Goldman Sachs BDC Inc

NYSE:GSBD

Earnings Call Transcript 2021-Q1

[Operator]

Good morning. This is Erica, and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs BDC, Inc. First Quarter 2021 Earnings Conference Call. [Operator Instructions].

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 audiocast is copyrighted material of Goldman Sachs BDC, Inc. and may not be duplicated, reproduced or rebroadcast without our consent. 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 10-Q filed yesterday with the SEC. This conference call is being recorded today, Friday, May 7, 2021, for replay purposes.

I will now turn the conference over to Brendan McGovern, Chief Executive Officer of Goldman Sachs BDC.

[Brendan McGovern, President & CEO]

Thank you, Erica. Good morning, everyone, and thank you for joining us for our first quarter earnings conference call. I'm joined on the call today by Jon Yoder, our Chief Operating Officer; and Joe DiMaria, our Interim Chief Financial Officer.

I will begin the call by providing an overview of our first quarter results, followed by a brief look back over the last year as we navigated the COVID-19 health crisis. I'll then give a discussion of the current state of the lending environment before turning it over to Jon Yoder to describe our portfolio activity in more detail. Finally, Joe will take us through our financial results in more detail before we open the lines for Q&A.

So with that, let's get to our first quarter results. Q1 net investment income per share was $0.57 on after-tax net investment income of $57.6 million. Excluding the impact of asset acquisition accounting in connection with the merger of MMLC, adjusted net investment income was $0.48 per share.

Net asset value per share increased to $16 per share as of March 31, an improvement of approximately 60 basis points from the end of the fourth quarter. The increase reflected continued improvement in underlying portfolio company performance, coupled with ongoing market spread tightening.

As we announced after the market closed yesterday, our Board declared a $0.45 per share dividend payable to shareholders of record as of June 30, 2021. Further, we paid the first of our 3 installments of $0.05 per share special dividends on March 15, 2021. The remaining 2 additional $0.05 per share special dividends will be made to shareholders of record as of May 14, 2021, and August 16, 2021, respectively.

Suffice to say, the past year presented a unique and challenging backdrop for GSBD as the social and economic toll from the COVID-19 health crisis weighed heavily on U.S. companies, particularly middle market companies that we target for our investment strategy. Despite this negative backdrop, GSBD has performed well, and we are pleased that our long-term shareholders have been rewarded along the way with stable income from -- and dividends and a near full recovery in net asset value from the lows of Q1 2020.

As we look back over the past year, we would note the following: first, asset quality has been strong, and our portfolio companies have exhibited remarkable durability during the pandemic. Despite the economic upheaval, only 1 GSBD portfolio company was placed on nonaccrual over the last year, amounting to just 30 basis points of total assets.

Our focus on companies in growing sectors of the economy with strong value propositions and nondiscretionary demand drivers has served us well and will continue to be the cornerstone of our approach.

In addition, we believe our balance sheet discipline and strong risk management culture was on full display during the crisis. Exiting Q1 of 2020, as the pandemic was unfolding, more than half of our liability structure was in termed out unsecured bonds. The flexibility afforded by the structure ensured that our secured lenders remain significantly overcollateralized even as asset prices dropped during the early days of the pandemic.

With the benefit of a strong capital base, we were able to execute on opportunities, including the merger with MMLC, which more than doubled the company's size and delivered significant deleveraging at a point in time when balance sheet strength was of paramount importance. This execution has enabled us to access capital at attractive terms from the unsecured market.

While there may still be uncertainties regarding the pandemic and its impact, we are very pleased that the business has exhibited remarkable resiliency during this period. As we look forward, the reflation has transpired on the back of the accommodative fiscal and monetary policy has led to a very strong capital markets backdrop. As we noted last quarter, repayment activity has picked up in recent months, and we see this trend continuing on the back of the strong M&A environment. The platform remains well positioned to capture and grow share in the Middle Market Lending space, and we will remain disciplined on new opportunities, keeping a strong focus on quality.

With that, let me turn it over to Jon Yoder.

[Jon Yoder, COO]

All right. Thanks, Brendan. As Brendan mentioned, the strong capital markets environment during the quarter enabled the team to be active on the new origination front. Our new investment commitments remain focused on senior secured loans and included both new and add-on opportunities to existing portfolio companies.

During the quarter, we made 13 new investment commitments, 4 of which were to new portfolio companies and 9 that were to existing portfolio companies. Together with fundings of previously unfunded commitments, total capital deployed was approximately $196 million.

Sales and repayment activity totaled $254 million in repayments, driven by the full repayment of investments in 10 portfolio companies. One notable repayment resulted in the monetization of a loan that we made originally in December 2018 and included in equity co-investment into a company called Wrike, a SaaS-based project management and cloud collaboration company, which was acquired by a strategic in March of this year.

The first lien loan repayment resulted in a 10.4% IRR and was augmented by a 3.3x money multiple on the equity co-investment.

Turning to portfolio composition. As of March 31, 2021, total investments in our portfolio were $3.202 billion at fair value, comprised of 96.8% in senior secured loans, including 78.1% in first lien, 4.3% in first lien/last-out unitranche and 14.4% in second lien debt as well as a negligible amount in unsecured debt and 3.2% in preferred and common stock.

We also had $223.8 million of unfunded commitments as of March 31, bringing total investments and commitments to $3.426 billion. As of quarter end, the company had 118 portfolio companies operating across 38 different industries. The weighted average yield of our investment portfolio at cost at the end of the quarter was 8.4%, which was the same as at the end of the fourth quarter. The weighted average yield of our total debt and income-producing investments at cost increased to 8.8% at the end of the quarter, up from 8.7% at the end of the fourth quarter.

Turning to credit quality. The underlying performance of our portfolio companies overall was stable quarter-over-quarter. The weighted average net debt-to-EBITDA of the companies in our portfolio was 6x at quarter end, again, unchanged from the end of the fourth quarter. The weighted average interest coverage of the companies in our investment portion was up slightly to 2.5x as compared to 2.6x at the prior quarter.

As of the end of the quarter, investments on nonaccrual status were 0.3% and 0.7% of the total investment portfolio at fair value and amortized cost, respectively, which remained unchanged from the end of the fourth quarter.

I'll now turn the call over to Joe to walk through our financial results.

[Joseph DiMaria, Interim CFO & Interim Treasurer]

Thank you, Jon. We ended the first quarter of 2021 with total portfolio investments at fair value of $3.2 billion, outstanding debt of $1.61 billion and net assets of $1.63 billion. We also ended the first quarter with a net debt-to-equity ratio of 0.96 compared to 1 at the end of the fourth quarter.

At quarter end, 63% of the company's outstanding borrowings were unsecured debt and $1.1 billion of capacity was available under GSBD's secured revolving credit facility. Given the current debt position and available capacity, we continue to feel we have ample capacity to fund new investment opportunities with borrowings under our credit facility.

Before continuing to the income statement and balance sheet, as a reminder, in addition to GAAP financial measures, we will also reference certain non-GAAP measures. This is intended to make GSBD's financial results easier to compare to the results prior to our October 2020 merger with MMLC. These non-GAAP or adjusted measures remove the impact of the merger-related purchase discount write-off and subsequent amortization.

For Q1 2021, GAAP and adjusted after-tax net investment income were $57.58 million and $48.44 million, respectively, as compared to $55.34 million and $45.23 million, respectively, in the prior quarter. The increase quarter-over-quarter was primarily due to the timing of the merger at close in Q4 as well as increased income from GSBD's historic origination activity during Q4. On a per share basis, GAAP and adjusted net investment income were $0.57 and $0.48 per weighted average share, respectively, as compared to $0.59 and $0.48, respectively, in the fourth quarter of 2020. The per share decrease is the result of an increase in post-merger weighted average shares outstanding.

In addition to the $0.45 regular distribution declared in February and paid on April 27, the first of three $0.05 special distribution was paid on March 15. We will be paying the other 2 special dividends on June 15 and September 15 to eligible holders of record.

Earnings per share were $0.60 in the quarter, fully covering both the regular and special distributions mentioned earlier. This contributed to a net increase in net asset value per share of $0.09, with ending NAV per share of $16, representing a 60 basis point increase quarter-over-quarter.

With that, let me turn it back to Brendan for closing remarks.

[Brendan McGovern, President & CEO]

Great. Thank you, Joe. As we have discussed, we are pleased with the resilience of the business in the face of significant challenges posed by the COVID-19 health crisis. I'd like to thank each and every member of the GSBD team for their outstanding focus, dedication and professionalism over the past year and for all their efforts to produce strong financial results for our shareholders. And as always, I'd like to thank you for the privilege of managing your capital.

With that, Erica, let's open up the line for Q&A.

[Operator]

[Operator Instructions]. Your first question is from Finian O'Shea with Wells Fargo Securities.

[Jordan Wathen, Wells Fargo Securities]

This is actually Jordan Wathen calling in for Fin today. I just have a couple of questions on the portfolio. Just a couple of questions on the portfolio. So coming through investments this quarter, it looks like it was kind of tilted towards software. Obviously, one quarter doesn't really make a trend, but can we kind of take that as maybe a hint, I guess, of where the portfolio is going from here?

[Brendan McGovern, President & CEO]

Yes. Jordan, thanks for the question. I don't think I would agree there's nothing notable in terms of a change in direction or anything that I think would hint towards any different portfolio construction prospectively. I think, as you know, technology, in general, growthier areas of the economy, certainly software, in particular, have been a very big theme in the portfolio going back several years. And certainly, as we look back over the past year and the volatility in the economy, other business models being a bit more cyclical in nature, that area has served to be a very, very good place to be. And we think that there continues to be very good opportunities within that space for sure.

Other themes within the portfolio would be other nondiscretionary, economically sensitive areas of the economy, I think, other business services, health care services and technology have also been strong proponents of the portfolio here for a period. So overall, I would say, a lot of diversity. When we look at the portfolio today, 118 different underliers, very significant increase over the past several years, and we've talked about this a bunch benefiting from the growth in the broader platform.

So I think overall, a very diverse portfolio. And I think the sectors where we've leaned into have been among the better performing sectors.

[Jordan Wathen, Wells Fargo Securities]

Okay. That's fair. And so another one, just looking at once I got marked down this quarter, it looks like Convene, Park Avenue, kind of stood out for $5 million markdown this quarter. Looks like some kind of combination of co-working or meeting space in New York City. So I appreciate this is a single name, private company. Maybe you could just give us -- maybe a little more about that business, maybe why it's getting a mark here, given that it feels like we're seemingly, hopefully, coming out of pandemic?

[Brendan McGovern, President & CEO]

Yes, that's right. And I'm sure we've talked about this name in the past on some prior calls. One of the few businesses in the portfolio, I would say, is squarely in the crosshairs of a lot of the behavioral issues associated with pandemic. So Convene is focused on providing shared meeting space services and leading -- it's a first lien investment in top of the capital structure, very well structured, leading into the pandemic, really performing quite, quite well, broadly benefiting from a trend around people wanting to optimize their real estate footprints.

One of the least efficient uses of your real estate is a big shared meeting space that gets used on a less frequent basis, so big secular tailwinds driving their business. But of course, in the lockdown environments, a lot of challenges within that business, really, a remarkable, I would say, management effort to get the business's cost structure down significantly to reduce the rent payments quite significantly as well.

In addition, we've had significant support from the equity shareholder base that has infused additional liquidity into the company. So we, like you, are looking forward to a bit more of a normalization of behavior more broadly. And I think in the current environment, appropriate to mark that investment down. But like I noted, we do take comfort in junior capital beneath us coming into the business and more broadly, the vaccine rollouts that are really starting to take hold here, resulting in a very different return to office, for example. And I think just more significant social interaction.

[Operator]

At this time, there are no further questions. Please continue with any closing remarks.

[Brendan McGovern, President & CEO]

Great. Thank you, Erica. And of course, thank you, everybody, for dialing in and listening to the call. To the extent you do have any additional questions, please feel free to reach out directly to the team. And I hope you enjoy a great weekend. Thank you.

[Operator]

Ladies and gentlemen, this does conclude the Goldman Sachs BDC, Inc. First Quarter 2021 Earnings Conference Call. Thank you for your participation. You may now disconnect.