just -- our deal flow is really robust across various asset classes. And as importantly, it gives us a relative value framework that I think if you go back to fourth quarter, I think it was a year and a half ago or so, we had a really slow origination quarter, and that was where we had a lot of volatility in the liquid market, and we didn't see a real illiquidity premium.

So we kind of put our foot on the brake on the middle market in that case, because we didn't really see that as value. And so, where we do see value, we're going to step in there to benefit shareholders. But I wouldn't view it as a change in strategy, and nor is it a target we have. But I would think of it as using that 30% bucket, some portion of it, for this type of investment, which I think can help differentiate ourselves versus other managers.

Ryan Lynch -- KBW -- Analyst

OK. Understood. Just recently, over the last several months, you guys have done a really good job getting the IG rating and diversifying the liability structure with some unsecured notes, including more in the fourth quarter. Obviously, there's a lot of benefits, and I think that that should be well received by the market, you guys' diversification and liability structure.

Those unsecured notes are a little bit higher cost than your line of credit. So I'm just wondering, as we sit here today with pro forma for the issuance you guys have done in the fourth quarter, do you feel good about the composition of your liability structure, or would you still like to layer on additional unsecured notes in the future if the pricing is right?

Jonathan Bock -- Chief Financial Officer

Ryan, this is Bock. I'll argue that there's certainly an opportunity to layer in more unsecured debt, just generally speaking, because there is a general expectation for that of investment-grade BDCs to have secured debt, think of your revolvers, no more than 30% of your total assets. And so, you can kind of look at our ratio and understand that where we are versus where many IG-rated BDCs are targeted or kind of ranked. Honestly, the true north when it comes to how you think about unsecured debt issuance comes out in Slide 28.

Because clearly, everyone saw the benefits of unsecured debt issuance. It helped quite a few respected peers navigate the time frame, and it also avoided the material dilutive rights offerings, etc., that had occurred in more security-oriented type debt structures. That being said, you don't want to let your liability structure become the tail that wags the dog. And so, if you have a high focus on attractively priced debt and you make sure that when you put it together with your alignment, your fee structure, etc., and you're able to continue to prosecute across a wide array of assets with that required spread maths that we referenced, then yes, it's attractive because it provides flexibility and protection during times of volatility.

But at the same time, it doesn't force material yield-seek to the detriment of investors. Because you can see that happen just as fast, because it's a two-edged sword. So for us, we're comfortable. You can kind of see the math outlined on 28, and that's more of a long-term view for us.

And so, you could expect additional unsecured debt to be layered in, while keeping a very important point on price and realizing that there can be downside when you increase your unsecured debt too much to the point where it forces you into the wrong asset base at the wrong time. But right now, we can expect more and still allow us to achieve our objective returns with a very stable and boring liability structure.

Ryan Lynch -- KBW -- Analyst

OK, understood. That's all I had today. Congrats on the really nice quarter, guys.

Jonathan Bock -- Chief Financial Officer

Thanks, Ryan. Appreciate it.

Operator

Thank you. Our next question is coming from Casey Alexander, of Compass Point. Please go ahead.

Casey Alexander -- Compass Point -- Analyst

I know we only have a couple of minutes, but I just have two questions. Was it at the point where when you looked at the spread available on the broadly syndicated loan portfolio, which you said the yield at fair value was 4.80%, versus your cost of capital that it simply didn't make sense to hold any of them anymore?

Jonathan Bock -- Chief Financial Officer

Less of a cost of capital decision, Casey, and much more of an opportunistic redeployment opportunity. Because clearly, you can look at those two as exclusive events and not necessarily connected. Because even a smart manager that might be raising carry could still hold liquidity at a certain cost, to the extent that they felt they weren't exiting those at proper fair value and redeploying them at wider spread.

Casey Alexander -- Compass Point -- Analyst

Yeah. OK. And secondly, Ian, if you could give us some color in terms of when you talk about the cross-platform investments, and I understand Eric says you're still in Barings' lane, you're not in the normal lane of the normal BDC. So I think investors would benefit from understanding what type of companies are these, what type of opportunities are these that are creating this excess return so that they can get a better feel with some more specificity about how you're investing and what your investing philosophy is.

Eric Lloyd -- Chief Executive Officer

Why don't we have Bryan High, who's on the phone, answer that. He's one of our co-portfolio managers. He runs our US special situations business. So maybe, Bryan, if you're available to add a little color to that.

And then, Ian, you can backfill.

Bryan High -- Head of US Special Situations and Co-Portfolio Manager

Yeah, sure. Thanks, Eric. So if I just have you turn back to Slide 15, you can see that Jon broke it out nicely in a few different buckets. The special situation investments being -- think of them as more of a rescue financing type of an investment, good companies that got caught up in COVID, running out of liquidity.

And we're looking for attractive ways to provide them capital, with solutions that are maybe a little bit not down the middle of the fairway, whether it's a drop-down of assets to finance on a first lien basis or a super senior loan or something like that. Opportunistic liquid is exactly what it would sound like. It's just good intrinsic value based on dislocation in the market. Typically, for this vehicle, we're looking for more off-the-run transactions that maybe don't have a liquidity in the market, and we know them fairly well given the research platform that we have here at Barings.

And then the structured products, this is another form of rescue financing. The theme that I would point to, I guess, in the third quarter was EETCs related to some of the airlines, providing capital with some of the metal as the collateral but having the underlying risk of the airline, as well. So we think we get a good risk-adjusted return given the fact that we have those hard assets and we can leverage our ABS team within Barings, as well as our real assets team to really understand exactly what it is we're lending against and then take a broader view on the overall credit of the airline, as well.

Eric Lloyd -- Chief Executive Officer

Casey, based on your question, as well as this kind of theme that Ryan hit it, Finn hit it, from day one we promised you transparency and communication. So one of the takeaways for me will be, if we get to the point we can have an investor day, maybe it will be virtual, we'll Zoom it or something, we'll do a real focus on these other areas. Because I think we spend a lot of time on our traditional first lien senior secured middle market business, but maybe we'll use some time during that investor meeting to really do some deep dive in a couple of these areas so that people can really understand the teams, the depth of the team, the track record and all of that so that there's no concern around it.

Casey Alexander -- Compass Point -- Analyst

Great. That's helpful, thank you. That's all my questions. Thanks guys.

Operator

Thank you. Our next question is coming from Kyle Joseph, of Jefferies. Please go ahead.

Kyle Joseph -- Jefferies -- Analyst

Good morning, guys. Nice quarter. Thanks for taking my questions. And yes, let me echo that appreciate all the color in the deck.

I know you guys have a lot going on, and I think the deck does a good job really explaining it and making it easy to understand. So appreciate that. Most of my questions have been answered. Just a few.

Obviously, in terms of portfolio yields, obviously, there were some kind of nuances in the quarter in terms of the buildup of short-term investments ahead of the debt paydown. But just want to get kind of a refreshed outlook given the portfolio rotation we saw in the quarter, some of the new investments you're seeing in terms of ABS and opportunistic. Give us a sense for your kind of near-term yield outlook, and then layer in how that looks with the theoretically MVC portfolio on top of it into next year.

Jonathan Bock -- Chief Financial Officer

Kyle, what I would do is, if you turn to the balance sheet, so clearly you can -- also looking at our subsequent events, the DMs on average of 8.2%. And as Ian and Eric outlined, kind of a focus on the, we'll call it, core direct lending at wide spread. Expect that to continue. You can expect the debt structure to change now that you know of course we announced the securitization paydown, as well as the unsecured debt.

And so when you get to that kind of blending, you can approach certainly a leverage target a bit higher than where we are now but before the delevering activity that would occur on the onboard of the MVC merger. So all in all, I think it was perhaps referenced previously that you can expect origination strength in the quarter from ourselves. You can also expect earnings lift as it relates to a higher-earning portfolio that becomes onboarded. And you could also likely expect leverage to remain fairly constant over this time frame.

Well, a little bit higher than 0.74, clearly, because you can imagine it's been a heavy deployment quarter. But at the same time, we'd be left with more than enough carry or dry powder capacity to take advantage of opportunities in the future while still generating an improved ROE as a result of the rotation. So all those kind of factors come together to just point as a refresh of improved ROE, with still improved ability to deploy capital to the extent volatility returns and middle market volumes stay robust moving into 2021.

Kyle Joseph -- Jefferies -- Analyst

Very helpful. And then, one follow-up for me. I think this has been glossed over a little bit in the quarter, but obviously we're still in a pandemic. There's a lot of companies struggling.

I know you guys referenced no non-accruals and no increase in PIK income from restructurings and anything like that. But can you give us a sense for just, broadly, how portfolio company performance has trended between second quarter and third quarter? Did you see ongoing recoveries? Did some continue to struggle? And just kind of talk about the trends you're seeing, on average, in your portfolio.

Eric Lloyd -- Chief Executive Officer

I'll give a couple of high-level comments and then turn it over to Ian to kind of give some specifics. I'd say the first thing I'd say is the partnership approach I've seen with our private equity clients during this situation has really been strong. And I think that partnership from both sides really is defining in a lot of ways and I think will lead to enhanced relationships. Two, I'd say management teams, in general, have adjusted business plans and business models much more quickly and much more creatively than I would have expected.

And so I think, just in general, I'd say the partnership that the private equity firms and us have worked in a constructive manner, combined with management teams who have been, I'd say, very impressive on their ability to adapt, are really part of the reason or a lot of the reason why this portfolio has continued to perform as it is, in addition to our underwriting on the front end. But I'll turn it over to Ian to give anything specific in kind of second to third quarter.

Ian Fowler -- Co-Head of Global Private Finance

Well, first of all, I would just put a finer point on what Eric said. One of the reasons why we like the sponsor business is because of that very fact, that sponsors, if you pick the right sponsors, and we underwrite the sponsors that we work with, we expect them to be ahead of the curve and to be proactive. And we definitely saw that during COVID and the dislocation caused from COVID. And of course, as you underwrite the issuers, we underwrite the management teams.

And so, the combination of both the efforts by the management teams and the sponsors to rightsize the business. But also in terms of communication and transparency, that was really important for us. You may recall that we discussed last quarter we went through each company in the portfolio, working with the sponsors and the PortCo management teams to forecast the next two quarters. And obviously, it was done at a time with a lot of uncertainty.

And expecting the worse, we were pretty proactive and I think conservative in terms of our internal risk ratings, and we downgraded a number of companies, expecting some adverse impacts because of shelter in place and the COVID dislocation. But at a high level, recall that we limit and avoid many consumer-facing businesses, generally, and especially those that are discretionary in nature, such as retail, restaurants and gyms. So the good news for us is our portfolio was comprised of mostly essential businesses with -- yes, some of them were impacted initially by shelter in place but came out of that. And we really avoided the industries that I think a lot of other people have had to deal with in a tough environment, where the business model has been impaired because of COVID and they haven't been able to work their way through it.

So third quarter, we just saw a lot of better financial performance than what we initially estimated when we had those initial conversations, and we've reversed many of those downgrades that took place in the second quarter.

Kyle Joseph -- Jefferies -- Analyst

Very helpful. Thanks again for answering my questions.

Ian Fowler -- Co-Head of Global Private Finance

Thanks, Kyle. Thanks for your time.

Operator

Our last question today is coming from Bryce Rowe, of Robert W. Baird. Please go ahead.

Bryce Rowe -- Baird -- Analyst

Thanks and good morning. Wanted to maybe talk about a topic we haven't talked about for the last couple of quarters because of the ongoing acquisition. But with that expected to close here by the end of the year, just curious what the appetite might be for more stock repurchases given your action in the past. I assume that they're still up for grabs, so to speak.

Eric Lloyd -- Chief Executive Officer

So we announced as part of the transaction that we'll do $15 million of share buybacks post the transaction, the closing of the MVC. And we work with our board on that strategy on an annual basis depending on factors. And so, it's always something that will be in a discussion, that we'll evaluate using basically the equity as a form of return to shareholders if it's attractive. At the same time, we want to make sure we balance the scale and liquidity of the underlying corpus of equity, too.

And so that, in combination with our board, is something we look at on an annual basis. But we've already committed to the $15 million post transaction.

Bryce Rowe -- Baird -- Analyst

Great. Thanks Eric. Appreciate it.

Eric Lloyd -- Chief Executive Officer

You got it, Bryce.

Operator

Thank you. At this time, I'd like to turn the floor back over to Mr. Lloyd for closing comments.

Eric Lloyd -- Chief Executive Officer

I just want to thank everybody for dialing in and your time. I know, particularly for the analyst community, you all are very busy at this time. I appreciate the compliments on our transparency and the quality of the deck, and Jonathan Bock and Elizabeth Murray and their team have really put a lot of effort into that. And so, I'm glad it's recognized by people out in the investor community.

If we can answer anything else, always let us know. We're always here. And just, everybody, stay healthy and stay positive out there, and thanks for your time and support.

Operator

[Operator signoff]

Duration: 63 minutes

Call participants:

Eric Lloyd -- Chief Executive Officer

Ian Fowler -- Co-Head of Global Private Finance

Jonathan Bock -- Chief Financial Officer

Finian O'Shea -- Wells Fargo Securities -- Analyst

Finian OShea -- Wells Fargo Securities -- Analyst

Robert Dodd -- Raymond James -- Analyst

Ryan Lynch -- KBW -- Analyst

Casey Alexander -- Compass Point -- Analyst

Bryan High -- Head of US Special Situations and Co-Portfolio Manager

Kyle Joseph -- Jefferies -- Analyst

Bryce Rowe -- Baird -- Analyst

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