NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Barings Corporate Investors (the “Trust”)
commenced operations in 1971 as a Delaware corporation. Pursuant to an Agreement and Plan of Reorganization dated November 14, 1985,
approved by shareholders, the Trust was reorganized as a Massachusetts business trust under the laws of the Commonwealth of Massachusetts,
effective November 28, 1985.
The Trust is a diversified closed-end
management investment company. Barings LLC (“Barings”), a wholly-owned indirect subsidiary of Massachusetts Mutual Life Insurance
Company (“MassMutual”), acts as its investment adviser. The Trust’s investment objective is to maintain a portfolio
of securities providing a current yield and, when available, an opportunity for capital gains. The Trust’s principal investments
are privately placed, below-investment grade, long-term debt obligations including bank loans and mezzanine debt instruments. Such direct
placement securities may, in some cases, be accompanied by equity features such as common stock, preferred stock, warrants, conversion
rights, or other equity features. The Trust typically purchases these investments, which are not publicly tradable, directly from their
issuers in private placement transactions. These investments are typically made to small or middle market companies. In addition, the
Trust may invest, subject to certain limitations, in marketable debt securities (including high yield and/or investment grade securities)
and marketable common stocks. Below-investment grade or high yield securities have predominantly speculative characteristics with respect
to the capacity of the issuer to pay interest and repay capital.
On January 27, 1998, the Board of
Trustees authorized the formation of a wholly-owned subsidiary of the Trust (“CI Subsidiary Trust”) for the purpose of
holding certain investments. The results of CI Subsidiary Trust are consolidated in the accompanying financial statements. Footnote 2.D
below discusses the Federal tax consequences of the CI Subsidiary Trust.
| 2. | Significant Accounting Policies |
The following is a summary of significant
accounting policies followed consistently by the Trust in the preparation of its consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America (“U.S. GAAP”).
The Trustees have determined that the
Trust is an investment company in accordance with Accounting Standards Codification (“ASC”) 946, Financial Services –
Investment Companies, for the purpose of financial reporting.
A. Fair Value Measurements:
Under U.S. GAAP, fair value represents
the price that should be received to sell an asset (exit price) in an orderly transaction between willing market participants at the measurement
date.
Determination of Fair Value
The determination of the fair value of
the Trust’s investments is the responsibility of the Trust’s Board of Trustees (the “Trustees”). The Trustees
have adopted procedures for the valuation of the Trust’s securities and have delegated responsibility for applying those procedures
to Barings. Barings has established a Pricing Committee which is responsible for setting the guidelines used in following the procedures
adopted by the Trustees and ensuring that those guidelines are being followed. Barings considers all relevant factors that are reasonably
available, through either public information or information directly available to Barings, when determining the fair value of a security.
The Trustees meet at least once each quarter to approve the value of the Trust’s portfolio securities as of the close of business
on the last business day of the preceding quarter. This valuation requires the approval of a majority of the Trustees of the Trust, including
a majority of the Trustees who are not interested persons of the Trust or of Barings. In approving valuations, the Trustees will consider
reports by Barings analyzing each portfolio security in accordance with the procedures and guidelines referred to above, which include
the relevant factors referred to below. Barings has agreed to provide such reports to the Trust at least quarterly. The consolidated financial
statements include private placement restricted securities valued at $339,026,808 (101.64% of net assets) as of June 30, 2022, the
values of which have been estimated by the Trustees based on the process described above in the absence of readily ascertainable market
values. Due to the inherent uncertainty of valuation, those estimated values may differ significantly from the values that would have
been used had a ready market for the securities existed, and the differences could be material.
Independent Valuation Process
The fair value of bank loans and
equity investments that are unsyndicated or for which market quotations are not readily available, including middle-market bank
loans, will be submitted to an independent provider to perform an independent valuation on those bank loans and equity investments
as of the end of each quarter. Such bank loans and equity investments will be held at cost until such time as they are sent to the
valuation provider for an initial valuation subject to override by the Adviser should it determine that there have been material
changes in interest rates and/or the credit quality of the issuer. The independent valuation provider applies various methods
(synthetic rating analysis, discounting cash flows, and re-underwriting analysis) to establish the rate of return a market
participant would require (the “discount rate”) as of the valuation date, given market conditions, prevailing lending
standards and the perceived credit quality of the issuer. Future expected cash flows for each investment are discounted back to
present value using these discount rates in the discounted cash flow analysis. A range of value will be provided by the valuation
provider and the Adviser will determine the point within that range that it will use in making valuation recommendations to the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Trustees, and will report to the Trustees on its rationale for each such determination. The Adviser will continue to use its
internal valuation model as a comparison point to validate the price range provided by the valuation provider and, where applicable,
in determining the point within that range that it will use in making valuation recommendations to the Trustees. If the
Advisers’ Pricing Committee disagrees with the price range provided, it may make a fair value recommendation to the Trustees
that is outside of the range provided by the independent valuation provider, and will notify the Trustees of any such override and
the reasons therefore. In certain instances, the Trust may determine that it is not cost-effective, and as a result is not in the
shareholders’ best interests, to request the independent valuation firm to perform the Procedures on certain investments. Such
instances include, but are not limited to, situations where the fair value of the investment in the portfolio company is determined
to be insignificant relative to the total investment portfolio. Finally, the Trustees determined in good faith that the
Trust’s investments were valued at fair value in accordance with the Trust’s valuation policies and procedures and the
1940 Act based on, among other things, the input of Barings, the Trust’s Audit Committee and the independent valuation
firm.
Following is a description of valuation
methodologies used for assets recorded at fair value:
Corporate Public Securities at Fair
Value – Bank Loans, Corporate Bonds, Preferred Stocks and Common Stocks
The Trust uses external independent third-party
pricing services to determine the fair values of its Corporate Public Securities. At June 30, 2022, 100% of the carrying value of these
investments was from external pricing services. In the event that the primary pricing service does not provide a price, the Trust utilizes
the pricing provided by a secondary pricing service.
Public debt securities generally trade
in the over-the-counter market rather than on a securities exchange. The Trust’s pricing services use multiple valuation techniques
to determine fair value. In instances where significant market activity exists, the pricing services may utilize a market based approach
through which quotes from market makers are used to determine fair value. In instances where significant market activity may not exist
or is limited, the pricing services also utilize proprietary valuation models which may consider market characteristics such as benchmark
yield curves, option adjusted spreads, credit spreads, estimated default rates, coupon rates, anticipated timing of principal underlying
prepayments, collateral, and other unique security features in order to estimate the relevant cash flows, which are then discounted to
calculate the fair value.
The Trust’s investments in bank
loans are normally valued at the bid quotation obtained from dealers in loans by an independent pricing service in accordance with the
Trust’s valuation policies and procedures approved by the Trustees.
Public equity securities listed on an
exchange or on the NASDAQ National Market System are valued at the last quoted sales price of that day.
At least annually, Barings conducts reviews
of the primary pricing vendors to validate that the inputs used in that vendors’ pricing process are deemed to be market observable
as defined in the standard. While Barings is not provided access to proprietary models of the vendors, the reviews have included on-site
walk-throughs of the pricing process, methodologies and control procedures for each asset class and level for which prices are provided.
The reviews also include an examination of the underlying inputs and assumptions for a sample of individual securities across asset classes,
credit rating levels and various durations. In addition, the pricing vendors have an established challenge process in place for all security
valuations, which facilitates identification and resolution of prices that fall outside expected ranges. Barings believes that the prices
received from the pricing vendors are representative of prices that would be received to sell the assets at the measurement date (exit
prices) and are classified appropriately in the hierarchy.
Corporate Restricted Securities at
Fair Value – Bank Loans, Corporate Bonds
The fair value of certain notes is determined
using an internal model that discounts the anticipated cash flows of those notes using a specific discount rate. Changes to that discount
rate are driven by changes in general interest rates, probabilities of default and credit adjustments. The discount rate used within the
models to discount the future anticipated cash flows is considered a significant unobservable input. Increases/(decreases) in the discount
rate would result in a (decrease)/increase to the notes’ fair value.
The fair value of certain distressed notes
is based on an enterprise waterfall methodology which is discussed in the equity security valuation section below.
Corporate Restricted Securities at
Fair Value – Common Stock, Preferred Stock and Partnerships & LLC’s
The fair value of equity securities is
determined using an enterprise waterfall methodology. Under this methodology, the enterprise value of the company is first estimated and
that value is then allocated to the company’s outstanding debt and equity securities based on the documented priority of each class
of securities in the capital structure. Generally, the waterfall proceeds from senior debt, to senior and junior subordinated debt, to
preferred stock, then finally common stock.
To estimate a company’s enterprise
value, the company’s trailing twelve months earnings before interest, taxes, depreciation and amortization (“EBITDA”)
is multiplied by a valuation multiple.
Both the company’s EBITDA and valuation
multiple are considered significant unobservable inputs. Increases/ (decreases) to the company’s EBITDA and/or valuation multiple
would result in increases/ (decreases) to the equity value.
Barings Corporate Investors
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Short-Term
Securities
Short-term
securities with more than sixty days to maturity are valued at fair value, using external independent third-party services. Short-term
securities, of sufficient credit quality, having a maturity of sixty days or less are valued at amortized cost, which approximates fair
value.
New Accounting
Pronouncement
In March
2020, the Financial Accounting Standards Board issued Accounting Standards Update 2020-04 (“ASU 2020-04”)
“Reference
Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This guidance provides optional
expedients and exceptions for applying generally accepted accounting principles to contract modifications and hedging relationships,
subject to meeting certain criteria, that reference LIBOR or another reference rate expected to be discontinued. ASU 2020-04 is effective
for all entities as of March 12, 2020 through December 31, 2022. The Trust expects that the adoption of this guidance will not have a
material impact on the Trust’s financial position, result of operations or cash flows.
Fair Value
Hierarchy
The Trust categorizes
its investments measured at fair value in three levels, based on the inputs and assumptions used to determine fair value. These levels
are as follows:
Level 1 – quoted
prices in active markets for identical securities
Level 2 – other
significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.)
Level 3 – significant
unobservable inputs (including the Trust’s own assumptions in determining the fair value of investments)
The following
table summarizes the levels in the fair value hierarchy into which the Trust’s financial instruments are categorized as of June
30, 2022.
The fair values
of the Trust’s investments disaggregated into the three levels of the fair value hierarchy based upon the lowest level of significant
input used in the valuation as of June 30, 2022 are as follows:
| Assets: | |
Total | | |
Level 1 | | |
Level 2 | | |
Level 3 | |
| Restricted Securities | |
| | | |
| | | |
| | | |
| | |
| Corporate Bonds | |
$ | 33,952,088 | | |
$ | — | | |
$ | 12,955,972 | | |
$ | 20,996,116 | |
| Bank Loans | |
| 273,766,136 | | |
| — | | |
| — | | |
| 273,766,136 | |
| Common Stock - U.S. | |
| 3,989,543 | | |
| — | | |
| — | | |
| 3,989,543 | |
| Preferred Stock | |
| 3,601,693 | | |
| — | | |
| — | | |
| 3,601,693 | |
| Partnerships and LLCs | |
| 36,673,320 | | |
| — | | |
| — | | |
| 36,673,320 | |
| Public Securities | |
| | | |
| | | |
| | | |
| | |
| Bank Loans | |
| 6,887,953 | | |
| — | | |
| 4,187,960 | | |
| 2,699,993 | |
| Corporate Bonds | |
| 1,392,688 | | |
| — | | |
| 1,392,688 | | |
| — | |
| Common Stock | |
| 94,513 | | |
| 14,186 | | |
| — | | |
| 80,327 | |
| Total | |
$ | 360,357,934 | | |
$ | 14,186 | | |
$ | 18,536,620 | | |
$ | 341,807,128 | |
See
information disaggregated by security type and industry classification in the Consolidated
Schedule of Investments. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Quantitative Information about Level 3 Fair
Value Measurements
The following table represents quantitative information
about Level 3 fair value measurements as of June 30, 2022.
| |
|
|
|
|
|
| |
Fair
Value |
Valuation
Technique |
Unobservable
Inputs |
Range |
Weighted* |
| Bank Loans |
$
222,905,656 |
Income
Approach |
Implied
Spread |
8.6% - 18.7% |
10.5% |
| |
|
|
|
|
|
| |
$
2,572,349 |
Enterprise Value
Waterfall Approach |
Valuation
Multiple |
5.0x
to 11.6x |
7.1x |
| |
|
|
|
|
|
| Corporate
Bonds |
$
19,209,619 |
Income
Approach |
Implied
Spread |
13.0% - 23.7% |
16.5% |
| |
|
|
|
|
|
| |
$ 1,786,497 |
Enterprise Value
Waterfall Approach |
Valuation
Multiple |
5.5x
to 6.8x |
5.5x |
| |
|
|
|
|
|
| Equity Securities** |
$
41,482,090 |
Enterprise Value
Waterfall Approach |
Valuation
Multiple |
5.0x
to 52.5x |
13.2x |
Certain
of the Trust’s Level 3 equity securities investments may be valued using unadjusted inputs that have not been internally developed
by the Trust, including recently purchased securities held at cost. As a result, fair value of assets of $53,850,917 have been excluded
from the preceding table.
| * | The weighted
averages disclosed in the table above were weighted by relative fair value |
| ** | Including
partnerships and LLC’s |
Following is a reconciliation of Level 3
assets for which significant unobservable inputs were used to determine fair value:
| Assets: | |
Beginning
balance at
12/31/2021 | | |
Included in
earnings | | |
Purchases | | |
Sales | | |
Prepayments | | |
Transfers
into
Level 3 | | |
Transfers
out of
Level 3 | | |
Ending
balance at
06/30/2022 | |
| Restricted
Securities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Corporate
Bonds | |
$ | 19,812,561 | | |
$ | 1,036,498 | | |
$ | 196,484 | | |
$ | (49,427 | ) | |
$ | — | | |
$ | — | | |
$ | — | | |
$ | 20,996,116 | |
| Bank
Loans | |
| 266,448,199 | | |
| (2,011,725 | ) | |
| 30,229,188 | | |
| (897,186 | ) | |
| (20,002,340 | ) | |
| — | | |
| — | | |
| 273,766,136 | |
| Common
Stock - U.S. | |
| 2,597,553 | | |
| 698,016 | | |
| 900,323 | | |
| (206,349 | ) | |
| — | | |
| — | | |
| — | | |
| 3,989,543 | |
| Preferred
Stock | |
| 3,555,582 | | |
| 8,644 | | |
| 55,101 | | |
| (17,634 | ) | |
| — | | |
| — | | |
| — | | |
| 3,601,693 | |
| Partnerships
and LLCs | |
| 38,266,204 | | |
| (4,704,576 | ) | |
| 3,186,482 | | |
| (74,790 | ) | |
| — | | |
| — | | |
| — | | |
| 36,673,320 | |
| Public
Securities | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
| Bank
Loans | |
| 2,220,737 | | |
| (218,115 | ) | |
| 667,246 | | |
| — | | |
| (1,125 | ) | |
| 911,250 | | |
| (880,000 | ) | |
| 2,699,993 | |
| Common
Stock | |
| 82,031 | | |
| (1,704 | ) | |
| — | | |
| — | | |
| — | | |
| — | | |
| — | | |
| 80,327 | |
| Total | |
$ | 332,982,867 | | |
$ | (5,192,962 | ) | |
$ | 35,234,824 | | |
$ | (1,245,386 | ) | |
$ | (20,003,465 | ) | |
$ | 911,250 | | |
$ | (880,000 | ) | |
$ | 341,807,128 | |
| * | For the six months ended June 30, 2022, transfers into and out of Level 3 were the result of changes in
the observability of significant inputs for certain portfolio companies. |
Barings Corporate Investors
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
Income, Gains
and Losses on Level 3 assets included in Net Increase in Net Assets resulting from Operations for the period are presented in the following
accounts on the Statement of Operations:
| |
Net Increase /
(Decrease) in
Net Assets
Resulting from
Operations | | |
Change in
Unrealized
(Depreciation)
in Net Assets
from assets
still held | |
Interest Income
(OID Amortization) | |
$ | 528,655 | | |
$ | — | |
Net realized gain on
investments
before taxes | |
| 520,547 | | |
| — | |
Net change in unrealized
(depreciation)
of investments
before taxes | |
| (6,242,164 | ) | |
| (9,624,356 | ) |
B.
Accounting for Investments:
Investment
Income
Investment
transactions are accounted for on the trade date. Interest income, including the amortization of premiums and accretion of discounts
on bonds held using the yield-to-maturity method, is recorded on the accrual basis to the extent that such amounts are expected to be
collected. Generally, when interest and/or principal payments on a loan become past due, or if the Trust otherwise does not expect the
borrower to be able to service its debt and other obligations, the Trust will place the investment on non-accrual status and will cease
recognizing interest income on that investment for financial reporting purposes until all principal and interest have been brought current
through payment or due to a restructuring such that the interest income is deemed to be collectible. The Trust writes off any previously
accrued and uncollected interest when it is determined that interest is no longer considered collectible. As of June 30, 2022, the
fair value of the Trust’s non-accrual assets was $10,429,237, or 2.9% of the total fair value of the Trust’s portfolio, and
the cost of the Trust’s non-accrual assets was $16,672,546, or 4.7% of the total cost of the Trust’s portfolio.
Payment-in-Kind
Interest
The Trust
currently holds, and expects to hold in the future, some investments in its portfolio that contain Payment-in-Kind (“PIK”)
interest provisions. The PIK interest, computed at the contractual rate specified in each loan agreement, is added to the principal balance
of the investment, rather than being paid to the Trust in cash, and is recorded as interest income. Thus, the actual collection of PIK
interest may be deferred until the time of debt principal repayment. PIK interest, which is a non-cash source of income at the time of
recognition, is included in the Trust’s taxable income and therefore affects the amount the Trust is required to distribute to
its stockholders to maintain its qualification as a
“regulated investment company” for federal income tax purposes, even
though the Trust has not yet collected the cash.
Generally,
when current cash interest and/or principal payments on an investment become past due, or if the Trust otherwise does not expect the
borrower to be able to service its debt and other obligations, the Trust will place the investment on PIK non-accrual status and will
cease recognizing PIK interest income on that investment for financial reporting purposes until all principal and interest have been
brought current through payment or due to a restructuring such that the interest income is deemed to be collectible. The Trust writes
off any accrued and uncollected PIK interest when it is determined that the PIK interest is no longer collectible. As of June 30,
2022, the Trust held no PIK non-accrual assets.
Realized
Gain or Loss and Unrealized Appreciation or Depreciation of Portfolio Investments
Realized
gains and losses on investment transactions and unrealized appreciation and depreciation of investments are reported for financial statement
and Federal income tax purposes on the identified cost method.
C.
Use of Estimates:
The preparation
of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and the differences could
be material.
D.
Federal Income Taxes:
The Trust
has elected to be taxed as a “regulated investment company” under the Internal Revenue Code, and intends to maintain this
qualification and to distribute substantially all of its net taxable income to its shareholders. In any year when net long-term capital
gains are realized by the Trust, management, after evaluating the prevailing economic conditions, will recommend that the Trustees either
designate the net realized long-term gains as undistributed and pay the Federal capital gains taxes thereon or distribute all or a portion
of such net gains.
The Trust
is taxed as a regulated investment company and is therefore limited as to the amount of non-qualified income that it may receive as the
result of operating a trade or business, e.g. the Trust’s pro rata share of income allocable to the Trust by a partnership operating
company. The Trust’s violation of this limitation could result in the loss of its status as a regulated investment company, thereby
subjecting all of its net income and capital gains to corporate taxes prior to distribution to its shareholders. The Trust, from time-to-time,
identifies investment opportunities in the securities of entities that could cause such trade or business income to be
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
allocable
to the Trust. The CI Subsidiary Trust (described in Footnote 1 above) was formed in order to allow investment in such securities without
adversely affecting the Trust’s status as a regulated investment company.
The CI
Subsidiary Trust is not taxed as a regulated investment company. Accordingly, prior to the Trust receiving any distributions from the
CI Subsidiary Trust, all of the CI Subsidiary Trust’s taxable income and realized gains, including non-qualified income and
realized gains, is subject to taxation at prevailing corporate tax rates. As of June 30, 2022, the CI Subsidiary Trust has incurred
income tax expense of $94,569.
Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement
carrying amounts of the existing assets and liabilities and their respective tax basis. As of June 30, 2022, the CI Subsidiary Trust
has a deferred tax liability of $804,643.
E.
Distributions to Shareholders:
The Trust
records distributions to shareholders from net investment income and net realized gains, if any, on the ex-dividend date. The Trust’s
net investment income dividend is declared four times per year. The Trust’s net realized capital gain distribution, if any, is
declared in December.
| 3. | Investment
Services Contract |
A. Services:
Under an
Investment Services Contract (the “Contract”) with the Trust, Barings agrees to use its best efforts to present to the Trust
a continuing and suitable investment program consistent with the investment objectives and policies of the Trust. Barings represents
the Trust in any negotiations with issuers, investment banking firms, securities brokers or dealers and other institutions or investors
relating to the Trust’s investments. Under the Contract, Barings also provides administration of the day-to-day operations of the
Trust and provides the Trust with office space and office equipment, accounting and bookkeeping services, and necessary executive, clerical
and secretarial personnel for the performance of the foregoing services.
B.
Fee:
For its
services under the Contract, Barings is paid a quarterly investment advisory fee of 0.3125% of the net asset value of the Trust as of
the last business day of each fiscal quarter, which is approximately equal to 1.25% annually. A majority of the Trustees, including a
majority of the Trustees who are not interested persons of the Trust or of Barings, approve the valuation of the Trust’s net assets
as of such day.
C.
Basis for Board Renewal of Contract
At a meeting
of the Trustees held by remote electronic communications (in accordance with Securities and Exchange Commission relief) on April 18,
2022, the Trustees
(including
a majority of the Trustees who are not “interested persons” of the Trust or Barings) unanimously approved a one-year continuance
of the Contract.
Prior to
the meeting, the Trustees requested and received from Ropes & Gray LLP, counsel to the Trust, a memorandum describing the Trustees’
legal responsibilities in connection with their review and re-approval of the Contract. The Trustees also requested and received from
Barings extensive written and oral information regarding, among other matters: the principal terms of the Contract; the reasons why Barings
was proposing the continuance of the Contract; Barings and its personnel; the Trust’s investment performance, including comparative
performance information; the nature and quality of the services provided by Barings to the Trust; financial results and condition of
Barings; the fee arrangements between Barings and the Trust; fee and expense information, including comparative fee and expense information;
profitability of the advisory arrangement to Barings; and “fallout” benefits to Barings resulting from the Contract.
In connection
with their deliberations regarding the continuation of the Contract, the Trustees, including the independent Trustees, considered such
information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant.
The Trustees’ conclusion as to the continuance of the Contract was based on a comprehensive consideration of all information provided
to the Trustees and not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations
are described below, although individual Trustees may have evaluated the information presented differently from one another, giving different
weights to various factors. It is also important to recognize that the fee arrangements between Barings and the Trust are the result
of years of review and discussion between the independent Trustees and Barings, that certain aspects of such arrangements may receive
greater scrutiny in some years than in others, and that the Trustees’ conclusions may be based, in part, on their consideration
of these same arrangements during the course of the year and in prior years.
Nature,
Extent and Quality of Services to be Provided by Barings to the Trust
In evaluating
the scope and quality of the services provided by Barings to the Trust, the Trustees considered, among other factors: (i) the scope of
services required to be provided by Barings under the Contract; (ii) Barings’ ability to find and negotiate private placement securities
that are consistent with the stated investment objectives of the Trust; (iii) the experience and quality of Barings’ staff; (iv)
the strength of Barings’ financial condition; (v) the nature of the private placement market compared to public markets (including
the fact that finding, analyzing, negotiating and servicing private placement securities is more labor-intensive than buying and selling
public securities and the administration of private placement securities is more
Barings Corporate Investors
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
extensive, expensive, and requires greater time and
expertise than a portfolio of only public securities); (vi) the potential advantages afforded to the Trust by its ability to co-invest
in negotiated private placements with MassMutual and its affiliates; and (vii) the the scope of services provided by Barings in light
of regulatory and legislative initiatives that have required increased legal, compliance and business attention and diligence. Based
on such considerations, the Trustees concluded that, overall, they are satisfied with the nature, extent and quality of services provided
by Barings, and expected to be provided in the future, under the Contract.
Investment
Performance
The Trustees
also examined the Trust’s short-term, intermediate-term, and long-term performance as compared against various benchmark indices
presented at the meeting, which showed that the Trust had outperformed the Credit Suisse Leveraged Loan Index for the 3-month, year-to-date,
1- and 3- year periods, had outperformed the Bloomberg Barclays US Corporate High Yield Index for the 3-month, year-to-date, 1-, 3-,
5- and 10-year periods, and had underperformed the S&P 500 Index for the 1-, 3- , 5- and 10-year periods, in each case ended December
31, 2021. In addition, the Trustees considered comparisons of the Trust’s performance with the performance of (i) selected closed-end
investment companies and funds that may invest in private placement securities and/or bank loans; (ii) selected business development
companies with comparable types of investments; and (iii) investment companies included in the Broadridge closed-end bond universe. The
Trustees considered that, while such comparisons are helpful in judging performance, they are not directly comparable in terms of types
of investments. Based on these considerations and the detailed performance information provided to the Trustees at the regular Board
meetings each quarter, the Trustees concluded that the Trust’s absolute and relative performance over time have been sufficient
to warrant renewal of the Contract.
Advisory
Fee/Costs of Services Provided and Profitability/ Manager’s “Fallout” Benefits
In connection
with the Trustees’ consideration of the advisory fee paid by the Trust to Barings under the Contract, Barings noted that it was
unaware of any registered closed-end investment companies that are directly comparable to the Trust in terms of the types of investments
and percentages invested in private placement securities (which require more extensive advisory and administrative services than a portfolio
of publicly traded securities, as previously discussed) other than Barings Participation Investors, which is also advised by Barings.
Under the terms of its Investment Advisory and Administrative Services Contract, Barings Participation Investors is charged a quarterly
investment advisory fee of 0.225% of net asset value as of the end of each quarter, which is approximately equal to 0.90% annually. In
considering the fee rate provided in the Contract, the Trustees noted the advisory fee charged by Barings to
various private and public
funds that Barings manages that invest in similar asset classes, and observed that the fee charged to Barings Participation Investors
compares favorably to the Trust’s advisory fee.
At the
request of the Trustees, Barings provided information concerning the profitability of Barings’ advisory relationship with the Trust.
The Trustees also considered the non-economic benefits Barings and its affiliates derived from its relationship with the Trust, including
the reputational benefits derived from having the Trust listed on the New York Stock Exchange, and the de minimis amount of commissions
resulting from the Trust’s portfolio transactions used by Barings for third-party soft dollar arrangements. The Trustees recognized
that Barings should be entitled to earn a reasonable level of profit for services provided to the Trust and, based on their review, concluded
that they were satisfied that Barings’ historical level of profitability from its relationship with the Trust was not excessive
and that the advisory fee under the Contract is reasonable.
Economies
of Scale
The Trustees
considered the concept of economies of scale and possible advisory fee reductions if the Trust were to grow in assets. Given that the
Trust is not continuously offering shares, such growth comes principally from retained net realized gain on investments and dividend
reinvestment. The Trustees concluded that the absence of breakpoints in the fee schedule under the Contract was currently acceptable
given the Trust’s current size and closed-end fund structure.
Based on
their evaluation of factors that they deemed to be material, including those factors described above, the Trustees (including a majority
of the Trustees who are not “interested persons” of the Trust or Barings) unanimously concluded that the Trust’s Contract
should be continued for an additional one-year period.
Senior
Secured Indebtedness
MassMutual
holds the Trust’s $30,000,000 Senior Fixed Rate Convertible Note (the “Note”) issued by the Trust on November 15,
2017. The Note is due November 15, 2027 and accrues interest at 3.53% per annum. MassMutual, at its option, can convert the principal
amount of the Note into common shares. The dollar amount of principal would be converted into an equivalent dollar amount of common shares
based upon the average price of the common shares for ten business days prior to the notice of conversion. For the six months ended June
30, 2022 the Trust incurred total interest expense on the Note of $529,500.
The Trust
may redeem the Note, in whole or in part, at the principal amount proposed to be redeemed together with the accrued and unpaid interest
thereon through the redemption date plus a Make Whole Premium. The Make Whole Premium equals the excess of (i) the present value
of the scheduled payments of principal and interest which the Trust would have paid but for the proposed redemption,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
discounted at the
rate of interest of U.S. Treasury obligations whose maturity approximates that of the Note plus 0.50% over (ii) the principal of
the Note proposed to be redeemed.
Credit
Facility
On July
22, 2021 (the “Effective Date”), MassMutual provided to the Trust, a five-year $30,000,000 committed revolving credit facility.
Borrowings under the revolving credit facility bear interest, at the rate of LIBOR plus 2.25%. The Trust will also be responsible for
paying a commitment fee of 0.50% on the unused amount. For purposes of calculating the commitment fee for the period from the Effective
Date to the earlier to occur of (x) the date that is 270 days after the Effective Date and (y) the first date on which the aggregate
outstanding borrowings is greater than $15,000,000, the unused amount shall be deemed to be in an amount equal to $15,000,000. As of
June 30, 2022 the Trust had $12,000,000 of outstanding borrowings on the revolving credit facility.
| 5. | Purchases and Sales of Investments |
| | |
For the six
months ended
06/30/2022 | |
| | |
Cost of
Investments
Acquired | | |
Proceeds
from
Sales or
Maturities | |
| | |
| | |
| |
| Corporate restricted securities | |
$ | 39,316,142 | | |
$ | 26,345,373 | |
| | |
| | | |
| | |
| Corporate public securities | |
| 677,250 | | |
| 1,125 | |
Investment
Risks
In the
normal course of its business, the Trust trades various financial instruments and enters into certain investment activities with investment
risks. These risks include: (i) market risk, (ii) volatility risk and (iii) credit, counterparty and liquidity risk. It
is the Trust’s policy to identify, measure and monitor risk through various mechanisms including risk management strategies and
credit policies. These include monitoring risk guidelines and diversifying exposures across a variety of instruments, markets and counterparties.
There can be no assurance that the Trust will be able to implement its credit guidelines or that its risk monitoring strategies will
be successful.
Impacts
of COVID-19
The pandemic
related to the global spread of novel coronavirus disease (COVID-19), which was first detected in December 2019, has resulted in significant
disruptions to global business activity and the global economy, as well as the economies of individual countries, the financial performance
of individual companies and sectors, and the securities and commodities markets in general. This pandemic, the full effects of which
are still unknown, has resulted in substantial market volatility and may continue to adversely impact the prices and liquidity of the
Trust’s investments and the Trust’s performance.
LIBOR
The United
Kingdom’s Financial Conduct Authority (“FCA”), which regulates LIBOR, announced a desire to phase out the use of LIBOR
by the end of 2021. LIBOR has historically been a common benchmark interest rate index used to make adjustments to variable-rate loans.
It is used throughout global banking and financial industries to determine interest rates for a variety of financial instruments and
borrowing arrangements. The transition process might lead to increased volatility and illiquidity in markets that currently rely on LIBOR
to determine interest rates. It could also lead to a reduction in the value of some LIBOR-based investments held by a fund and reduce
the effectiveness of new hedges placed against existing LIBOR-based investments. While some LIBOR-based instruments contemplate a scenario
where LIBOR is no longer available by providing for an alternative rate-setting methodology, not all have such provisions and there may
be significant uncertainty regarding the effectiveness of any such alternative methodologies.
| 7. | Commitments
and Contingencies |
During the
normal course of business, the Trust may enter into contracts and agreements that contain a variety of representations and warranties.
The exposure, if any, to the Trust under these arrangements is unknown as this would involve future claims that may or may not be made
against the Trust and which have not yet occurred. The Trust has no history of prior claims related to such contracts and agreements.
Barings Corporate Investors
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
At June 30, 2022, the Trust had the following
unfunded commitments:
Delayed Draw Term Loans:
Investment | |
Unfunded Amount
| | |
Unfunded Value
| |
| Amtech Software | |
$ | 727,273 | | |
$ | 728,878 | |
| Best Lawyers | |
| 448,718 | | |
| 449,586 | |
| Dwyer Instruments, Inc. | |
| 263,158 | | |
| 262,329 | |
| Electric Power Systems International
Inc. | |
| 104,298 | | |
| 105,378 | |
| eShipping | |
| 594,564 | | |
| 595,860 | |
| FragilePAK | |
| 1,093,750 | | |
| 1,110,684 | |
| Heartland Veterinary Partners | |
| 93,333 | | |
| 94,196 | |
| Kano Laboratories LLC | |
| 1,150,988 | | |
| 1,150,704 | |
| National Auto Care | |
| 284,314 | | |
| 284,171 | |
| Navia Benefit Solutions Inc. | |
| 1,103,200 | | |
| 1,108,867 | |
| Portfolio Group | |
| 497,000 | | |
| 498,848 | |
| ROI Solutions, LLC | |
| 1,242,823 | | |
| 1,258,364 | |
| Scaled Agile, Inc. | |
| 582,664 | | |
| 588,641 | |
| SEKO Worldwide, LLC | |
| 325,286 | | |
| 324,847 | |
| Smartling, Inc. | |
| 411,765 | | |
| 412,683 | |
| Standard Elevator Systems | |
| 1,044,068 | | |
| 1,045,647 | |
| Stratus Unlimited | |
| 344,212 | | |
| 347,665 | |
| Syntax Systems Ltd. | |
| 386,615 | | |
| 387,110 | |
| Tencarva Machinery Company | |
| 485,968 | | |
| 486,715 | |
| The Caprock Group | |
| 731,294 | | |
| 735,581 | |
| Ziyad | |
| 575,973 | | |
| 576,731 | |
| | |
| | | |
| | |
| | |
$ | 12,491,264 | | |
$ | 12,553,484 | |
Revolvers:
| Investment | |
Unfunded Amount
| | |
Unfunded Value
| |
| Accurus Aerospace
Corporation | |
$ | 121,963 | | |
$ | 121,890 | |
| Amtech Software | |
| 181,818 | | |
| 182,220 | |
| Best Lawyers | |
| 197,436 | | |
| 197,870 | |
| BrightSign | |
| 279,241 | | |
| 274,448 | |
| CAi Software | |
| 471,493 | | |
| 470,754 | |
| Cash Flow Management | |
| 104,478 | | |
| 104,729 | |
| Cogency Global | |
| 165,304 | | |
| 165,509 | |
| Comply365 | |
| 109,756 | | |
| 109,683 | |
| Decks Direct | |
| 534,545 | | |
| 526,133 | |
| EFI Productivity Software | |
| 146,023 | | |
| 146,266 | |
| eShipping | |
| 346,829 | | |
| 347,585 | |
| Jones Fish | |
| 329,114 | | |
| 329,464 | |
| LeadsOnline | |
| 394,794 | | |
| 395,326 | |
| Marshall Excelsior Co. | |
| 68,674 | | |
| 68,507 | |
| Narda-MITEQ | |
| 424,977 | | |
| 414,736 | |
| National Auto Care | |
| 196,078 | | |
| 196,043 | |
| Office Ally | |
| 266,249 | | |
| 265,845 | |
| Omega Holdings | |
| 78,889 | | |
| 79,194 | |
| Polara | |
| 218,094 | | |
| 217,676 | |
| ProfitOptics | |
| 387,097 | | |
| 387,461 | |
| Scaled Agile, Inc. | |
| 470,149 | | |
| 474,851 | |
| Smartling, Inc. | |
| 205,882 | | |
| 206,342 | |
| Standard Elevator Systems | |
| 200,508 | | |
| 200,827 | |
| Syntax Systems Ltd. | |
| 89,524 | | |
| 89,705 | |
| Tank Holding Corp | |
| 25,455 | | |
| 25,495 | |
| Tencarva Machinery Company | |
| 619,093 | | |
| 620,044 | |
| The Caprock Group | |
| 215,035 | | |
| 215,805 | |
| Woodland Foods, Inc. | |
| 267,120 | | |
| 267,911 | |
| Ziyad | |
| 359,983 | | |
| 360,457 | |
| | |
$ | 7,475,601 | | |
$ | 7,462,772 | |
Total Unfunded
Commitments | |
$ | 19,966,866 | | |
$ | 20,016,257 | |
As of June 30, 2022, unfunded commitments
had unrealized appreciation of $49,391 or 0.01% of net assets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
| 8. | Quarterly Results of Investment Operations (unaudited) |
| | |
March 31,
2022 | |
| | |
Amount
| | |
Per Share
| |
| | |
| | | |
| | |
| Investment income | |
$ | 6,017,736 | | |
| | |
| Net investment income (net of
taxes) | |
| 4,321,111 | | |
$ | 0.21 | |
| Net realized and unrealized
loss on investments (net of taxes) | |
| (1,105,288 | ) | |
| (0.05 | ) |
| | |
June 30,
2022 | |
| | |
Amount
| | |
Per Share
| |
| | |
| | | |
| | |
| Investment
income | |
$ | 6,443,947 | | |
| | |
| Net investment
income (net of taxes) | |
| 4,734,192 | | |
$ | 0.23 | |
| Net realized
and unrealized loss on investments (net of taxes) | |
| (7,552,322 | ) | |
| (0.37 | ) |
| 9. | Results of Shareholder Meeting |
The Annual Meeting of Shareholders was
held on Thursday, May 19, 2022. The shareholders were asked to vote to re-elect Susan B. Sweeney as Trustee for a three-year term, and
to elect David M. Mihalick as Trustee for a three-year term. The shareholders approved the proposal. The Trust’s other Trustees,
Clifford M. Noreen, Michael H. Brown, Barbara M. Ginader, Edward P. Grace and Maleyne M. Syracuse continued to serve their respective
terms following the May 19, 2022 Annual Shareholder Meeting. Eric J. Lloyd’s term expired following the May 19, 2022 Annual Shareholder
Meeting. The results of the voting are set forth below.
| | |
Shares
for
| | |
Withheld
| |
| | |
| | | |
| | |
| Susan B. Sweeney | |
| 13,935,056 | | |
| 341,034 | |
| David M. Mihalick | |
| 13,965,684 | | |
| 310,406 | |
Barings
Corporate Investors
This
privacy notice is being provided on behalf of Barings LLC and its affiliates: Barings Securities LLC; Barings Australia Pty Ltd; Barings
Japan Limited; Barings Investment Advisers (Hong Kong) Limited; Barings Funds Trust; Barings Global Short Duration High Yield Fund; Barings
BDC, Inc.; Barings Corporate Investors and Barings Participation Investors (together, for purposes of this privacy notice, “Barings”).
When you use Barings you entrust us not only
with your hard-earned assets but also with your personal and financial data. We consider your data to be private and confidential, and
protecting its confidentiality is important to us. Our policies and procedures regarding your personal information are summarized below.
We may collect non-public personal information
about you from:
| • | Applications or other forms, interviews, or by other means; |
| • | Consumer or other reporting agencies, government agencies, employers or others; |
| • | Your transactions with us, our affiliates, or others; and |
We may share the financial information we collect
with our financial service affiliates, such as insurance companies, investment companies and securities broker-dealers. Additionally,
so that we may continue to offer you products and services that best meet your investment needs and to effect transactions that you request
or authorize, we may disclose the information we collect, as described above, to companies that perform administrative or marketing services
on our behalf, such as transfer agents, custodian banks, service providers or printers and mailers that assist us in the distribution
of investor materials or that provide operational support to Barings. These companies are required to protect this information and will
use this information only for the services for which we hire them, and are not permitted to use or share this information for any other
purpose. Some of these companies may perform such services in jurisdictions other than the United States. We may share some or all of
the information we collect with other financial institutions with whom we jointly market products. This may be done only if it is permitted
by the state in which you live. Some disclosures may be limited to your name, contact and transaction information with us or our affiliates.
Any disclosures will be only to the extent permitted
by federal and state law. Certain disclosures may require us to get an “opt-in” or “opt-out” from you. If this
is required, we will do so before information is shared. Otherwise, we do not share any personal information about our customers or former
customers unless authorized by the customer or as permitted by law.
We restrict access to personal information about
you to those employees who need to know that information to provide products and services to you. We maintain physical, electronic and
procedural safeguards that comply with legal standards to guard your personal information. As an added measure, we do not include personal
or account information in non-secure e-mails that we send you via the Internet without your prior consent. We advise you not to send such
information to us in non-secure e-mails.
This joint notice describes the privacy policies
of Barings, the Funds and Barings Securities LLC. It applies to all Barings and the Funds accounts you presently have, or may open in
the future, using your social security number or federal taxpayer identification number - whether or not you remain a shareholder of our
Funds or as an advisory client of Barings. As mandated by rules issued by the Securities and Exchange Commission, we will be sending you
this notice annually, as long as you own shares in the Funds or have an account with Barings.
Barings Securities LLC is a member of the Financial
Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation (SIPC). Investors may obtain information about
SIPC including the SIPC brochure by contacting SIPC online at www.sipc.org or calling (202)-371-8300. Investors may obtain information
about FINRA including the FINRA Investor Brochure by contacting FINRA online at www.finra.org or by calling (800) 289-9999.
April 2019
Members
of the Board of
Trustees
Clifford
M. Noreen
Chairman
Michael
H. Brown*
Barbara
M. Ginader*
Edward
P. Grace III*
David
M. Mihalick
Susan
B. Sweeney*
Maleyne
M. Syracuse*
*Member
of the Audit Committee
Officers
Christina
Emery
President
Jonathan
Bock
Chief
Financial Officer
Jill
Dinerman
Chief
Legal Officer
Michael
Cowart
Chief
Compliance Officer
Elizabeth
Murray
Principal
Accounting Officer
Christopher
D. Hanscom
Treasurer
Ashlee
Steinnerd
Secretary
Alexandra
Pacini
Assistant
Secretary
Sean
Feeley
Vice
President
Jonathan
Landsberg
Vice
President
|
DIVIDEND
REINVESTMENT AND SHARE PURCHASE PLAN
Barings Corporate Investors (the “Trust”)
offers a Dividend Reinvestment and Share Purchase Plan (the “Plan”). The Plan provides a simple way for shareholders to add
to their holdings in the Trust through the receipt of dividend shares issued by the Trust or through the investment of cash dividends
in Trust shares purchased in the open market. A shareholder may join the Plan by filling out and mailing an authorization card to DST
Systems, Inc., the Transfer Agent.
Participating shareholders will continue
to participate until they notify the Transfer Agent, in writing, of their desire to terminate participation. Unless a shareholder elects
to participate in the Plan, he or she will, in effect, have elected to receive dividends and distributions in cash. Participating shareholders
may also make additional contributions to the Plan from their own funds. Such contributions may be made by personal check or other means
in an amount not less than $10 nor more than $5,000 per quarter. Cash contributions must be received by the Transfer Agent at least five
days (but no more then 30 days) before the payment date of a dividend or distribution.
Whenever the Trust declares a dividend payable
in cash or shares, the Transfer Agent, acting on behalf of each participating shareholder, will take the dividend in shares only if the
net asset value is lower than the market price plus an estimated brokerage commission as of the close of business on the valuation day.
The valuation day is the last day preceding the day of dividend payment.
When the dividend is to be taken in shares,
the number of shares to be received is determined by dividing the cash dividend by the net asset value as of the close of business on
the valuation date or, if greater than net asset value, 95% of the closing share price. If the net asset value of the shares is higher
than the market value plus an estimated commission, the Transfer Agent, consistent with obtaining the best price and execution, will buy
shares on the open market at current prices promptly after the dividend payment date.
The reinvestment of dividends does not, in
any way, relieve participating shareholders of any federal, state or local tax. For federal income tax purposes, the amount reportable
in respect of a dividend received in newly-issued shares of the Trust will be the fair market value of the shares received, which will
be reportable as ordinary income and/or capital gains.
As compensation for its services, the Transfer
Agent receives a fee of 5% of any dividend and cash contribution (in no event in excess of $2.50 per distribution per shareholder.)
Any questions regarding the Plan should be
addressed to DST Systems, Inc., Transfer Agent for Barings Corporate Investors’ Dividend Reinvestment and Share Purchase Plan, P.O.
Box 219086, Kansas City, MO 64121-9086.
|
| |
|
 |
Barings
Corporate
Investors |