Barings BDC and MVC Capital entered into a definitive merger agreement under which MVC Capital will merge with and into Barings BDC. The combined company, which will remain externally managed by Barings, is expected to have more than $1.2 billion of investments on a pro forma basis. The boards of directors of both companies, the MVC Capital strategic review committee, the independent directors of MVC Capital and the independent directors of Barings BDC unanimously approved the merger, which is expected to close in Q4/20. 

Under the terms of the merger agreement, MVC Capital stockholders will receive aggregate consideration of approximately $177.5 million in the form of cash and stock consideration based on Barings BDC’s June 30, 2020 net asset value (NAV), representing total book value consideration of $10.01 per fully diluted MVC Capital share. On a market value basis, based on the closing price of Barings BDC common stock on Aug. 10, 2020, the transaction represents total consideration for MVC Capital stockholders of $145.5 million, or approximately $8.21 per share, representing a premium of 21% to MVC Capital’s closing price on Aug. 10, 2020.

MVC Capital stockholders will receive 0.94024 Barings BDC shares for each MVC Capital share, resulting in approximately 16.7 million newly issued Barings BDC shares, having total value of $170.5 million, or $9.62 per share, based on Barings BDC’s June 30, 2020 NAV of $10.23 per share. In addition, Barings will pay approximately $7 million in cash, or $0.39492 per share, directly to MVC Capital stockholders at closing. 

Following the transaction, Barings BDC’s equity base is expected to expand by $170 million and Barings BDC stockholders and MVC Capital stockholders are expected to own approximately 74.2% and 25.8%, respectively, of the combined company. The total value of the consideration to be received by MVC Capital stockholders at closing is subject to adjustment as set forth in the merger agreement and may be different than the estimated total consideration described herein depending on a number of factors, including the number of outstanding shares of Barings BDC and MVC Capital common stock, the payment of tax dividends by MVC Capital, undistributed investment company taxable income and undistributed net capital gains of MVC Capital, and changes of the Euro-to-U.S. dollar exchange rate relating to certain of MVC Capital’s investments between April 30, 2020 and the closing date.

In addition, Barings will enter into a credit support agreement (CSA) with Barings BDC to protect against net cumulative unrealized and realized losses of up to $23 million on the acquired MVC investment portfolio over the next 10 years.

Barings BDC also will provide up to $15 million in secondary-market support via accretive share repurchases over a 12-month period in the event the combined company’s shares trade below a specific level of NAV per share following the completion of the first quarterly period ended after the consummation of the transaction, subject to covenant and regulatory constraints (including Rule 10b-18 under the Securities Exchange Act of 1934).

Barings BDC agreed that, on the closing date, it will increase the size of its board of directors and one current member of the board of directors of MVC Capital will be mutually selected by MVC Capital and Barings BDC to be appointed to the Barings BDC board of directors.

In connection with the closing of the proposed transaction, MVC Capital will repay all outstanding amounts under its existing credit facilities and any remaining obligations thereunder will be terminated. In addition, in connection with the closing of the proposed transaction, Barings BDC intends to redeem MVC Capital’s 6.25% senior notes due November 30, 2022 with an aggregate principal amount outstanding of $95 million.

Including the financial support provided by Barings, it is anticipated that the combination will provide the following benefits:

  • More than $1.2 billion of investments on a pro forma basis
  • Estimated net investment income per share between $0.18 and $0.20 in the first full quarter after closing compared with $0.14 per share during Q2/20
  • An increased leverage and investment capacity, and improved access to unsecured debt capital markets through an expanded equity base
  • Manager and stockholder alignment through the upfront cash payment to MVC Capital’s stockholders in connection with the transaction and use of the CSA
  • Efficiencies and portfolio diversification through cost synergies and an increase in portfolio obligors
  • Expected accretion to long-term NAV as acquired assets are realized and repositioned into directly originated investments.

Additionally, Barings will seek to amend its current investment management agreement with Barings BDC to, among other things, (i) lower the base management fee to 1.25% from 1.375%, (ii) make certain conforming and definitional changes relating to the transaction and (iii) reset the incentive fee cap commencement date to coincide with the first quarterly period ending after the closing of the transaction. These proposed changes to the investment management agreement are subject to Barings BDC board and stockholder approvals. However, such approvals are not closing conditions required to consummate the transaction.

“The increasing benefits of alignment, scale, diversification and investment optionality are likely to drive improved shareholder returns over the long term and in this period of market dislocation,” Eric Lloyd, CEO of Barings BDC, said. “We believe this transaction materially enhances Baring BDC’s platform scale while also providing earnings accretion and portfolio diversification, while continuing our philosophy of strong shareholder alignment.”

“We believe that Barings’ robust global scale and wide frame of investment reference, combined with MVC Capital’s underlevered equity base, will allow us to complement MVC Capital’s existing portfolio with additional directly-originated investments and generate improved risk-adjusted returns for shareholders,” Jonathan Bock, CFO of Barings BDC, said. “We remain confident in our ability to drive platform scale, combined shareholder earnings accretion, and long-term value for both Barings BDC and MVC Capital shareholders.” 

“We are pleased to merge with Barings BDC as we believe that the combination of the complementary portfolios together forming a larger-scale BDC with increased investment capacity and portfolio diversification will offer all shareholders a strong platform for long-term growth,” Michael T. Tokarz, chairman and portfolio manager of MVC Capital, said. “MVC has made significant progress in transitioning to a yield-focused BDC, building its net operating income over the past few years. Our success makes this an opportune time to enjoy greater scale, cost synergies and continued shareholder alignment.” 

Leon Cooperman, Wynnefield Capital and West Family Investments, who collectively account for an approximate 25% ownership interest in MVC Capital, entered into voting agreements that require them to vote their MVC Capital shares in favor of the transaction subject to terms of such agreements. 

“The key to running a successful BDC is putting yourself in a position to be ‘highly aligned’ to generate attractive shareholder returns, and Barings has a history of doing just that,” Randy Rochman, CEO of West Family Investments, said. “This combination allows a continuation of this practice due to the underlevered nature of the combined entity, at a time when very attractive financing deals are being offered. The breadth and scope of the global sourcing by Barings is a huge advantage in sourcing these very attractive risk-adjusted opportunities.”

“We are pleased with the result and thank the board of MVC Capital for its hard work and success in delivering an excellent outcome for shareholders,” Cooperman, founder of Omega Advisors, said. “We believe this transaction represents strong shareholder alignment and provides the best path forward.”

Consummation of the transaction is subject to Barings BDC and MVC Capital stockholder approval, customary regulatory approvals and other closing conditions.

J.P. Morgan served as sole financial advisor and Dechert served as legal counsel to Barings BDC. JMP Securities served as financial advisor and Kramer Levin Naftalis & Frankel served as legal counsel to MVC Capital.

Barings BDC is a publicly traded, externally managed investment company that has elected to be treated as a business development company under the Investment Company Act of 1940. Barings BDC seeks to invest primarily in senior secured loans to private U.S. middle market companies. Barings BDC’s investment activities are managed by its investment adviser, Barings, a global asset manager based in Charlotte, NC with more than $346 billion of assets under management. 

MVC Capital is a business development company traded on the New York Stock Exchange that provides long-term debt and equity investment capital to fund growth, acquisitions and recapitalizations.