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Sierra Income Corporation to Merge with Publicly Traded BDC

Sierra Income Corporation, a non-traded business development company, has entered into an agreement to merge into Barings BDC Inc.

Sierra Income Corporation, a non-traded business development company, has entered into an agreement to merge into Barings BDC Inc. (NYSE: BBDC) to create a combined company with approximately $2.2 billion of investments. The transaction is expected to close in the first quarter of 2022 with the approval of both companies’ shareholders.

The combined company, which will be externally managed by Barings LLC, is expected to have 245 portfolio companies, with top 10 companies representing approximately 17 percent of the portfolio.

Earlier this month, The DI Wire reported that Sierra suspended share repurchases in connection with its strategic alternatives review process.

Under the terms of the merger agreement, Sierra stockholders will receive consideration in the form of cash and stock valued at approximately $623.7 million based on Barings BDC’s June 30, 2021 net asset value of $11.39 per share and representing total book value consideration of $6.10 per fully diluted Sierra share.

On a market value basis, based on the closing price of Barings BDC common stock on September 20, 2021, the transaction represents total consideration for Sierra stockholders of approximately $588.6 million or approximately $5.76 per Sierra share, representing a 6.1 percent premium to Sierra’s NAV per share of $5.43 as of June 30, 2021.

Sierra’s stockholders will receive 0.44973 shares of Barings BDC common stock for each share of Sierra common stock, resulting in approximately 46 million newly issued Barings BDC shares, having a total value of approximately $523.7 million, or $5.12 per fully diluted Sierra share, based on Barings BDC’s June 30, 2021 NAV of $11.39 per share.

In addition, Barings LLC will pay $100 million in cash, or approximately $0.98 per share, to Sierra stockholders at closing. Following the transaction, Barings BDC’s pro forma equity base is expected to be approximately $1.3 billion, and Barings BDC stockholders and Sierra stockholders are expected to own approximately 58.7 percent and 41.3 percent, respectively, of the combined company.

Barings LLC will enter into a credit support agreement with Barings BDC “to protect against net cumulative unrealized and realized losses of up to $100 million on the acquired Sierra investment portfolio over the next 10 years.”

Additionally, Barings LLC will amend its current investment advisory agreement with Barings BDC to raise the incentive fee hurdle rate from 8.0 percent to 8.25 percent.

Barings BDC said that it will also provide up to $30 million in secondary-market support through 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 merger.

Barings BDC has agreed that, on the closing date, it will increase the size of its board, and two of Sierra’s current independent directors will be selected by Barings BDC to be appointed to the board as Class II directors.

In connection with the closing of the proposed transaction, Sierra said that it will repay all outstanding amounts under its existing credit facility.

Stephen Byers, independent chairman of Sierra’s board and chair of its special committee, said that “the merger with Barings BDC is the best outcome to maximize Sierra stockholder value and interests. The transaction provides our stockholders with liquidity and immediate cash value along with an immediately accruing strong dividend, a best-in-class fee structure as well as the opportunity to benefit from ownership in a larger and more diversified global investment platform with a track record of generating stable and consistent returns.”

Broadhaven Capital Partners served as financial advisor, and Sullivan & Worcester LLP served as legal counsel to Sierra.

Sierra invests primarily in first lien senior secured debt, second lien secured debt and, to a lesser extent, subordinated debt of middle market companies in a range of industries with annual revenue between $50 million and $1 billion. The company oversees a portfolio of investments with a fair value of $631.4 million as of June 30, 2021.

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