Golub Capital Bdc Inc

NASDAQ:GBDC

Hello, everyone, and welcome to GBDC's earnings call for the fiscal quarter ended December 31, 2024.

Before we begin, I'd like to take a moment to remind our listeners that remarks made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in GBDC's SEC filings. For materials we intend to refer to on today's earnings call, please visit the Investor Resources tab on the homepage of our website, which is www.golubcapitalbdc.com and click the Events Presentations link. Our earnings release is also available on our website in the Investor Resources section. As a reminder, this call is being recorded.

With that, I am pleased to turn the call over to David Golub, Chief Executive Officer of GBDC.

Hello, everybody, and thanks for joining us today. I'm joined by Chris Ericson, our CFO; and Matt Benton, our Chief Operating Officer. For those of you who are new to GBDC, our investment strategy is focused on providing first lien senior secured loans to healthy, resilient middle market companies that are backed by strong partnership-oriented private equity sponsors. So yesterday, we issued our earnings press release for the December 31 quarter, and we posted an earnings presentation on our website. We'll be referring to that presentation during today's call.

I'm going to start as usual with headlines, and then Matt and Chris are going to go through our operating and financial performance for the quarter in more detail. And finally, I'll wrap up with our outlook for the coming period, and we'll open the floor for some questions.

So headlines. The headline is that GBDC had a strong quarter and a strong start to fiscal year 2025. We hit our [ aspirations ] to be good [indiscernible]. Here are the highlights. Adjusted NII per share was $0.39. This corresponds to an adjusted NII return on equity of 10.1%. If you exclude the impact of some noncash interest expense that was related to our interest rate swap, adjusted NII for the quarter was actually $0.40 per share. Adjusted net income per share was $0.42 per share. This corresponds to an adjusted return on equity of 11%. Adjusted net income per share included $0.03 of adjusted net realized and unrealized gains. The vast majority of GBDC's portfolio has been performing well and continue to perform well in the December 31 quarter. In fact, we saw a nice lift in GBDC's overall portfolio credit metrics this quarter.

And we also saw nice growth in GBDC's investment portfolio. New deal activity continue to pick up in the market, and GBDC was able to find attractive investment opportunities while remaining highly selective, enabling us to get back to our target leverage.

With that, let me pass the call over to Matt Benton to discuss the quarter in more detail. Thanks, David. I'm going to start on Slide 4.

GBDC's earnings were driven by 3 key factors. First, overall credit performance was solid. We recognized some realized losses on 3 nonaccrual investments that were restructured in the quarter. These investments were all on nonaccrual as of September 30, 2024, but these losses were more than offset by gains elsewhere. Overall, we're pleased with the credit picture at GBDC, and we'll share how the progress is visible in GBDC's quarter end credit metrics. Second, earnings continue to be supported by high base rates and attractive spreads, consistent with recent quarters. Having said this, we did see some reduction in yields this quarter, primarily from a decrease in SOFR and to a lesser extent, from some continued spread compression.

The spread compression was more pronounced and visible in new investments, but we have seen some repricing of existing investments, particularly in the large market of our portfolio. Repricing dynamics in the core middle market are less prolific than the large market where drive-by repricings are more common. At quarter end, we analyzed GBDC's portfolio in the context of current market spreads and believe there is limited repricing risk left within the existing loan book. Third, we realized a reduction in borrowing costs in the quarter, both from base rate decline and because of the funding cost benefits associated with the November 2024 funding structure initiatives that we discussed on last quarter's earnings call.

We didn't get a full quarter's benefit of those lower funding costs. We'll get that in the March 31 quarter. Fourth, earnings continue to benefit from lower expenses due to GBDC's fee structure. And fifth, earnings were negatively impacted in the quarter by $0.01 per share related to noncash interest expense associated with interest rate swaps on our fixed rate unsecured notes. Adding back the $0.01 per share impact on adjusted NII from noncash interest expense implies approximately $0.40 of adjusted NII per share.

Let me summarize portfolio activity and credit quality in the quarter. Gross originations were $1.2 billion, up from last quarter as we sought to continue to increase leverage post merger. After factoring in repayments and unfunded commitments associated with originations, net funds increased by $450 million sequentially. This represented net portfolio growth of approximately 5.5% quarter-over-quarter. GBDC did not receive the full benefit of the earnings power of this portfolio growth because a lot of the growth was back-end weighted. Last quarter, I said the lending environment was getting more borrower-friendly across all credit markets. This continued in the December 31 quarter, especially in the large market segment where we saw more spread compression, looser deal documentation and higher leverage.

Despite this, Golub Capital's origination stats in calendar Q4 continued to depict our conservatism. One, a selectivity rate of less than 4%; two, a repeat borrower percentage in excess of 70%; three, Golub acted as the lead or sole book runner in 88% of our transactions; four, our average LTVs at the time of origination have generally been in the mid-30% to mid-40% range; and five, given the risk-adjusted pricing dynamics we see across the entire middle market, we are choosing to primarily play in the core middle market.

The median EBITDA for our calendar Q4 2024 originations was $53 million. We believe this is a nice differentiator for Golub versus many of our peers solely focused on the large borrower market. Credit statistics improved quarter-over-quarter. Investments in Ratings category 4 and 5 increased to nearly 90% of the portfolio at fair value as of December 31, 2024, from approximately 87% the prior quarter. For context, this marks the highest combined level of 4 and 5-rated investments at GBDC since the September 2022 quarter. Investments in rating Category 3 declined from 11.6% of the portfolio at fair value as of September 30, 2024, to 8.8%. And investments in rating categories 1 and 2 remain very low, representing just 1.3% of the total portfolio at fair value.

As a percentage of total investments at fair value, nonaccrual investments declined from a very low 1.2% at September 30, 2024, to just 50 basis points, the lowest level at GBDC since 2019. In the quarter, the number of nonaccrual investments decreased to 9 following the restructuring of 3 former nonaccrual investments.

Continuing on Slide 4, let me briefly summarize distributions paid and certain balance sheet changes in the quarter. Total distributions paid in the quarter were $0.48 per share. This included: one, the quarterly base distribution of $0.39 per share; two, a $0.04 per share quarterly variable supplemental distribution that we declared in November 2024. And finally, the final $0.05 per share special distribution declared in June 2024 in conjunction with the GBDC 3 merger closing. NAV per share decreased by $0.06 on a sequential basis to $15.13, primarily because distributions paid, including the special distribution exceeded earnings. Net debt to equity increased quarter-over-quarter to 1.19 turns. This reflects leverage net of available cash and cash trapped and debt securitizations for the purposes of paying down principal on outstanding notes.

Similar to last quarter, the increase in net leverage largely happened in the last few weeks of the 12/31 quarter. GBDC's average net leverage during the quarter was just 1.14 turns. As a result, we expect GBDC to recognize the full run rate profitability benefit of its larger investment portfolio next quarter. Further, we expect GBDC to maintain average net leverage near our current target of 1.15 turns. In November 2024, we executed a series of debt funding-related transactions we expect to drive down GBDC's weighted average cost of debt, including a $2.2 billion GBDC term debt securitization with AAA notes priced at SOFR plus 158 basis points. In conjunction with the CLO pricing, we redeemed some higher cost debt securitizations and debt facilities.

We expect to recognize the full run rate profitability benefit from these transactions in the March 31, 2025 quarter, which we believe will add incremental adjusted NII that we think will be a valuable forward profitability cushion to the extent that we get further base rate or investment spread reductions. There are several other drivers of higher profits that we are working on, including further borrowing cost optimization as we look across our existing funding structure, GBDC was upgraded by Moody's this quarter to a Baa2 rating with a stable outlook, which we believe enhances our ability to issue low-cost unsecured debt.

Portfolio rotation. We believe the successful monetization of certain non-earning equity investments and low-yielding loans associated with prior restructured names with the subsequent redeployment of those proceeds into new core middle market originations could generate incremental NII. I'll include the obvious caveat that we have work to do to successfully resolve these names, and it won't all happen overnight, but we have the skills and resources to do this.

Let's turn to distributions declared in the quarter. The Board declared a regular quarterly distribution of $0.39 per share, representing an annualized dividend yield of 10.3% based on GBDC's NAV per share as of December 31, 2024. Adjusted NII per share adjusted for the $0.01 per share impact from noncash interest expense related to interest rate swaps continues to provide a comfortable cushion above our regular quarterly distribution, providing us distribution coverage of 103%. We expect the profitability drivers I discussed earlier to provide incremental cushion going forward.

Typically, I skip Slide 5, but I want to cover it this quarter as I do think some perspective on GBDC's quarter-over-quarter profitability would be helpful since we've had some moving pieces these last couple of quarters. In the 9/30/2024 quarter, GBDC generated $0.47 of adjusted NII per share, which is shown on Slide 5. What you don't see on the page is that the $0.47 included a positive benefit of $0.03 per share from the noncash impact from our interest rate swaps, which we discussed last quarter. It also included a $0.03 per share partial waiver of the income incentive fee. Adjusting for those 2 items, GBDC's 9/30/2024 adjusted NII was $0.41 per share.

This quarter, as I mentioned, GBDC generated $0.40 of adjusted NII after eliminating the noncash impact from the interest rate swaps I mentioned earlier. There was not an income incentive fee waiver this quarter. So on an apples-to-apples basis, GBDC saw a modest decrease in adjusted NII quarter-over-quarter from $0.41 to $0.40. We think this is a solid result given the base rate and spread movements during the quarter. So how was GBDC able to minimize the reduction to adjusted NII quarter-over-quarter given the headwinds on the rate side?

First, 81% of its liabilities are floating rate. So our borrowing costs benefited from SOFR decreases. We have meaningfully reduced GBDC's asset sensitivity over the past year, and we've now seen the benefits as base rates decreased. We do think GBDC is an outlier in the sector and is better positioned than most for a neutral decreasing base rate environment. Second, GBDC modestly increased financial leverage. And third, GBDC's leading fee structure structurally creates a higher return buffer.

I'm going to turn it over to Chris now to continue our presentation.

Thanks, Matt. Turning to Slide 7. You can see how the earnings drivers Matt just described and excess distributions paid in the quarter translated into GBDC's December 31, 2024 NAV per share of $15.13. Adjusted NII per share of $0.39 per share was below the $0.48 per share of aggregate distributions paid out during the quarter. Net realized and unrealized gains were $0.03 per share. Together, these results drove a net asset value per share decrease to $15.13, down $0.06 per share from the prior quarter.

If we turn to Slide 10, which details our origination activity for the quarter, net funds quarter-over-quarter increased by $450 million, representing a 5.5% increase in total portfolio size versus September 30, 2024. Looking at the bottom of the slide, the weighted average rate on new investments was 9.4%. Investments that repaid in the quarter were at a weighted average rate of 11.3%. And as David and Matt described at the outset, this contributed to a lower investment yield on the portfolio from prior quarters.

Slide 11 shows GBDC's overall portfolio mix. As you can see, the portfolio breakdown by investment type remained consistent quarter-over-quarter with one-stop loans continuing to represent around 87% of the portfolio at fair value.

And Slide 12 shows that GBDC's portfolio remains highly diversified by portfolio company with an average investment size of approximately 30 basis points, consistent with prior quarters. Additionally, our largest borrower represents just 1.5% of the debt investment portfolio and our top 10 largest borrowers represent below 13% of the portfolio. We are big believers in modulating credit risk through position size, which we believe has served GBDC well in previous credit cycles. As of December 31, 2024, 92% of our investment portfolio consisted of first lien senior secured floating rate loans to borrowers across a diversified range of what we believe to be resilient industries.

The economic analysis on Slide 13 highlights the drivers of the change in GBDC's net investment spread to 5%. Let's walk through this slide in detail. We'll start with the dark blue line, which is our investment income yield. As a reminder, the investment income yield includes the amortization of fees and discounts. GBDC's investment income yield fell 80 basis points sequentially to 11.2%. And as Matt highlighted, this was predominantly the result of a 99% floating rate investment portfolio re-indexing in the quarter to lower 3-month and 1-month SOFR reference rates and to a much lesser extent, lower weighted average spread on debt investments in the portfolio, which was driven via net originations at lower spreads and some repricing activity in the existing portfolio.

Our cost of debt, the teal line, decreased 60 basis points to 6.2%, reflecting our 81% floating rate debt funding structure. As Matt described earlier, we expect further improvement in GBDC's weighted average cost of debt next quarter as we see a full quarter impact from the transactions we executed in November and December 2024. Net-net, our weighted average net investment spread, the gold line, decreased 20 basis points sequentially to 5%. I'll turn the floor back over to Matt now.

Thanks, Chris. Let's move on to Slides 14 and 15 and take a closer look at the improving credit quality metrics. On Slide 14, you can see the nonaccruals decreased by 70 basis points to 0.5% of total investments at fair value, the lowest level since September 2019. Slide 15 shows the trend in internal performance ratings I highlighted earlier. Of note, investments rated 3, signaling a borrower could be out of compliance with debt covenants decreased materially to just 8.8% of the total investment portfolio. The proportion of loans rated 1 and 2, which are the loans we believe are most likely to see significant credit impairment remained very low at just 1.3% of the portfolio at fair value. As we usually do, we're going to skip past Slide 16 through 19. These slides have more detail on GBDC's financial statements, dividend history and other key metrics.

I'll wrap up this section by reviewing GBDC's liquidity and investment capacity on Slides 20 through 22. First, let's focus on the key takeaways on Slide 22. Our weighted average cost of debt this quarter was 6.2%, materially down from the prior quarter, reflecting the debt funding structure transactions we executed. 44% of our debt funding is in the form of unsecured notes with no upcoming maturities in 2025 and well laddered through 2029. The fixed rate notes coming due in 2026 and 2027 were issued with a weighted average coupon of 2.3%. And as you've heard us say on prior occasions, we did not swap them out for floating rate exposure.

The remainder of GBDC's total debt funding is floating rate or swapped to floating. Again, this dynamic contributes to GBDC being less asset sensitive than it was a year ago. Following quarter end, Moody's upgraded GBDC's corporate credit rating and senior unsecured shelf rating to Baa2 stable from Baa3 positive. With this upgrade, GBDC is one of just 3 publicly traded BDCs with both a Baa2 from Moody's and a BBB from Fitch. We encourage investors to read the Moody's report, but we believe the upgrade was the result of the collection of GBDC's differentiating qualities that we consistently discuss on our earnings calls, namely a highly diverse and first lien-oriented portfolio, solid liquidity and capital management and a track record of stellar, that's Moody's word, not ours, credit performance extending back to our IPO in 2010. Overall, our liquidity position remains strong, and we ended the quarter with approximately $1.1 billion of liquidity from unrestricted cash, undrawn commitments on our meaningfully over-collateralized corporate revolver and the unused unsecured revolver provided by our adviser.

Now I'll hand it back over to David for closing remarks and Q&A. David?

Thanks, Matt. So to sum up, GBDC had a strong first quarter and a strong start to the fiscal year. I want to touch briefly on our outlook before we open the line for questions. So one of the market dynamics we talked a lot about in 2024 was spread compression. We saw spread compression across all credit markets from investment grade to high yield to the broadly syndicated market and to our markets. In our markets, this impacted both new deals and some existing deals that saw repricing amendments. Spread compression has been much more pronounced in the broadly syndicated market than it has been in the private credit market. Within private credit, it's been more pronounced in the large side of the market than in the core middle market, but no segment of the credit market has been completely immune.

If we look beyond spread compression and look through a wider lens across all risk assets, markets today are pricing in considerable optimism about the business climate. So I think that raises an interesting question. Is that optimism justified? If you've listened to our earnings calls before, you probably can predict that I'm not going to make some bold forecast. Our mantra is very consistently to stay humble about making macro predictions, both because we're not macroeconomists and because consensus expectations generally have been so wrong so consistently over the course of the last couple of years. That said, I do want to offer a few observations.

First observation, the U.S. economy is doing quite well. Our Golub Capital Middle Market report highlighted how this last quarter was the ninth in a row showing very solid revenue and EBITDA growth. We do not see signs of an impending slowdown in our data. A second observation, private equity sponsors are voting with their wallets. Transaction volume continued to pick up in calendar Q4, and I think it seems likely to increase further through 2025. Dealmakers seem to be more excited about deregulation than they are concerned about tariffs. Both of these observations are consistent with the optimistic view. But let's look at the other side. At the same time that there are these reasons for optimism, there are also clear signs of elevated credit stress across the market. In the BSL market, the LSTA publishes data about defaults adjusted for liability management transactions. I think that's the right way to look at it. And their data shows that we're now looking at a rate of about 4.7% for the 12 months ended December 31.

That's more than double the 20-year average. It's a little hard to get apples-to-apples historical comparisons now that we've entered the era of liability management transactions, but I think that's about right. It's about double. Signs of rising credit stress also show up in reports from the major rating agencies, including S&P and Fitch and from major law firms that are covering restructurings and bankruptcies. So there are cross currents in the market that warrant both optimism and concern. We think this is the type of environment that historically has separated lenders with strong businesses, lenders with real competitive advantages from the newbies, the firms that lack the characteristics to be successful long-term players.

It's not surprising to us that in the last 5 quarters, we've seen increased dispersion in performance among BDC managers, and we expect to see more of this in the coming period. We believe Golub Capital and GBDC will once again be on the good side of this performance dispersion spectrum and we'll be delivering more good boring results for our shareholders. With that, let's open the line for questions.

[Operator Instructions]

Your first question today comes from the line of Ray Cheesman from Anfield Capital.

Congratulations on steering the ship very well during this changing time. My questions this morning are, the dollar has rallied strongly as the new administration has come in. regulations have declined or are being attempted to be reduced and tariffs, of course, they go on and off seemingly once in the morning, once in the evening and we ended up with only 1 of the 3 candidates remaining at the end of what it looks like at the end of this week. I'm wondering how -- in this fishbowl of craziness, how do you think the portfolio will respond. I believe you almost exclusively are a domestically focused owner of manufacturing and service entities. So I'm guessing it's not much, but I'm very interested in your answer.

Yes. We certainly live in interesting times right now. Thank you for the question. A couple of observations. First observation we're relatively insulated from movements in foreign exchange rates and movements in tariffs because of the construction of the portfolio. As you mentioned, most of the portfolio is U.S. borrowers, U.S. companies that are serving other U.S. companies.

A very large proportion of the base is -- base of our borrowers is service companies, including software providers. We do have a significant portion of the portfolio, a minority, but significant portion in Europe. But these are not European companies doing business in the U.S., so much as they're European companies that are doing business with other European companies. We're underweight in manufacturing. We're underweight in areas that have commodity exposure. We've been looking at the question of tariff vulnerability and for obvious reasons, everyone since the election ought to be planning for the possibility of tariffs.

One of the good news elements of our business is we work with very smart private equity sponsors and very talented management teams. They're all over this issue as well. Based on the work that we've done so far, I don't think we have a meaningful vulnerability on a first order basis to tariffs. But I want to sound a note of caution because I don't think anyone knows what the second, third, fourth order impacts could be. And a trade war probably isn't going to go well for anybody. So this is a period where, in my judgment, caution is best looking for resilient strategies that are going to do well across a variety of different macroeconomic scenarios. And those are familiar mantras for Golub Capital. That doesn't require a pivot for us in our approach.

Your next question comes from the line of Finian O'Shea from Wells Fargo.

Maybe they're not really continuing there, but on your closing remarks and a discussion . I just wanted to continue on the loss environment that David, you hit on toward the end, but for direct lending. Can you talk about what -- how this has changed over time and importantly, today with the level of competition, the degradation of terms like leverage covenants and so forth and what that means for the expected loss rate in the direct lending asset class. We can see that, obviously, as you pointed out, it's going higher in the leveraged finance markets. Those, of course, are much more transparent. We see it in real time, and it's much slower to play out in private. So seeing if you had any just high-level guide for us there.

Sure. So in today's environment, we have an real-time experiment in looking at how credit stress is showing up in the more liquid, broadly syndicated loan market and how it's showing up in private credit markets. And I think it's very instructive to look at both at the same time.

One difference is your point, Fin, that there's more information about what's going on in the broadly syndicated market, and we're seeing the signals of credit stress in the form of higher default rates, higher levels of liability management transactions, more CCC credits. One interesting element of the difference is the second piece. We're seeing liability management transactions. We really aren't seeing those transactions in the private credit market and liability management transactions are proving bad for recoveries in the broadly syndicated market.

I think they're largely a transfer of value from lenders to lawyers and restructuring advisers because they certainly aren't working for private equity firms. There have been very few successful turnarounds of companies that have undertaken liability management transactions. Virtually all of them end up going through restructurings. They just delay the inevitable and they end up costing credit or significant amounts through that delay.

In the private market, we are seeing indicia of more credit stress. It's not broad, it's a tail. And it's not everywhere. It's more concentrated in the portfolios of some players than in others. One of the characteristics that we're seeing in the private credit market that's similar to the broadly syndicated market is that when companies hit real difficulties, it's often because of liquidity issues as opposed to because of covenant issues, and that's particularly true in the larger end of the market.

That means that by the time lenders get into the picture and are able to take over control of situations that the company has had time to deteriorate significantly. Those can be harder turnarounds to effect. One of the reasons I strongly prefer the core middle market is that we tend to be either sole lender or we tend to be one of a small number of lenders. We tend to have stronger documentation terms and we're able to address problems in our borrowers much earlier. So I think what we're going to see in the coming period is a continuing playing out of this tail of companies that is less good at addressing higher interest rates, has less pricing power, hasn't grown over the course of the last couple of years.

We're going to see the mettle of a number of private credit players who haven't been tested in prior cycles. And 2 things are going to be tested. One is how good are they at underwriting? And the second is how good are they at managing and turning around underperformers? And both of those are critical skills for successful private credit players over time. I think we'll fare very well in that evaluation.

Great. That's helpful color. I guess just another high-level follow-up on the platform. I think you talked about in your maybe the closing remarks as well, some of the -- a lot of the newer players. Can you talk about how that is maybe changing Golub, pushing you to grow faster? I think Golub's building out more reach into insurance and retail, like that's where a lot of the capital is being raised now, is the sort of -- or how much faster, if any, is the sort of Golub train running on fundraising and origination in response to today's competition?

So we're not running faster because of competition. In fact, we don't run our strategy in response to how other people are playing. Our approach to growing Golub Capital has for years been to focus maniacally on building competitive advantages in a very narrow set of activity.

So we are a specialist in private credit and in sponsor finance in an era of multi-strategy alternative. And we're not changing our stripes on that front. A couple of years ago, when a number of our competitive brethren saw an opportunity to grow a lot in the large private credit -- the large markets competing with the broadly syndicated market, we chose to turn left and recommit ourselves to the core middle market. And I'm very happy that we made that decision. We are now one of the largest -- one of the dominant players in the core middle market. And I think that's a better business. So we continue to beat to our own drum, Fin. It's a different drum from others in the industry, and we think it's the right drum for us.

Your next question comes from the line of Robert Dodd from Raymond James.

A couple of questions on the liability side and then the asset type. On the liability side, you gave in the presentation, the weighted average cost effectively in the fourth -- the December quarter, was 6.2%, and it hasn't benefited from all the activity, which you did a lot during the quarter. So can you give us a scale like just how -- what's the scale of the relative cost savings or rate savings that once it's fully effective for full quarter, how significant is that cost saving on the liability side?

So I'm really glad you asked the question, Robert, because I think how firms manage the right-hand side of the balance sheet is just so critically important to long-term success. And we've got a great team that focuses on that. I'm going to hand the mic to Matt Benton to describe in more detail the steps that we've undertaken in the last few months to take advantage of reduced spreads in liability markets and how that's going to be impacting our profitability on a go-forward basis.

It's a good question. Look, I think the easiest way to think about it is look at Page 22 of our investor presentation, which shows our debt stack, the benefits of the funding structure initiatives, which we talked a lot about, right, issuing the inexpensive CLO, taking out higher cost debt facilities didn't really take effect until later in the quarter. So we closed the $2.2 billion CLO that had a blended interest expense of SOFR plus 158 basis points on November 18. We took out at that time some of the more expensive legacy debt facilities that we had, but we weren't, for example, able to call the GBDC 3 2022-2 Securitization until December 16, and recall that was $225 million of third-party notes priced at SOFR plus 260 basis points.

So that 6.2% weighted average cost of debt that you see on the slide, it reflects, again, the weighted average cost over the entire quarter, which includes operating for a good chunk of the quarter with those higher cost legacy facilities. If you look at where we are today, the easiest way to think about it would be the current in-place weighted average cost of funds for GBDC would be to apply a 4.3% current SOFR base rate through that debt stack and apply the weighted average spread on the page to that, which would give you around a 5.5% weighted average cost of debt today. That's in place, that's where it is today.

One other point that I would mention is there's obviously always a lot of moving parts when you think about the right and left side of the balance sheet here, for the CLOs, both of which comprise almost $1.6 billion of outstanding par, those did not reset their reference base rates lower until post quarter end. So they reset in January. So again, that's where you start to see some of the big differences. And again, my simple math there doesn't include amortizing fees into it, but that's the way to think about it.

Got it. Got it. Very helpful. And another one follows up on that. The JPMorgan facility, I mean, it's a good facility, attractive pricing. It's not a facility that was constructed when you have the credit ratings you have today. So what are the -- what do you think is the potential that you can do on that facility? I mean, obviously, it's got a many years to run, if you just want to let it sit. But at the same time, it was -- you were a BBB- when you structured that into BBB flat equivalent.

Yes. We do think that's another good question. There is room for improvement there as we look at what some of our peers have done in market. You can look at some of our close peers at how they have amended their existing facilities. And again, when we price -- when we put that facility in place, we had best-in-class pricing on that facility. We obviously have very good relationships on the bank side. We've got a very long, very successful track record, and we can leverage that. So you should definitely assume that we're evaluating that very, very closely and that if we're successful, there would be some nice upside to the current plus 175 basis point spread that we have today.

Got it. And if I can flip to the asset side. I mean on the -- not the tail, which I think, David, you've addressed within that. But on the -- I think it was 90% in our category 4 top performing -- performing above expectations. What's -- does that create a -- the market is getting more active, does it create a risk, [ quote unquote to that ] risk, that Those assets that are performing above expectations become acquisition targets in a more active market? And what's the risk that you see significant portfolio churn as we go through '25, if as everybody seems to think and as the fourth quarter activity just continues to ramp.

So it's a great question. If you look at overall levels of portfolio turnover in the last couple of years, they've been below normal levels, Robert. And that's for the obvious reason that M&A activity post May, June of 2022 in response to the interest rate hikes, M&A activity fell very significantly. So logic would tell you if our loans have a typical 5- or 6-year maturity and the usual average life of 1 of our loans is 3 years, and we've gone through a period when M&A activity and repayments have been lighter than usual.

But at some point, that's going to shift into an environment where M&A activity and portfolio turnover is going to be higher than normal. The good news is that when that happens, I think there will also be a lot of activity available for us in the new loan category. So my expectation would be that 2 things would happen at the same time. We'd see both higher new originations and higher repayments. And I think that's the pattern that we've seen in the past when we've seen this kind of pattern. I think that will make the period of higher portfolio turnover manageable.

Just one add-on question to that. Do you think of that -- would there be a change in the potential mix between large and core middle market if that activity picks up. Could you see the churn that you might have and -- have to shift more towards larger transactions, if that's where all the activity is concerned. Do you think that there's a potential for a mix shift there or anything like that?

So one of the great strengths of the platform, Robert, is that we participate in transactions that range from quite small, $20 million EBITDA companies to large companies to companies that have hundreds of millions of dollars in EBITDA and to whom we have across the platform, multibillion dollar loans. So we have an ability to move our origination to where we see the most attractive opportunities.

I will tell you to reiterate something that Matt said in our comments at the start of this call, we have seen the most attractive opportunities in the recent period in the core middle market. And my expectation is that that's going to continue in large measure because that's where our competitive advantages are strongest. That's where we're a dominant player. That's where our relationships and our incumbencies and our expertise are particularly valuable.

But having said that, I think being able to play the breadth of companies across different size ranges gives us the capacity to adjust if we're in an environment along the lines of what you're describing, if we're in an environment in which most of the new M&A activity is in larger companies, I don't think that's what's going to happen. I think when we start to see more activity, it's going to be across the spectrum. In fact, it may even be disproportionately middle market. But if it happened the way you described, I think that would be fine.

Your next question comes from the line of Ray Cheesman from Anfield Capital.

David, thanks for the follow-up. I was wondering, software has been a very attractive place for BDCs, including yours to put money to work and earn great returns. How do you feel about the category possibly being impacted going forward as artificial intelligence adjusts not only the hardware side with the NVIDIA story, but now it's getting into software with DeepSeek supposedly doing a lot more with software than it's ever done with hardware. So I'm just wondering, do you see the category possibly being a different kind of bucket going forward?

So you're right that software has been a very favorable industry for Golub Capital. We were very early in identifying software as being an industry with a lot of good credits almost 15 years ago now when we started being a large software lender. But a couple of comments. One is software has never been a no-brainer. They're good software companies and they are bad software companies. And we've learned how to be a very good software lender. Not all lenders are good software lenders. It takes a lot of skill and expertise to be able to understand the credit characteristics and strategic positioning of different software companies.

On a go-forward basis, I think that act of being able to distinguish between good software companies and less good ones is going to be even more important and harder. And one of the reasons for that is AI. Some software companies are going to be able to use AI as a means of enhancing the value proposition for their clients. And some other software companies are going to see situations arise where AI challenges their historical incumbencies.

So I think this is a very important area for firms to have really strong, internal expertise in order to evaluate and distinguish between the firms that are going to be winners and the firms that are going to be losers as a consequence of AI. Now AI is not the only thing that's going to distinguish winners and losers in software. There are many, many other factors at play as well. And I think firms that are good at software lending are going to need to be very good at evaluating those other factors as well.

And that concludes today's session. I will now turn the call back over to David Golub for closing remarks.

Well, thank you all for joining us today. I appreciate your attention and your time. As always, if you have further questions or issues that we didn't cover today, please feel free to reach out. And we look forward to talking to you next quarter.

This concludes today's conference call. Thank you for your participation. You may now disconnect.