Goldman Sachs BDC Inc

NYSE:GSBD

Earnings Call Transcript 2018-Q1

[Operator]

Good morning. This is Ian, and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs BDC, Inc. First Quarter 2018 Earnings Conference Call. At this time, please note that all participants will be in a listen-only mode till the end of the call and we'll open up the line for questions.

I will now turn the call over to Ms. Katherine Schneider, Head of Investor Relations at Goldman Sachs BDC. Katherine, you may begin your conference.

[Katherine Schneider, Head of IR]

Thanks, Ian. Good morning, everyone. Before we begin today’s call, I would like to remind our listeners that today's remarks may include forward-looking statements. These statements represent the company's belief regarding future events that, by their nature, are uncertain and outside of the company's control. The company's actual results and financial condition may differ, possibly materially, from what is indicated in those forward-looking statements as a result of a number of factors, including those described from time to time in the company's SEC filings.

This audio cast is copyright material of Goldman Sachs BDC, Inc. and may not be duplicated, reproduced or rebroadcast without our consent. Yesterday, after the market closed, the company filed a preliminary proxy statement within SEC. The company will also file the SEC, a definitive version of the proxy statement that will be sent by provider to stockholders when available.

The information contained in the preliminary proxy statement is not complete and maybe changed. The company stockholders and other interested persons are advised to read the preliminary proxy statement and when available that if they have a proxy statement in connection with the board solicitation of proxies for the meeting because they will contain important information about the proposal.

Stockholders are able to obtain copies of the preliminary proxy statement and once available will also be able to retain copies of the definitive proxy statement without charge at the SEC’s website at www.sec.co or by contacting the company's media contact noted in the company's press release.

In addition yesterday after the market closed, the company issued an earnings press release and posted a supplemental earnings presentation both of which can be found on the homepage of our website at www.goldmansachsbdc.com under the investor resources section. These documents should be reviewed in conjunction with the company's Form 10Q filed yesterday with the SEC. This conference call is being recorded today May 4, 2018 for replay purposes.

With that I'll turn the call over to Brendan McGovern CEO of Goldman Sachs BDC.

[Brendan McGovern, CEO and President]

Thank you, Katherine. Good morning, everyone and thank you for joining us for our first quarter earnings conference call. Before getting into our first quarter financial results, I’d like to start by discussing the Small Business Credit Availability Act, which as you're probably aware was passed into law in late March and which permits GSBC to decrease its asset coverage requirement from 200% to 150% subject to either Board or shareholder approval.

This reduction in the asset coverage requirement is what commonly referred to as an increase in the maximum permitted debt-to-equity ratio from one-to-one, to two-to-one. We issued a press release and preliminary proxy statement last night, which describes that we'll be seeking stockholder approval at our upcoming annual meeting on June 15 to permit the company to avail itself of the increase leverage permitted by the law.

Importantly, if this proposal is approved by our shareholders, GSAM, the company's investment advisor will reduce its base management fee from 150% of 1.5% [ph] of gross assets to 1% of gross assets beginning immediately following shareholder approval. The company's Board of Directors unanimously recommends that shareholders approve this proposal.

We believe that granting the company increased balance sheet flexibility by allowing for a wider range of leverage levels, together with a significant reduction in the base management fee is in the best interest of our shareholders.

Our decision to pursue these changes is based on a careful analysis and incorporates feedback from a number of key stakeholders. Most importantly, we believe that the added balance sheet flexibility will allow us to pursue increased returns on shareholder equity, while also allowing us to invest in lower risk, lower yielding loans.

Based on our existing maximum permitted debt-to-equity ratio of just these lower risk, low yielding loans are currently dilutive to our targeted shareholder returns. We believe greater flexibility in asset selection is strategically important for permanent capital vehicle such as GSBDC, which will invariably be investing in capital through different credit cycles.

Our approach to implementing additional leverage will continue to be rooted in thoughtful risk analysis that considers the magnifying effect that leverage has on asset returns. I'd like to pause on this point and emphasize that we do not intend to simply add additional leverage across the Board for existing asset mix.

Instead, we expect to consider increasing leverage, on certain lower risk assets or leverage levels on other assets maybe left unchanged or even reduced. An example of how we have done this in the past is a selection of assets and leverage levels in our senior credit fund.

As a reminder our senior credit fund is comprised almost exclusively of lower risk, firstly in loans. Given this asset profile, we have historically levered the Senior Credit Fund's portfolio at a debt to equity ratio of between 1.5 to 1 and 2 to 1.

This strategy has performed exceptionally well since inception. The company has earned approximately a 13% IRR on its investment with no net realized capital losses and no non-accruals. As we have described to our shareholders before, our approach to investing is to seek the best risk adjusted returns and a borrower's capital structure, based on a fundamental bottoms up review of the borrower, its business model and its prospects.

While this approach will remain unchanged, we expect that over time, our asset mix will shift toward a higher percentage of first lien loans that may have lower yields, but which we believe also carry a lower risk. Assuming, we're successful in resuming these assets, we'd expect our leverage level to increase in tandem that we would also expect to maintain an appropriate cushion relative to the two-to-one statutory limit, consistent with our longstanding risk management policies.

I would also note that as we look over the horizon and think about other market environments that could come to pass in the future. We do not intend to be dogmatic and only pursue lower yielding, lower risk first lien loans.

There undoubtedly will be times and it is for specific deals when junior loans with higher yields will offer better risk adjusted returns. In those environments and situations, we respect our leverage profile to come down commensurately and reflect the higher asset risk that we might be assuming.

A reduction in the asset coverage requirement provides benefits in addition to expansion of the company’s investment strategy that I have described in detail. In particular the company will have a greater ability to raise capital from sources other than public equity capital markets.

This is important in order to capitalize on investment opportunities that present themselves at times when equity capital market conditions might not be favorable. Additionally, the large capital base resulting from the increase leverage level is likely to derive even greater deal flow to the company, as it becomes a more meaningful participant private debt markets.

Finally a lower asset coverage requirement gives the company an enhanced ability to make distributions to shareholders that are required under tax regulations, in order to maintain pass through tax treatment. We believe these are important reasons, shareholders should consider when voting on the proposal to reduce the asset coverage requirement.

While all of the BDCs in the industry now have the potential to increase leverage levels in the manner we are proposing, we believe that GSBDC is uniquely positioned to benefit from this change.

First, an increase in the debt-to-equity ratio places more importance on careful risk management. GSBDC benefits from the best-in-class risk infrastructure provided by the Goldman Sachs platform. Second, the availability in terms of financing become a critical driver of shareholder returns and debt-to-equity ratios increase.

Hereto GSBDC benefits from the relationships and capital markets expertise of the Goldman Sachs platform as we seek to optimize financing. Third, as I mentioned previously, we have a track record of implementing an investment strategy utilizing higher levels of leverage on lower risk, lower yielding assets.

This strategy has proved strong shareholder returns as evidenced by the success of our senior credit fund. Taken together, we believe these factors provide significant positive differentiation versus other competitors in the BDC industry.

I now want to spend a moment discussing the 50 basis point reduction in the base management fee that will be implemented if shareholders approve the proposed decrease in the asset coverage requirement. The Board and GSAM are in strong agreement that shareholders benefit from the economies of scale that an increase in GSBDCs leverage ratio would provide.

In addition the Board and GSAM considered that borrowing cost may increase as additional leverage incurred while asset yields may decline as the company pursues lower risk first lien assets.

In an effort to support the increased returns on equity, that are the objectives of the proposed increasing leverage, both the Board and GSAM believe reduction in the base management fee is appropriate. Reduction in the base management fee to 1% of gross assets will go into effect immediately following shareholder approval of the decrease in the asset improvement requirements.

The board and GSAM strongly believe that GSAM is both well aligned and well incentivized to continue pursuing strong returns on shareholder equity and quarterly GSAMs incentive fee structure will not be altered.

With that let me dive into first quarter results. We are pleased to report another solid quarter for our shareholders. Net investment income per share was $0.47 cents in Q1 which equates a 10.4% and our return on common equity. Our net investment income covered our dividend by 104% during the quarter representing the 11th consecutive quarter that net investment come exceeded the dividend.

We believe that this performance is result of attractive yields on our assets combined with low operating expense structure. As we announced the aftermarket closed yesterday our board to credit $0.45 per share dividend payable to shareholders of record on June 29th.

This equates to a dividend yield of 9.9% based on net asset value per share at the end of Q1. Moving on to investment performance and credit quality, overall credit quality was stable in the quarter. Our weighted average basis our portfolio companies experienced solid revenue in the earnings growth over the past 12 months.

At the end of the quarter we had one investment not non-accrual status representing just 1/10 of 1% of the investment portfolio at cost and 0% at fair value.

With that let we turn over to Jon Yoder.

[Jon Yoder, COO]

All right. Great. Thank you Brendan. So the first quarter of the year is typically slow for deal flow as an off to a flurry of fourth quarter activity in some time is required to restock deal flow pipelines. Given this context we were pleased with the first quarter activity levels which were a bit higher across our platform as compared with Q1 of 2017.

Much of the activity during the quarter resulted from transactions at existing portfolio companies driven primarily by acquisitions and investments. This appears to be part of a larger trend within the private equity community where more and more sponsors are seeking to deploy capital into add on investments, within their existing portfolio companies, often by acquiring smaller competitors in order to benefit from scale and synergies.

We think that this trend is positive for lenders as deploying capital into companies we are already invested in reduces certain risks. Another broad trend that's affecting private lending is the increase in LIBOR that continued throughout the quarter.

Three month LIBOR was up approximately 60 basis points and ended the quarter at 2.3%. One month LIBOR rose approximately 30 basis points and ended the quarter at 1.9%. Since we have more floating rate assets than floating rate liabilities an increase in LIBOR is generally positive for us.

However as LIBOR increases, there is typically a lag effect before we see its full impact in the interest payments that we receive from our borrowers this is because borrowing rates generally reset either monthly or quarterly to reflect the then current LIBOR.

Accordingly intra month or intra quarter changes respectively in LIBOR generally do not result in a change in the interest rate of our borrowers. While we expect that current rate resets and any further increases in LIBOR to be beneficial. We are cognizant of the potential for declines and spreads on new originations to offset some of these gains.

Turning to results for the first quarter, new investment commitments and funding were 67.2 million and 72.7 million respectively.

New investment commitments were across to new portfolio companies in 9 existing portfolio companies. Sales and repayment activity to whom 78.7 driven primarily by the full repayment from four portfolio companies, partial sales of one portfolio company, and as syndication of an investment in one other portfolio company.

One repayment to highlight this quarter was our first lien last out loan and equity co-investments into a company called myON, which is a digital reading platform serving K-12 students. We made the investment alongside the Top tier private equity firm approximately one year ago.

Our thesis was that myON provides a cost efficient medium for schools to offer a broad array of supplemental reading materials and that this was evidenced a very high contract renewal rates. Moreover, we expected meaningful growth in the business as we believed the market is significantly under penetrated.

During the quarter, myON was sold at a valuation that allowed us to earn an attractive return on our loan. And a 3.6 times multiple pre-tax on our equity co-investments. While equity co-investments are not a regular part of our investment strategy, we will invest modest amounts in equity alongside our loans when we have strong conviction in that potential returns on an equity investments.

During the quarter, the yields on our investment portfolio rose modestly. The weighted average yield on our investment portfolio ad cost moved from 10.6% to 11.1%. This modest increase was driven primarily by an increase in LIBOR.

Regarding portfolio composition as of the end of the quarter, total investments in our portfolio where 1 billion to 156.7 million at fair value comprised of 89.3% senior secured loans, which included 33.4% in first lien, 18.9% in first lien last out unit tranche and 37% in second lien debt, as well as 0.4% in unsecured debt, 2.9% in preferred and common stock and 7.4% in the senior credit funds.

We also had 24.7 of unfunded commitments as of the end of the quarter, bringing total investments and commitments to [281. 4 million]. Single name diversification of our portfolio is unchanged quarter over quarter as we continue to have investments in 56 portfolio companies operating across 30 different industries.

Turning to credit quality, the weighted average net debt to EBITDA of the companies in our investment portfolio at quarter end was 5.1 times which was a modest decrease from the 5.3 times at the end of the prior quarter.

The weighted average interest coverage of our companies at the end of the quarter, it was unchanged at 2.3 times. As Brendan mentioned, we continue to believe that the growth of the US economy combined with low levels of unemployment is a strong backdrop for our portfolio of investments in US middle market companies.

In general, we continue to see solid operating performance across these companies. The senior credit fund continues to be the company's largest investment at 7.4% of the total investment portfolio, and we're very pleased with the returns on this investment.

Over the trailing 12 months, the senior credit fund produced a 12% return on invested capital. As Brendan mentioned, we believe that the senior credit fund provides a good case study for how we might take advantage of our lower asset coverage requirement if shareholders approve our proposal.

Since its inception, the senior credit fund is invested approximately $920 million into primarily first lien middle-market loans, and it's produced to return to the company of approximately 13%. More over on a realized basis the portfolio has produced modest net capital gains with no non-accrual to date.

Over the course of its life the weighted average yield at cost of investments in the senior credit funds portfolio has varied between 6.6% and 7.6%, while leverage in the senior credit fund has averaged 1.8 times. While the performance of the senior credit fund provides a good example of our ability to successfully manage portfolios that are more levered, but have lower risk, lower yielding assets, our investment strategy, if we are granted, a lower asset coverage ratio is likely to expand upon the approach we have taken in the senior credit fund.

In particular, our investment strategy would focus on middle market loans that we directly originate. Our experiences that directly originated loans generally have more attractive pricing in terms.

With that let's turn to the activity and the senior credit fund during the quarter. The senior credit fund had new originations of 44.8 million in two new companies into existing portfolio companies. Sales and repayments were 64.2 million as a result of this investment activity, the total size of the investment portfolio and commitments was 466.8 million at quarter end.

The weighted average yield to cost on the investments at quarter end within the senior credit fund was 7.6%, which is relatively unchanged from the prior quarter. Firstly, loans comprise 96.7% of the total investment portfolio within the fund, and nearly all of our investments are floating rate with LIBOR floors and again, no investments to Senior Credit Fund on our non-accrual status.

The seniors credit fund portfolio remain diversified with investments in 32 companies operating across 19 different -- I'm sorry, 17 different industries. I will now turn the call over to Jonathan to walk through our financial results.

[Jonathan Lamm, CFO and Treasurer]

Thanks Jon. We ended the first quarter of 2018 with total portfolio investments at fair value of 1,257 billion, outstanding debt of 530 million and net assets of 727 million. Our net investment income per share was $0.47 as compared to $0.47 in the prior quarter.

Earnings per share were $0.46 as compared to $0.31 in the prior quarter. During the quarter, our average debt to equity ratio was 0.72 times, which was slightly higher than the previous quarter 0.7 times. We ended the first quarter with the debt to equity ratio of 0.73 times versus 0.75 times the end of Q4.

Turning into the income statement, our total investment income for the quarter was 35.5 million which was up from 34.2 million last quarter. The increase quarter over quarter was primarily driven by higher prepayment related income and higher interest income from the increase in LIBOR. Total expenses before taxes were 16.5 million for the first quarter as compared to 14.7 million in the prior quarter.

Expenses were up quarter over quarter, primarily driven by an increase in incentive fees and an increase in interest expense. Net realized and unrealized gains for the quarter million were 0.1 million. We had approximately $450,000 or $0.01 per share of tax provision related to our realized gain on myON.

We ended the quarter with net asset value per share at $18.10 $18.09 from the prior quarter. Our supplemental earnings presentation provides a NAS bridge average to walk you through the changes.

The company had $32.7 million in accumulated and distributed net investment income at quarter end resulting from net investment income that has exceeded our dividend in past quarters. This equates to $0.81 per share on current shares outstanding.

During the quarter we were successful in our ability to attract new capital to our revolving credit facility at attractive terms which we believe is a reflection of the strength of the GSAM platform. Specifically, we increased total commitments under our evolving credit facility to $695 million extended the maturity date to February 20, 23.

The extended maturity is an important benefit as we look to capitalize on market opportunities in the years ahead. Also, as noted earlier in the call, if stockholders approve the proposal through to use the company's asset coverage requirement to a 150%, GSAM base management fee will be reduced to 1% of gross assets beginning immediately upon receipt of stockholder approval. The annual stockholder meeting is scheduled to be held on June 15th, 2018. With that, I will turn it back to Brendan.

[Brendan McGovern, CEO and President]

Overall, we're pleased from produced another solid quarter for our shareholders. We are particularly excited about the recent legislation that gives a company the opportunity to reduce its asset coverage requirement in both the management team and the Board of Directors believe that approving this proposal is in the best interest of shareholders.

The ability to expand the company's investment strategy, increased flexibility, and capitalizing the company away from the equity markets and potentially extend returns on equity, a powerful reasons to approve the proposal.

We also believe we have approval of proposal will enable the global tax platform to provide even more value to shareholders and serve as a greater source of positive differentiation. As the importance of financing risk management increases.

However, we're always cognizant that the capital we managed belongs to our shareholders to both the management team and the board believe that approved it reduced at the requirement is in the best interest of shareholders. We look forward to responsible shareholders at the proposal contain our proxy statement and the vote at the annual shareholder meeting next month.

As always, we thank you for the privilege of managing your capital and we look forward to continue to work hard on behalf of shareholders or the remainder of 2018. With that, Ian will open up for questions.

[Operator]

[Operator Instructions] Our first question is from line of Jonathan Block from Wells Fargo Securities.

[Brendan McGovern, CEO and President]

Good morning.

[Jonathan Block, Wells Fargo Securities.]

Thank you so much for taking my question and good morning, everybody. So, I just want to make a declarative statement, this isn’t a question, shareholders as was myself greatly appreciate the dialog that you're developing clearly that's quite a very well received and appreciated discussion point.

And beyond that folks absolutely value flexible leverage as well as increased regulatory flexibility for folks that have greatly managed capital and chose to listen shareholders concerns that’s a credit to you Brendon, that’s a credit to your Board and folks definitely look forward to participating and we see so it's being widely supportive.

So that now allows us to maybe move into some individual questions on kind of the opportunities. And so let's, start with a view of the off balance sheet entity. And so Lamm and Brendan. Now in a 2 to 1 dynamic, how would you view the current off balance sheet JV because it kind of provided more leverage on liquid capital?

And now it would seem that you might have the opportunity to press de-emphasize and bring those types of loans on the balance sheet to make them, certainly with the lower fee more than economic for shareholders. So how does that push go between with your off balance sheet fund?

[Jon Yoder, COO]

Hey, John, its Jon Yoder here. Great question and thank you for your declarative statement. We appreciate the recognition there. So the senior credit fund as we talked about and as you've seen over time, it’s certainly been a really strong investment for us. And so we want to always keep that in mind and be cognizant of that.

The other thing is, as you pointed out the senior credit fund has historically focused on slightly different types of deals and what we've done on the balance sheet, not just in the sense that they are more traditional lower yielding, lower risk first lien, but also and importantly it's been this focus has really been on more nearly syndicated types of NIMs. Whereas, of course what we do on the balance sheet is really focused on directly originated deals.

And so as we think about the place of the senior credit fund in our balance sheet going forward assuming that shareholders agree with our recommendation to reduce the asset coverage ratio. I think that there is at least a viewpoint that the two strategies don't necessarily overlap and that they're not necessarily incompatible with each other.

That being said, I think we are very much engaged in a thorough top to bottom review of really both the financing and the asset guide. And so obviously considering what the best results or the best sort of path forward for the senior credit fund is a key component to that. And so I don't have specific stuff for you right now, but I wouldn't necessarily say assume that they're incompatible given that they do pursue slightly different investment strategy.

[Jonathan Block, Wells Fargo Securities.]

Different.

[Brendan McGovern, CEO and President]

I'd add there John. We don't want get you hard too far ahead of ourselves here. We are obviously out there with the proposal to shareholders as you described. We do anticipate and look forward to a really good robust dialog with our shareholders, obviously we also have our lenders to work with our current credit facility as most folks are probably where does contain a covenant that does not permit us to incur additional debt beyond one to one.

So we are in dialog with our lenders and we look forward to continuing to partner with them in a way that continues to give us attractive access to capital. But ongoing discussions and work to do there. So I think when you think of the order operations here, we’re getting to where you are going, certainly appropriate questions.

But a lot of work for the teams to do to even be in a position to start actually uprising those this chart, I think you question those, were strategic elements. Certainly team has lot of fire parks, but their like considerations there as well.

So you'll forgive ourselves for lack of specificity, it's not having spent time thinking through a lot of different options here. And as Jon described, we think it’s a variety of different scenarios. But a lot of work to do between them and a point where we are making definitive decisions in that.

[Jonathan Block, Wells Fargo Securities.]

And, we won't put the cart ahead of the horse, I mean, likely this is very attractive both in additional flexibility as well as the process by which you're going through asking these questions and getting them answered with all your constituencies.

Maybe what I'll ask is, if you Mr. Lamm if you look at your borrowing base today right on your revolver and looking some of the advance rates do you have a view on whether banks one could argue over-reliant on the 1 to 1 so they always needed that whatever they would put it advance rate might actually it's not going get fully.

I wouldn’t say they didn't put much thought into it, but certainly not as much as they would now in light of the increased leverage component. Do you see advance rates broadly for the space changing too dramatically just because I know you finance a lot of different things.

And then the next question is where does that put a view of the proprietary origination channel that you bring to Goldman Sachs probably wealth management division is extremely lucrative important. Does that in any way the types of deals that come through that channel would you say that they’re perhaps more amenable to a little bit higher leverage than in the past.

If you were not constrained by the regulatory caps or borrowing base question in advanced rates questions first? And then how that ties into the Private Wealth Management origination vertical that so many folks realize is a very unique secret sauce that’s offered?

[Jonathan Lamm, CFO and Treasurer]

Yes, I mean with respect to the for the borrowing base question definitely, I think that there is a view that the advance rates that were given were relatively higher and to some degree based on the fact that there was the one to one.

But when we look at the actual asset coverage we think that there is a dialog that we can certainly have with our financing providers to find a place that works for all of us considering the types of assets, that we'd be looking to leverage and looking at the types of assets that we have in the senior credit fund as a perfect example, for that.

So we think that there is definitely room. But your point is definitely well taken. There definitely is or has been reliance on that one to one, I think by the lending universe. But where the lenders -- but we are looking to and already started to have dialog with them from a partnership perspective. I'll turn it over to John to just the private wealth component of your question.

[Jon Yoder, COO]

Yes, Jon. So, definitely a good question, good observation, I think, I wouldn't necessarily view what the additional expansion in the size of the investment universe within Private Wealth is probably not that different in what it is within the sponsor community in the sense that, just like in the sponsor community.

There are situations where in the past, our capital didn't make sense, because it was too expensive, given the financing alternatives that the borrower had the same thing we've seen historically in the private wealth channel where there are times when our process capital, wasn't going to make sense given the other financing options, those folks have.

And so similarly, we do think that the increased -- decrease asset coverage ratio in the corresponding increase in the investment universe that opens to us will help facilitate for sure additional assets from the private wealth channel. But I wouldn't say it’s different than the expansion and we also expect to receive in the sponsor channel.

[Jonathan Block, Wells Fargo Securities.]

Got it, got it. And then the last question, just the fun one as it relates to the investment opportunity environment this quarter. So, I think one of the largest investments that you made, clearly was in investment ASC. And so I just kind of want to understand clearly how the sourcing occurred and then; B, in an environment and I think we're spending so introductions can be proactive provided it's on the right company and so we've seen a migration, right.

The question is how do you have understanding of the second lien component kind carries an owner of added risk, what were some of the thesis points or points that you looked at in making the investment that makes it attractive in this environment when folks are obviously being conditioned to focus on more of a first lien style strategy at this moment in time.

[Brendan McGovern, CEO and President]

Yeah, I'll take that, I think overall, Jon when you look at the quarter it was a pretty muted quarter of activity in general, where $67 million of gross realizations, no change the asset mix in any material way whatsoever. So specifically when you look at what we did the second liens everything single second liens within this quarter was a follow to an existing portfolio of company where we had benefit of seeing performance.

The strong performance might be in all those names as you mentioned, will be the biggest one follow-on investments I think $24 million.

ASC potentially animal supply company, very stable business, focusing on distributing pet food and pet products very strong secular trends in that business and we've got particular point of view on the merits of the quality of that company I think as we look forward we think that's like would be relatively short-lived asset in light of the quality of that on that business.

So, completely agree and understand in light to where the credit cycle has been focused on where we're putting most of our dollars when we step back and look in totality really not a lot to be gain from this particular quarter, and we entered the quarter at a relatively high leverage ratio compared to our target leverage ratios and exit the same.

And effectively, the capital that was investment the course of the quarter was a function of capital that was generated organically with that within the business and we take that in totality again really relatively insignificant changes in the total portfolio mix.

And of course we have a bigger topic I think for the industry and for us, in particular with respect to how we're moving forward on two to one tremendous flexibility going forward to change an asset mix in a way that doesn't that decrease shareholders returns.

And moreover, when you look at absolutely done with the management fee here a lot of flexibility that we have to pursue a wide range of assets. Even when you start to consider different outcomes in the financing environment. So we feel really good about where we're positioned today and we're looking forward to getting a strong response shareholder base that's kind of just brought in our investment going forward.

[Jonathan Block, Wells Fargo Securities.]

Got it. And then we look at the last credit statement was just yesterday I had a chance to host a large LP offsite. One of the largest state pension fund CIOs his main concern in this environment being private credit or even public credit, which is the public BC space clearly credit risk, but it was with the line.

And so, having the concern is I wanted to commend you for one when you're addressing not only the alignment issue through your fee structure. As you have said they want to, but also how you've approached this Web decisions you should be commended for it. And my congrats to yourselves. The Board, Goldman Sachs. Thank you for taking my question.

[Brendan McGovern, CEO and President]

Thanks, Jon. We appreciate it.

[Operator]

Our next question is from line of Leslie Vandegrift from Raymond James.

[Leslie Vandegrift, Raymond James]

Hi, good morning. Thank you for taking my questions.

[Brendan McGovern, CEO and President]

Hey, Leslie, how are you?

[Leslie Vandegrift, Raymond James]

Doing well. Thank you. You answered most of the questions on the leverage issue that I had this morning but just on a comparison the senior credit funds revolver right now is about 30 to 35 basis points, why does the price of your on balance sheet revolver depending on I guess the level of assets you have out and would you expect something similar to that you discuss the advance rate but the overall costs if you were to refi your on balance sheet revolver to the two to one limit?

[Brendan McGovern, CEO and President]

Yeah, I will take that first and then Jon you can jump in it. We don't Leslie want to start to get pinned down to a lot of specifics as I've described in some of the remarks. We have a fair bit of work to do one to get this proposal to our shareholders and ongoing discussions in partnership with our lenders.

I think fair to look at the senior credit fund financing that's in place I feel it’s right to recognized that was put in place at a handful of years ago and also came with provisions and if that mean it's expensive to repay it early.

And so I don't think when you look at the cost of that is indicative of where similar financings might be available to us today as we described that's all that we've been looking at over the past few months. And so as you think through your modeling in your views going forward you should recognize that the price that we had today on senior credit fund is probably wide where our market is.

[Leslie Vandegrift, Raymond James]

Okay. And then on this indication in the quarter the one that occurred just a little bit of color on that?

[Brendan McGovern, CEO and President]

Which area Leslie, are you looking at?

[Leslie Vandegrift, Raymond James]

The syndication that you had that you mentioned in the prepared remarks? The one that you had in the quarter that yes.

[Brendan McGovern, CEO and President]

Yeah. Sorry, sorry yes. Thank you very much for the question. So yeah the name that it is a small syndication, which is why it’s kind of was initially in our minds here, but the syndication was really to response your dynamic where a sponsor had a party they wanted us to bring in. And so we originated it and sold into and some piece that to another fund that the sponsor assets to do.

[Leslie Vandegrift, Raymond James]

Okay. Alright. And then my last question on the originations in the quarter, I know you mentioned that the lower activity quarter and that some of that had to do with the higher leverage level at the beginning and end of the quarter.

I know you have the private funds versus that you wish how much of that how much were you able to continue to earn in the private funds versus that you wished you could have co-invest so how much of the lack of leverage capability right now stop in the quarter?

[Brendan McGovern, CEO and President]

Yes, good question from platform perspective we did remain active in the quarter. When you look you at GSBDC there were 2 new names that we were able to co-invest alongside with our other 2 private vehicle and there were also handful beams whereby of the capital dynamic with it within the GSBDC did not participate.

So, as you know, as we do have in place. Our intention relief order it has very prescriber fatalities on allocation, all those allocations are reviewed and approved by our independent Board of Directors of those vehicles. But as we step back and look at that kind of GSBDC for sure what we're trying to do is maintain an optimal capital structure that can deliver attractive net investment income that we produced this quarter.

So as you think you participation in the deals going forward opportunities would be if the market is right, of course, we could raise new equity capital, which would facilitate new investments. But I think more likely we will continue to receive repayment, those are almost by definition impossible to predict with that with any certainty.

But as we look over our expectations for the course of 2018, we do anticipate or expect to see ongoing we payments, perhaps even that were elevated rates in this quarter, which would give rise to that we're organic capital creation in participation in the all those platform regulation.

[Leslie Vandegrift, Raymond James]

Thank you. And I guess around that. And then on the current definite green itself. If you do increase leverage. Is there any sort of issue have to be updated there with that relief, or is that just something that can move with the leverage.

[Brendan McGovern, CEO and President]

No, there is nothing that we're aware of regarding implications to the order. I think as we've described the practical implementation of the strategy. Now that we've kind of to shareholders of course successfully got getting the approval for shareholders to pursue, we do reduced asset coverage requirements.

And then second working collaboratively with our lenders to get relief under the undercover that's squirrel currently in place. Beyond that, from practical perspective of course arranging the financing to facilitate that would be the next, in the next step.

[Leslie Vandegrift, Raymond James]

Great, thank you so much.

[Brendan McGovern, CEO and President]

Thank you..

[Operator]

And our next question is from line of Douglas Mewhirter from SunTrust.

[Douglas Mewhirter, SunTrust.]

Hi, good morning. Jon Block comment on the fee reduction, I think that's a very positive in shareholder friendly action given the requirements of the higher the perspective, higher leverage. related to the leverage, and I apologize if you would addressed this on the remarks I came into the call about halfway through your opening remarks.

And have you had any discussions with the rating agencies of this possible move, I know sort of medium term fixed rate rated termed as it is actually pretty attractive to BDCs right now for to mitigate interest rate risk and duration risk. And I also know rating agencies have been very sensitive to increased BDCs leverage and I know there is already one downgrade, so I guess in how you're thinking about that possibility?

[Brendan McGovern, CEO and President]

Appreciate the question and so we've definitely been in dialog with the Rain agency that rates us and in broadly been following for the reaction of Rain agencies to the potential for the reduction in the asset coverage ratio. Look, I think I think even the public statement that have been made out there I'm sure most on the phone are well aware of there's probably a pretty high likelihood of a downgrade and so that was part of what we had to factor into our decision here.

That said you know long term, we think that this creates a better platform and we're hopeful that that will be recognized by rating agencies going forward. To take some of the reasons why we think it creates a better credit profile for lenders to our company are with increased leverage and allows for increased diversity of assets it allows for increased diversity of funding sources.

And I think it allows us to, in many environments and certainly in the environment that we're in to reduce asset level risk by going into, as we described slightly less risky assets, but probably also carry lower yields.

So the combination of those things, we think over time will be recognized by the rating agencies as things that we are an important consideration and hopeful and we're hopeful that that over time will result in positive from the from the rating agencies, but we understand shorter there other some turbulence here and understand that there's probably a reason the likelihood of a downgrade.

[Jonathan Lamm, CFO and Treasurer]

Yes, I would be for those where I've got opened to the potential implications. I think I've done described, when we look at this holistically fair say we've got a different point of view, the rating agencies when you factor in the flexibility when you factor in the business plan that we would pursue we spent a fair bit of time with S&P who does rate us today, what we emphasized with them is when you look at the Goldman Sachs could you see Goldman Sachs obviously has a tremendous risk infrastructure in place for that.

But I sincerely does differentiate us from the industry here don't forget, we are going access a bank holding. The infrastructure that is steeped in risk management and have a lot of controls we look at.

Within that, within that framework, I would also say I would trust and when you look at how we essentially we've been quite, quite prudent with quite thoughtful about how we've business any business plan that we take on. With your leverage would be in with full recognition of the volatility of the assets, and the appropriate capital structure for those assets.

So I think it was disappointing about the S&P response was a relative lack of willingness to take differentiated views with respect to platforms and their business plans. But that being said, even if there is a negative outcome. That's not going to sway us for what we think is the right course of action that we, that we can take we in our board sincerely think that getting the flexibility for the company that this was racially provide us in the in the big, big benefit to the company.

So we're going to stay the course furthermore two things there are concerns around any change the financial markets or increase cost of financing by virtue of how do you see coming out. Again, I think we've taken really sort of steps with respect to our expense structure.

When you think about a 50 basis point reduction on the entire asset stack that will come, that will be a good mitigating any negative implications that might arise from, I'll review it's coming that but we as a board with the Company are much more focused on the longer term.

This is up from a capital vehicle. This will be investing to maintenance. Many, many cycles. And so we're not just focused on the very short term elements of what kind of ROEs that we can produce. We think there's good opportunities there. But the bigger picture here is really what caused us to really want to pursue the flexibility that this legislation provides,

[Douglas Mewhirter, SunTrust.]

Thanks that was actually a very comprehensive answer and helpful. My last question regards, just help me understand maybe relative market size no, I'm not as familiar with the dynamics of the IOC BP, the upper tier of the first lien, middle market type loans, with that potentially, is that a fairly big market you would potentially tap into?

And I guess the context of the question is look, it's pretty slow activity wise in terms of the ins and outs your balance sheet and it actually maybe tough to I guess to rapidly fill up that bigger bucket. If approved by shareholders, right. I was wondering if you'd just a larger markets actually have more looked.

[Brendan McGovern, CEO and President]

I will take a quick stab Jon, reductions wealth yes. When you, when you look at our business model today, we're trying to achieve, trying to return our dividend is almost on a common equity were capped at 1 to 1 leverage. So, that dynamic here trying to achieve, the attractive returns with limitations on leverage, causes us to only really targets certain parts market that provide relatively high asset yields.

So by definition, the ability to maintain this higher levels leverage ratio is going to expand our market opportunity, whether it's into the upper part of the of the middle market, we're not, there are just many, many, more [indiscernible] and that's via the platform can take to pursue different assets to generate a similar return on shareholders' equity.

So again I think that's -- it's a really import actuation and the big component of our procedure. The bigger market opportunity, a broad and more diverse array of assets that we can seek improved the same returns. We think that they're much better outcome for our platform.

[Jon Yoder, COO]

Yes. I would add to that, well said. The only thing I would add is Doug, you said, either able to get in touch with that sort of firstly market and I guess I would, I would say we're already in touch with that market. And we live and breathe the private credit markets in the middle market, all day, every day and our approach historically has been, we, as you know, bottoms up analysis, we try to figure out where the best risk adjusted return is in any particular borrowers capital stack.

And today, if we determined that the best risk adjusted return is in, first lien, and that first lien ends up pricing tighter than our cost of capital that we simply can't participate. Whereas going forward, where we do benefit from a reduction in the minimum asset coverage ratio that will be something to be open to us. So as Brendan said factor there and it's just a matter of will our investment expand. Thanks a lot for answering my questions.

[Douglas Mewhirter, SunTrust.]

Thank you.

[Operator]

And our next question is from the line of Christopher Testa from National Securities.

[Christopher Testa, National Securities]

Hi, good morning guys. Thanks for taking my questions today. First just looking at obviously your comments on comparing the potential on balance sheet, loans SCFD, the SCFD growth is kind of been, lackluster despite producing a very good returns for you guys.

Just curious what's the opportunity set actually look like today, if you were granted the ability to increase leverage. What's the addressable opportunity set that you could actually be putting on the books.

[Brendan McGovern, CEO and President]

Yes. So, Chris, thanks for your question. Just going back to some of comment I made earlier, I would, think you're aware of this, but just remind you the senior credit fund is really been focused on sort of the upper part of the middle market where things start to get narrowly syndicated in less so less so on sort of the directly into transactions. And we've kept the directly with transactions on our balance sheet.

So, I do think, we do think that the senior credit fund. We, as we talked on the call last quarter, we've been pretty prudent with how we've been deploying capital there in that sort of narrowly syndicated, -- syndicated part of the upper middle market, we've seen spreads come in a bit over the last 12 months. Not necessarily, a big change quarter-over-quarter, but if you go back 12 months, it's come in.

If you look at structures are getting looser, and so we've been a little bit more cautious on that sort of syndicated part of the market. And you're right, have moderated tempered sort of the pace of growth are really kind of kind of flat line the size there.

When we talk about the benefit from an asset selection perspective of a decrease in the asset coverage ratio. I think what we would be focused on are directly originated deals that are probably a little bit below that upper part of the middle market. In our sandboxes historically been for our balance sheet deals, what we, what we refer to as the hard to the middle market, companies that are not upper middle market, not lower-middle market, but kind of right down the middle of fairway.

And in that part of the market we continue to see opportunities, interesting opportunities and we don't think that the, the pace of growth or lack of growth in the senior credit fund really portends very much for the opportunity set that we would intend to pursue in the some sort of a hardening middle market where would be granted that minimum asset coverage ratio reduction.

[Christopher Testa, National Securities]

Got it. So, is it safe to say in that case, but when you'd be looking to put on balance sheet in terms of lower yielding loans would obviously have lower EBITDA than the senior credit fund. Some comparable EBITDA borrowers was on balance sheet, but just say for credits lower yields.

[Brendan McGovern, CEO and President]

That's a fair generalization.

[Christopher Testa, National Securities]

Okay. And kind of sticking with you guys talk about kind of the core middle market and where you operate now obviously it's different from the likely syndicate and certainly broadly syndicated market, but how much over the past year or so, how much you've seen an increase in, kind of hub light and structures and what not kind of seeping into your directly originated market?

[Brendan McGovern, CEO and President]

So we haven't seen a lot in terms of covenant light, well I shouldn't say we have seen a lot, we've seen a lot when terms of what we've done, our book continues to be the overwhelming majority continues to be covenanted transactions that we're actually doing.

So we think there is still, there are still some discipline in terms of the covenants. In terms of structures, there is, I would say the, that the biggest cause of consternation within our investment committee is sort of adjustments in EBITDA.

And so, sponsor in particular, wanting to get credit for add backs EBITDA for things that haven't happened yet, but which they expect will happen for example, cost take out synergies resulting from acquisitions, things like that.

And so we have to be very, very cost careful and thoughtful around looking through what we think are legitimate things that should be added back are kind of one-time things that what reoccur and things that are speculative.

And so that's probably the biggest in my estimation, probably the biggest source of aggressiveness within the market right now is what people are willing to give credit for in terms of those add backs. But again, one thing that has held in reasonably well within the space. We play at least quarter over quarter. Our spreads we're not seen a massive decrease in spreads quarter over quarter or really over the last, call it 6 months or so, that seems to be reasonably steady.

[Christopher Testa, National Securities]

Got it. Okay, that's great color. Thank you. And to the extent, obviously that you do get the ability to lower the asset coverage increase your leverage obviously you're likely your average debt equity is going to be much higher than it is today and produce solid ROEs.

Just wondering how you think about that in the context of your dividend where it would seem that the current run rate of recurring earnings would be augmented in this scenario and whether you'd be looking to do specials or potentially if we could see a small bump up in the regular distribution?

[Jonathan Lamm, CFO and Treasurer]

Yes it’s not really I would say talk about changes in distributions. We have raised this question historically, we think there is, what we're trying to create value for shareholders. At the end of the day a few observations when you look at how the market value our stock, Retaining that excess capital into the company.

That in turn is generally a multiple is a better proposition. I would say. The more we want to make sure we've got to stability in that dividend for a long period time as we think.

Moving to the one there will certainly be a transition that takes place over relatively significant push kind of period time based on a few different this difference areas so far too soon to start thinking through modeling different expectations for things.

First, we want to get the approval from our shareholders, get through our process with lenders and I think as we continue to evolve over the course of 2018. I think those conversations become a bit more reasonable.

[Christopher Testa, National Securities]

Got it. Okay and last one for me, just how much of the current portfolio was sourced from your private wealth management channel. And I guess over the past year or so how is this sort of contribution match up against your expectations?

[Brendan McGovern, CEO and President]

Hey, Chris. Look we -- one of the things that is important to us about the private wealth channel is sort of the non-sponsored channel more broadly is that it gives us as a kind of I guess think it's 2 pistons in the engine.

Right, we've got our sourcing channel through private equity sponsors and we've got a sourcing channel through private equity, which is mostly private wealth and so when one is attractive and the other one is not, we can focus on the ones more attractive and vice versa.

I'd say that over the last 12 months or maybe 18 months what we've seen is that there is increased competition for companies in earlier stages of their life cycle. So where our capital under our current cost of capital where it's generally tends to make the most sense for borrowers for sponsored Private Wealth loan types of companies, or when they're trying to do leveraged acquisitions, when they're trying to engage in rapid growth strategies or things like that.

And so those types of businesses historically were given their size and the stage they were in their development, probably would not have drawn a significant amount of -- significant premium valuation from a private equity buyer. Meaning we trade perhaps I don't know 8 times instead of what it was larger and more established and so on could trade at a much higher leverage ratio. I'm sorry, much higher EBITDA multiple.

And so in over the last year or so, we've seen frankly more private equity firms pursuing more companies in earlier stages of their life cycle. And so what we're seeing is that with some of those companies in fact a good chunk of those companies.

The owners of those companies are choosing to say yeah, I could borrow money from Goldman and I could put that into growth and to grow my EBITDA by 5%, 10%, 15% or it might take me a few years to do that or I could sell it to a private equity sponsor at what is a very attractive multiple of my current EBITDA.

And the risk is, if they choose to borrow from us in 2 or 3 years, one they've added that EBITDA is the multiple has contracted the sponsors are going to pay for the business, then they have kind of running stand in place. They are absolute, the total valuation of the company is unchanged now outstanding the increase in EBITDA.

So given those dynamics, it's frankly becoming more competitive for us to originate the loans in kind of traditional ways that we had historically. We're still quite active don't get me wrong we -- actually we were -- we go through all of our opportunities there on a weekly basis and I think in our most recent meeting, we had about 127 different companies that were in contact with and then thinking through.

So, we're still quite active in the space, but I would say, relative to what we relative if you think about the 2 pistons which one has been producing more, it's definitely the sponsored side.

[Christopher Testa, National Securities]

Yeah, got it, that's great detail on those are all my questions, thank you.

[Operator]

And at this time there are no further questions, continued any closing.

[Brendan McGovern, CEO and President]

Great, well thank you very for spending time with us on this Friday morning. As always, we appreciate your time, attention if there are additional questions feel free to reach out the capital who heads up IR. And we look forward catch up soon have a great day.

[Operator]

Ladies and gentlemen, this does conclude the Goldman Sachs BDC, Inc First Quarter 2018 Earnings Conference Call. Thank you for your participation, you may now disconnect.