Barings BDC, Inc. 10-Q

Item 1A. Risk Factors. You should carefully consider the risks described below and in Item 1A entitled "Risk Factors" in Part 1 of our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 23, 2021, and all other information contained in this Quarterly Report on Form 10-Q, including our interim financial statements and the related notes thereto, before making a decision to purchase our securities. The risks and uncertainties described below are not the only ones facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may have a material adverse effect on our business, financial condition and/or operating results, as well as the market price of our securities. Risks Relating to the Sierra Merger Sales of shares of the Company’s common stock after the completion of the Merger may cause the market price of the Company’s common stock to decline. Based on the number of outstanding shares of Sierra’s common stock as of the close of business on September 20, 2021, the Company would issue approximately 46 million shares of the Company’s common stock pursuant to the Merger Agreement. Former Sierra stockholders may decide not to hold the shares of the Company’s common stock that they receive pursuant to the Merger Agreement. In addition, the Company’s stockholders may decide not to hold their shares of the Company’s common stock after completion of the Merger. In each case, such sales of the Company’s common stock could have the effect of depressing the market price for the Company’s common stock and may take place promptly following the completion of the Merger. The Company’s stockholders will experience a reduction in percentage ownership and voting power in the combined company as a result of the Merger. The Company’s stockholders will experience a substantial reduction in their respective percentage ownership interests and effective voting power in respect of the combined company relative to their respective ownership interests in the Company prior to the Merger. Consequently, the Company’s stockholders should expect to exercise less influence over the management and policies of the combined company following the Merger than they currently exercise over the management and policies of the Company. If the Merger is consummated, based on the number of shares of the Company’s common stock and Sierra’s common stock issued and outstanding on September 20, 2021, it is expected that current stockholders of the Company will own approximately 58.7% of the Company’s outstanding common stock and former Sierra stockholders will own approximately 41.3% of the Company’s outstanding common stock. In addition, both prior to and after completion of the Merger, subject to certain restrictions in the Merger Agreement and the approval of the Company’s stockholders, the Company may issue additional shares of its common stock (including, subject to certain restrictions under the 1940 Act, at prices below the Company’s then-current net asset value (“NAV”) per share), all of which would further reduce the percentage ownership of the combined company held by current stockholders. In addition, the issuance or sale by the Company of shares of its common stock at a discount to NAV poses a risk of economic dilution to stockholders. The NAV per share of the Company’s common stock will be diluted if the Company issues shares at a price below the then-current NAV per share in connection with the Merger. At the special meeting of the Company’s stockholders to be held in connection with the Merger and subject to certain determinations required to be made by the Company’s board of directors, the Company’s stockholders will be asked to approve the Company’s ability to issue shares of its common stock at a price below the then-current NAV per share in connection with 96 the Merger in the event that at the time of such issuance, the Company’s then-current NAV per share is greater than the value of the shares of Sierra’s common stock being exchanged. Under the Merger Agreement, the Exchange Ratio was fixed on September 21, 2021, at the signing of the Merger Agreement, subject to certain adjustments pursuant to the Merger Agreement. The Exchange Ratio was determined taking into account the NAV per share of each of the Company’s common stock and Sierra’s common stock as of June 30, 2021 and is not subject to adjustment based on changes in the NAV per share of the Company’s common stock or Sierra’s common stock. In that regard, regardless of the date on which the Merger is consummated and the resulting date on which the shares of the Company’s common stock are issued, the Exchange Ratio upon which the shares of the Company’s common stock will be issued will not change (except for certain customary anti-dilution adjustments). Consequently, if, on the date that the Company’s common stock is issued in connection with the Merger, the per share value of Sierra’s common stock were to decrease from its per share value as of June 30, 2021 and the NAV of the Company’s common stock were to remain the same, then the Company could be deemed to be issuing shares at a price below its then-current NAV per share. As a result, it is not known at this time whether the Company will be issuing shares of its common stock at a price below the then-current NAV per share to Sierra stockholders in connection with the Merger. The determination of whether the Company is issuing shares of its common stock at a price below the then-current NAV per share will be made at or around the time of the closing of the Merger. If the Company were to issue shares of its common stock below its then-current NAV per share in connection with the Merger, such sales would result in an immediate dilution to the NAV per share of the Company’s common stock. This dilution would occur as a result of the issuance of shares at a price below the then-current NAV per share of the Company’s common stock and a proportionately greater decrease in the stockholders’ interest in the Company’s earnings and assets and their voting interest in the Company than the increase in the Company’s assets resulting from such issuance. Because the NAV of shares of the Company’s common stock at or around the time of the Merger is not currently known, the actual dilutive effect cannot be predicted. The Company may be unable to realize the benefits anticipated by the Merger, including estimated cost savings, or it may take longer than anticipated to realize such benefits. The realization of certain benefits anticipated as a result of the Merger will depend in part on the integration of Sierra’s investment portfolio with the Company’s and the integration of Sierra’s business with the Company’s. There can be no assurance that Sierra’s investment portfolio or business can be operated profitably or integrated successfully into the Company’s operations in a timely fashion or at all. The dedication of management resources to such integration may divert attention from the day-to-day business of the combined company and there can be no assurance that there will not be substantial costs associated with the transition process or there will not be other material adverse effects as a result of these integration efforts. Such effects, including incurring unexpected costs or delays in connection with such integration and failure of Sierra’s investment portfolio to perform as expected, could have a material adverse effect on the financial results of the combined company. The Company also expects to achieve certain cost savings from the Merger when the two companies have fully integrated their portfolios. It is possible that the estimates of the potential cost savings could ultimately be incorrect. The cost savings estimates also assume the Company will be able to combine the operations of the Company and Sierra in a manner that permits those cost savings to be fully realized. If the estimates turn out to be incorrect or if the Company is not able to successfully combine Sierra’s investment portfolio or business with the operations of the Company, the anticipated cost savings may not be fully realized, or realized at all, or may take longer to realize than expected. The announcement and pendency of the proposed Merger could adversely affect both the Company’s and Sierra’s business, financial results and operations. The announcement and pendency of the proposed Merger could cause disruptions in and create uncertainty surrounding both the Company’s and Sierra’s business, including affecting relationships with their respective borrowers and future borrowers, which could have a significant negative impact on the Company’s future revenues and results of operations, regardless of whether the Merger is completed. In addition, the Company and Sierra have diverted, and will continue to divert, significant management resources towards the completion of the Merger, which could have a significant negative impact on each of their future revenues and results of operations. Sierra and the Company are also subject to restrictions on the conduct of each of their businesses prior to the completion of the Merger as provided in the Merger Agreement, generally requiring Sierra and the Company to conduct their business only in the ordinary course and subject to specific limitations, including, among other things, certain restrictions on their respective ability to make certain investments and acquisitions, sell, transfer or dispose of their respective assets, amend their respective organizational documents and, in the case of Sierra, enter into or modify certain material contracts. These restrictions could 97 prevent Sierra or the Company from pursuing otherwise attractive business opportunities, industry developments and future opportunities and may otherwise have a significant negative impact on the Company’s future investment income and results of operations. If the Merger does not close, neither the Company nor Sierra will benefit from the expenses incurred in their pursuit of the Merger and, under certain circumstances, Sierra may be required to pay an $11.0 million termination fee and to reimburse expenses incurred in connection with the Merger by the Company and Barings, subject to a maximum expense reimbursement payment of $2.0 million. For various reasons, the Merger may not be completed. If the Merger is not completed, Sierra and the Company will have incurred substantial expenses for which no ultimate benefit will have been received. Both companies have incurred out-of-pocket expenses in connection with the Merger for investment banking, legal and accounting fees and financial printing and other related charges, much of which will be incurred even if the Merger is not completed. The Merger Agreement provides that, upon the valid termination of the Merger Agreement under certain circumstances, Sierra may be required to pay or cause to be paid to the Company a termination fee of $11.0 million and to pay the Company’s and Barings’ expenses incurred in connection with the Merger, subject to a maximum reimbursement payment of $2.0 million. The termination of the Merger Agreement could negatively impact the Company. The Merger may not be completed. For example, either Sierra or the Company may terminate the Merger Agreement if the Merger is not completed by March 31, 2022 (so long as the party seeking termination has not been the primary cause of the delay). If the Merger Agreement is terminated, there may be various consequences, including: • the Company’s businesses may have been adversely impacted by the failure to pursue other beneficial opportunities due to the focus of management on the Merger, without realizing any of the anticipated benefits of completing the Merger; and • the market price of the Company's common stock might decline to the extent that the market price prior to termination reflects a market assumption that the Merger will be completed. Except in specified circumstances, if the Merger is not completed by March 31, 2022, either Sierra or the Company may choose not to proceed with the Merger. Either Sierra or the Company may terminate the Merger Agreement if the effective time of the First Merger has not occurred by March 31, 2022. However, this right to terminate the Merger Agreement will not be available to Sierra or the Company if the failure of such party to perform any of its obligations under the Merger Agreement has been the primary cause of or resulted in the failure of the Merger to be complete on or before such date. The Merger is subject to closing conditions, including stockholder approvals, that, if not satisfied or waived, will result in the Merger not being completed, which may result in material adverse consequences to the Company’s business and operations. While there can be no assurances as to the exact timing, or that the Merger will be completed at all, the Company and Sierra are working to complete the Merger in the first quarter of 2022. The Merger is subject to closing conditions, including required regulatory approvals (including the expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder) and certain approvals of the Company’s and Sierra’s respective stockholders that, if not satisfied, will prevent the Merger from being completed. The closing condition that the Company’s stockholders approve the issuance of shares of the Company’s common stock in connection with the Merger and the issuance of shares of the Company’s common stock in connection with the Merger at a price below its then-current NAV may not be waived and must be satisfied for the Merger to be completed. The Company currently expects that all directors and executive officers of the Company will vote their shares of the Company’s common stock in favor of the proposals presented at the special meeting of the Company’s stockholders to be held in connection with the Merger. Additionally, Barings, as a party to the Merger Agreement, agreed to vote all shares of the Company’s common stock over which it has voting power (other than in its fiduciary capacity) in favor of the proposals presented at the Company’s special meeting of stockholders. Furthermore, the closing condition that Sierra stockholders approve the Merger may not be waived and must also be satisfied for the Merger to be completed. If the closing conditions to the Merger are not satisfied, including receipt of the required approvals by the stockholders of the Company and of Sierra, and the Merger is not completed, the resulting failure to complete the Merger could have a material adverse impact on the Company’s business and operations. 98 Sierra and the Company will be subject to contractual restrictions while the Merger is pending, including restrictions on pursuing alternatives to the Merger. Uncertainty about the effect of the Merger may have an adverse effect on the Company and Sierra and, consequently, on the combined company following completion of the Merger. These uncertainties may impair the Company’s and Sierra’s abilities to motivate key personnel until the Merger is consummated and could cause those who deal with the Company and Sierra to seek to change their existing business relationships with the Company and Sierra, respectively. In addition, the Merger Agreement restricts the Company and Sierra from taking actions that they might otherwise consider to be in their best interests without the consent of the other party. These restrictions may prevent the Company and Sierra from pursuing certain business opportunities that may arise prior to the completion of the Merger, including restrictions on them pursuing alternatives to the Merger. Subject to applicable law, each party may waive one or more conditions to the Merger without resoliciting approval from its respective stockholders. Certain conditions to the Company’s and Sierra’s obligations to complete the Merger may be waived, in whole or in part, to the extent legally allowed, either unilaterally or by agreement of the Company and Sierra. In the event that any such waiver does not require resolicitation of stockholders, the parties to the Merger Agreement will have the discretion to complete the Merger without seeking further stockholder approval. Accordingly, the terms and conditions as set forth in the Merger Agreement and described herein, including certain protections to the Company and Sierra, may be waived. The conditions requiring the approval of the Company’s stockholders and approval of Sierra’s stockholders, however, cannot be waived. The market price of the Company’s common stock after the Merger may be affected by factors different from those affecting the Company’s common stock or Sierra’s common stock currently. The businesses of the Company and Sierra differ in some respects and, accordingly, the results of operations of the combined company and the market price of the Company’s common stock after the Merger may be affected by factors different from those currently affecting the independent results of operations of each of the Company and Sierra. These factors include: • a larger stockholder base; • a different portfolio composition; and • a different capital structure Accordingly, the historical trading prices and financial results of the Company may not be indicative of these matters for the combined company following the Merger. The Merger may trigger certain “change of control” provisions and other restrictions in certain of the Company’s and Sierra’s contracts and the failure to obtain any required consents or waivers could adversely impact the combined company. Certain agreements of the Company and Sierra or their controlled affiliates will or may require the consent of one or more counterparties in connection with the Merger. The failure to obtain any such consent may permit such counter-parties to terminate, or otherwise increase their rights or the Company’s or Sierra’s obligations under, any such agreement because the Merger may violate an anti-assignment, change of control or similar provision. If this happens, the Company or Sierra may have to seek to replace that agreement with a new agreement or seek a waiver or amendment to such agreement. The Company cannot assure you that it or Sierra will be able to replace, amend or obtain a waiver under any such agreement on comparable terms or at all. If any such agreement is material, the failure to obtain consents, amendments or waivers under, or to replace on similar terms or at all, any of these agreements could adversely affect the financial performance or results of operations of the combined company following the Merger, including preventing the Company from operating a material part of Sierra’s business. In addition, the consummation of the Merger may violate, conflict with, result in a breach of any provision of or the loss of any benefit under, constitute a default (or an event that, with or without notice or lapse of time or both, would constitute a default) under, or result in the termination, cancellation, acceleration or other change of any right or obligation (including any payment obligation) under the Company’s or Sierra’s agreements. Any such violation, conflict, breach, loss, default or other effect could, either individually or in the aggregate, have a material adverse effect on the financial condition, results of operations, assets or business of the combined company following completion of the Merger. 99 The combined company may not be able to obtain financing for additional capital requirements. Following completion of the Merger, the combined company may seek significant ongoing capital funding and, although the Company anticipates that the combined company will be able to obtain such funding through cash generated from operations and subsequent debt, equity or hybrid offerings, there can be no assurances that the combined company will be able to obtain financing on acceptable terms or at all. The Company has incurred and expects to incur substantial transaction fees and costs in connection with the Merger, whether or not the Merger is completed. The Company has incurred and expects to incur additional material non-recurring expenses in connection with the Merger and completion of the transactions contemplated by the Merger Agreement. The Company has incurred significant legal, advisory and financial services fees in connection with the process of negotiating and evaluating the terms of the Merger. Additional significant unanticipated costs may be incurred in the course of coordinating the businesses of Sierra and the Company after completion of the Merger. Even if the Merger is not completed, the Company will need to pay certain costs relating to the Merger incurred prior to the date the Merger was abandoned, such as legal, accounting, financial advisory, filing and printing fees. Such costs may be significant and could have an adverse effect on the Company’s future results of operations, cash flows and financial condition. Litigation filed against Sierra or the Company in connection with the Merger could result in substantial costs and could delay or prevent the Merger from being completed. From time to time, Sierra and the Company may be subject to legal actions, including securities class action lawsuits and derivative lawsuits, as well as various regulatory, governmental and law enforcement inquiries, investigations and subpoenas in connection with the Merger. These or any similar securities class action lawsuits and derivative lawsuits, regardless of their merits, may result in substantial costs and divert management time and resources. An adverse judgment in such cases could have a negative impact on the Company’s liquidity and financial condition or could prevent the Merger from being completed.