Goldman Sachs BDC Inc

NYSE:GSBD

Earnings Call Transcript 2022-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 2022 Earnings Conference Call. Please note that all participants will be in a listen-only mode until the end of the call, when we will open up the line for questions.

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 conditions 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 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 Web site at www.goldmansachsbdc.com under the Investor Resources section, and which include reconciliations of non-GAAP measures to the most directly comparable GAAP measures. These documents should be reviewed in conjunction with the company's quarterly report on Form 10-Q filed yesterday with the SEC. This conference call is being recorded today, Friday, May 6, 2022, for replay purposes.

I'll now turn the call over to Alex Chi, Co-Chief Executive Officer of Goldman Sachs BDC.

[Alex Chi, Co-CEO and Co-President]

Thank you, Erica. Good morning everyone and thank you for joining us for our first quarter earnings conference call. I'm here today with my Co-Chief Executive Officer, David Miller; Gabriella Skirnick, our Chief Operating Officer; and Carmine Rossetti, our Chief Financial Officer. And we're all excited to present the quarter together for the first time as the company's management team.

I'll begin the call by providing a brief overview of our first quarter results before discussing the current market environment in more detail. I'll then turn the call over to David to describe our portfolio activity before we hand it to Carmine to take us through our financial results. And finally, we'll open the line for Q&A. So with that, let's get to our first quarter results.

Net investment income per share was $0.49. Excluding the impact of asset acquisition accounting in connection with the merger with MMLC, first quarter adjusted net investment income was $0.45 per share. And asset value per share decreased slightly to $15.80 as of March 31, a decrease of approximately 38 basis points or $0.06 from the end of the fourth quarter. 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, 2022.

With respect to our business this past March, the BDC platform was integrated into the broader direct lending business within the Asset Management Division of Goldman Sachs. This integration brought together a combined platform of almost 100 investment professionals in the Americas, focused solely on the private credit market.

One of the primary reasons for the integration was to provide the company with access to the broader Goldman Sachs platform, and a significant flow of additional investment opportunities, as well as the enhanced scale of capital that the broader private credit platform can provide. It's going very well thus far, and we've already begun to see the benefits of the integration.

In fact, within just the last three weeks of the quarter that the BDC was part of the integrated platform, we already had one new investment that was a direct result of these benefits. We're excited that there are a number of attractive investments in the pipeline that came through other channels within the broader private credit platform and other parts of Goldman Sachs. We look forward to highlighting these investments and further discussing the benefits of our integrated private credit platform in the coming quarters.

With respect to the market environment during the first quarter, we continue to experience volatility, which is highlighted by a continued period of higher raw materials and labor costs inflation, supply chain disruptions, the military conflict between Russia and Ukraine and continued increases in interest rates.

Given where current LIBOR and SOFR base rates are and projections for future rate increases, we anticipate that this rising rate environment will provide a positive tailwind to our earnings in the coming quarters, given substantially all of our assets are floating rate. Lastly, we, the management team, will continue to actively make decisions that serve the best interests of our shareholders.

To this end, we've decided to support our shareholders through this period of volatility by extending incentive fee waiver. Specifically, through and including the fourth quarter of 2022, we intend to voluntarily waive incentive fees, if necessary, in an amount to achieve at least $0.45 of adjusted net investment income per share on a quarterly basis. We believe that the support reflects our management team's outlook on the strength of the company's portfolio and ability to generate stable returns, while also factoring in the volatile market conditions.

With that, let me turn it over to my Co-CEO, David Miller.

[David Miller, Co-CEO and Co-President]

Thanks, Alex. During the quarter, we retained 132 million in new investment commitments, 40 million in new investments to four new portfolio companies, and 92 million of follow-on investments to 11 existing portfolio companies, primarily to finance M&A activity. Our new investment commitments remain focused on first lien senior secured loans.

Sales and repayment activity returned to more normalized levels this quarter, totaling 120 million, driven by the full repayment of investments in two portfolio companies and a partial sell down of investment in one portfolio company for need to [ph] portfolio composition.

As of March 31, 2022, total investments in our portfolio were 3.477 billion at fair value comprised of 97.2% senior secured loans, including 86.4% in first lien, 2.9% in first-lien last-out unitranche and 7.9% in second lien debt, as well as a negligible amount of unsecured debt and 2.8% in a combination of preferred and common stock and warrants.

We also had 453 million of unfunded commitments as of March 31, bringing total investments and commitments to 3.93 billion. As of quarter end, the company held investments in 124 portfolio companies operating across 38 different industries.

The weighted average yield of our investment portfolio at cost at the end of Q1 was 7.9%, unchanged from the prior quarter. The weighted average yield of our total debt and income producing investments at cost increased to 8.5% at the end of Q1 from 8.4% at the end of Q4.

Turning to credit quality. The underlying performance of our portfolio companies overall were stable quarter-over-quarter. The weighted average net debt to EBITDA of the companies in our investment portfolio decreased to 6.2x at quarter end as compared to 6.4x from the prior quarter. The weighted average interest coverage of the companies in our investment portfolio at quarter end was 2.5x, which is unchanged from the prior quarter.

While base rates are rising, our portfolio companies have significant breathing room that we believe supports increased interest expense without stressing the underlying positions. We estimate that 100-basis point increase in base rates would reduce interest coverage for our companies from 2.5x to 2.2x.

And finally, turning to asset quality. Non-accrual investments as of quarter end increased slightly to 2.8% and 2.2% of the portfolio cost and fair value, respectively. As we indicated on our last earnings call, we placed our investment in Convene on non-accrual in Q4 2021. Subsequent to Q1 2022, we monetized and fully exited our investment in Convene as part of its acquisition by Hudson's Bay Company, the parent company of Sachs.

After including all accrued interest fees and expenses, the investment yielded a 3.8% IRR and 1.08x [indiscernible] since inception. While the investment fell short of our initial expectations, we're satisfied with the outcome and believe the exit was in the best interest of our shareholders, because we're now positioned to reinvest the capital in the income-producing assets. Pro forma non-accrual status for the disposition of Convene prior to quarter end would represent 0.4% and 0.9% of the portfolio at fair value and cost, respectively.

With that, I will now turn the call over to Carmine to walk through our financial results.

[Carmine Rossetti, CFO, Treasurer and Principal Financial Officer]

Thank you, David. We ended the first quarter of 2022 with total portfolio investments at fair value of 3.5 billion, outstanding debt of 1.87 billion and net assets of 1.61 billion. We also ended the first quarter with a net debt to equity ratio of 1.15x, which is a slight increase from 1.14x at the end of Q4. Average net debt to equity for the quarter was 1.16x as compared to 1.02x in the prior quarter.

At quarter end, 54% of the company's outstanding borrowings were unsecured debt and 833 million of capacity was available under our secured revolving credit facility. Subsequent to quarter end, on April 1, the company's 155 million, 4.5% convertible notes reached their maturity. The notes matured out of the money for conversion and repayment was funded using capacity under our secured revolving credit facility.

In addition, post quarter end, we closed an amendment to our secured revolving credit facility which extended the maturity date from August 2026 to May 2027 removed certain financial covenants and replaced the LIBOR benchmark with a SOFR benchmark.

Before continuing to the income statement, as a reminder, in addition to GAAP financial measures, we will also reference certain non-GAAP or adjusted measures. This is intended to make the company's financial results easier to compare to results prior to our October 2020 merger with MMLC. These non-GAAP measures removed the purchase discount amortization impact from our financial results.

For Q1, GAAP and adjusted after tax net investment income were 50.2 million and 45.9 million, respectively, as compared to 57.3 million and 48.9 million, respectively, in the prior quarter. The decrease in quarter-over-quarter GAAP net investment income was primarily due to a reduction in accelerated accretion as a result of lower repayment levels this quarter as compared to last quarter, as well as a slight increase in interest and other expenses.

On a per share basis, GAAP net investment income was $0.49 compared to $0.56 in the fourth quarter. Adjusted net investment income was $0.45 compared to $0.48 in the fourth quarter. Distributions during the quarter totaled $0.45. Net asset value per share on March 31, 2022 was $15.80 as compared to $15.86 as of December 31, 2021.

With that, I'll turn it back to Alex and David for closing remarks.

[Alex Chi, Co-CEO and Co-President]

Thanks, Carmine. In conclusion, thank you all for joining us on our call. Notwithstanding in the current market backdrop, the platform delivered solid results this quarter. And we believe we have the portfolio that's primarily positioned in segments of the economy that are less vulnerable to the volatility associated with the current economic and geopolitical backdrop. We're very excited about the prospects for the company as a part of the broader direct lending platform at Goldman Sachs. We appreciate your time and attention today.

With that, I'll turn the call over to Erica to open the lines for Q&A.

[Operator]

Ladies and gentlemen, we will now take a moment to compile the Q&A roster. Your first question comes from the line of Finian O’Shea with Wells Fargo.

[Finian O’Shea, Wells Fargo]

Hi, everyone. Good morning. First question on the dividend and the fee waivers, appreciating that you're extending those waivers another year to meet the dividend it sounds like. The question sort of at this point is why a year given you seem very committed to earning it and keeping it. So sort of touch on the meaningless of that timeline? And also in today's market, what are the sort of levers you'll pull to get there if it's -- assuming a combination of yields and leverage, just where you see yourself driving there from a returns perspective?

[David Miller, Co-CEO and Co-President]

Hi. Good morning, Fin. Thanks for the question. On the dividend and the waiver, as we said, we're voluntarily waiving it through the end of the year. We do believe that there's a few factors at play here. Number one, a rising interest rate environment, which is going to benefit the platform. Number two, reinvesting the proceeds from Convene that we can do now in the interest earning assets. And number three, incremental leverage that we think we can put on the platform. We feel very good where the portfolio is positioned today with primarily first lien senior secured debt. We think leverage can tick-up a little bit. And all three of those factors will be able to increase this and support the dividend probably in the third or fourth quarter, we're not exactly sure where that's going to play out. We'll have to see where rates go too. But we feel pretty confident that we can cover the dividend in the back half of this year.

[Finian O’Shea, Wells Fargo]

Okay. Thanks. That's helpful. And then if you could provide an update on the platform integration and co-invest, I know there's a couple applications out there that grants you the ability to invest with parts of GCM that you were previously unable to, just any update on that progress, and if any co-investment is now happening?

[Alex Chi, Co-CEO and Co-President]

Hi, Fin. It's Alex. Thanks for the question. So as I mentioned, we bought the businesses together in early March. So we had three weeks within the quarter. And we already had one new investment that was a result of bringing the businesses together. And in that particular instance, we were able to speak for a larger part of the deal by bringing the platforms together. And so that allowed us to take a leadership position in the investment. So that's just one of the examples of how we've been able to realize the benefits of bringing the businesses together. It's going very well thus far. The teams are very familiar with the diverse pools of capital that we have. And with respect to the second part of your question, we are still waiting for the exemptive relief from the SEC, which would allow the firm to co-invest the balance sheet alongside the BDC. We're very confident that we will receive that relief in a very short order. So that's the update.

[Finian O’Shea, Wells Fargo]

That's helpful. And then I guess just a small follow up on that. You have the main platform funds and those origination verticals, understanding they're all important to creating now [ph]. By adding the final piece, which is the proprietary accounts, correct me if I'm wrong, how different does that make it from where you are now, having merged the platforms? What's the sort of additional benefit or change in origination when you complete the entire integration?

[Alex Chi, Co-CEO and Co-President]

Yes. Fin, from my perspective, the balance sheet investing just gives us the ultimate flexibility. It's the most flexible capital we have. Of course, it's the firm capital. We can go up and down the balance sheet. And so being able to deploy that side-by-side with the BDC vehicles is just going to give us much more flexibility. A lot of the other senior loan vehicles that we have, have more specific mandates. And so when we bring on the balance sheet capital, it's just going to be able to enhance the overall platform as it's the most flexible.

[Finian O’Shea, Wells Fargo]

Okay, great. That's all for me, and thanks so much.

[Operator]

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

[Alex Chi, Co-CEO and Co-President]

Again, thank you very much everyone for attending the call, and we appreciate your support. Thank you very much.

[David Miller, Co-CEO and Co-President]

Thanks, everyone.

[Operator]

And ladies and gentlemen, this does conclude the Goldman Sachs BDC, Inc. first quarter 2022 earnings conference call. Thank you for your participation. You may now disconnect.