Goldman Sachs BDC Inc

NYSE:GSBD

Earnings Call Transcript 2023-Q1

[Austin Neri, IR]

Good morning. This is Austin Neri, a member of the Investor Relations team for Goldman Sachs BDC, Inc., and I would like to welcome everyone to the Goldman Sachs BDC, Inc. First Quarter 2023 Earnings Conference Call. Please note that all participants will be in listen-only mode until the end of the call when we 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 condition may differ, possibly materially from that 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 home page of our website at www.goldmansachsbdc.com, under the Investor Relations 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 5, 2023, 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]

Thank you, Austin. Good morning, everyone, and thank you for joining us for our first quarter 2023 earnings conference call.

I'm here today with my Co-Chief Executive Officer, David Miller; Gabriella Skirnick, our Chief Operating Officer; and David Pessah, our Chief Financial Officer.

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 Miller to describe our portfolio activity before we hand it off to David Pessah 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. Our net investment income per share for the quarter was $0.46. Excluding the impact of asset acquisition accounting in connection with the merger with MMLC, adjusted net investment income for the quarter was $0.45 per share equating to an annualized net investment income yield on book value of 12.5%. The increase in returns is largely a reflection of the increase in base rates during the quarter.

As we announced after the market closed yesterday, our Board declared a $0.45 per share dividend payable to the shareholders of record as of June 30, 2023. This marks the company's 33rd consecutive quarter of a $0.45 per share dividend totaling $14.85 per share since our IPO, excluding the special dividends we paid in 2021 post the merger with MMLC.

Net asset value per share decreased to $14.44 per share as of March 31, a decrease of approximately 1.2% from the end of the fourth quarter. This decrease was primarily attributable to unrealized losses in more junior and non-first lean positions. On a fair value basis, first lien loans are 92.6% of assets as of March 31, which leaves us well-positioned to withstand potential headwinds in the current marketing environment.

As we stated the last quarter, we have an emphasis within our pipeline on sourcing first lien senior secured investments. We also continue to remain dedicated to directly originated private credit opportunities and have not participated in the secondary market for broadly syndicated loans.

During the quarter, we completed a follow-on public offering of common stock at an accretive offering price above NAV per share, which resulted in net cash proceeds of $97.6 million. David will expand on this in more detail below.

Despite the continued media deal environment as a result of macroeconomic uncertainty coupled with the recent headwinds from the regional banking crisis during the quarter, we believe that the coming quarters may likely witness increased deal volumes through more strategic corporate actions, such as take private transactions or divestitures, as well as secondary LBOs. This view is further informed by increasing pipeline activity as well as the close dialogue we have with our Goldman Sachs investment banking colleagues.

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

[David Miller, Co-CEO]

Thanks, Alex.

During the quarter, we originated $2.1 million in new investment commitments, half of the amount in new investments to one new portfolio company and half as part of a follow-on investment to one existing portfolio company, primarily to finance M&A activity. Our new investment commitments were a 100% in first lien senior secured loans.

Sales and repayment activity totaled $12.6 million, primarily driven by the full repayment of investments by one Portfolio Company. We are pleased to note that this full repayment was by Tronair which was previously a watchlist name for us and a position that was a three on our risk matrix. Of note, Tronair was marked at 94 as of quarter end December 31 and was repaid at par.

Turning to portfolio composition, as of March 31, 2023, total investments in our portfolio were $3.5 billion at fair value comprising 97.4% in senior secured loans, including 89.3% in first lien, 3.3% in first lien/last-out unitranche, and 4.8% in second lien debt, as well as a negligible amount in unsecured debt, and 2.4% in a combination of preferred and common stock and warrants. We also had $325.2 million of unfunded commitments as of March 31, bringing total investments at fair value and commitments to $3.8 billion.

As of quarter end, the company held investments in 133 portfolio companies operating across 37 different industries. Weighted average yield of our investment portfolio at cost at the end of Q1 was 11.6% as compared to 11.0% from the prior quarter. The weighted average yield of our total debt in income producing investments at amortized cost increased to 12.2% at the end of Q1 from 11.7% at the end of Q4.

Turning to credit quality. The weighted average net debt to EBITDA of the companies in our investment portfolio had a slight decrease to 6.0x at quarter end from 6.1x at the end of the fourth quarter. Given the level of existing base rates, we would anticipate that future originations and transactions should reflect lower leverage metrics.

Just as importantly, and in response to your questions some of you have had with regard to macro headwinds over the past few quarters, our portfolio companies had both top-line and EBITDA growth on a year-over-year and quarter-over-quarter basis. As Alex discussed earlier, deal activity was muted throughout the quarter. Nonetheless, we expect sponsored dry powder coupled with management and active shareholder activity to seize current opportunities in the marketplace to drive future pipeline activity.

We remain selected from a credit and risk adjusted return perspective and maintain a long-term strategic view on capital deployment that is insulated by our orientation to first lien credit risk. The weighted average interest coverage of the companies in our investment portfolio at quarter end was 1.6x, which was flat relative to our prior quarter.

It's important to note that we calculate our coverage ratios based on current quarter metrics rather than a trailing or LTM basis. Were we to use an LTM calculation, then our coverage ratio of the companies in our investment portfolio would be 2.3x.

And finally, turning to asset quality. As of March 31, 2023, investments on non-accrual status amounted to 0.6% and 1.6% of the total investment portfolio at fair value and amortized cost respectively versus 0.3% and 2.1% at fair value and amortized cost respectively as of the quarter ended December 31, 2022. We had one junior non-first lien position placed on non-accrual and one Portfolio Company removed from non-accrual status as we exited the position.

I will now turn the call over to David Pessah to walk through our financial results.

[David Pessah, CFO]

Thank you, David.

We ended the first quarter of 2023 with total portfolio investments at fair value of $3.5 billion, outstanding debt of $1.9 billion, and net assets of $1.6 billion. Our ending net debt to equity ratio decrease to 1.2x from 1.32x last quarter.

As Alex mentioned on March 6, we opportunistically completed a follow-on public offering of common stock at an accretive offering price above NAV per share. The offering resulted in net cash proceeds of $97.6 million, which we used to reduce our leverage. The lowered leverage levels allow us to deploy capital into attractive risk adjusted opportunities in the current market.

At quarter end 44.3% of the company's total principal amount of debt outstanding was in unsecured debt and $612 million of capacity was available under our secured revolving credit facility. 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 remove the purchase discount amortization impact from our financial results.

For Q1, GAAP and adjusted after-tax net investment income were $48 million and $47.1 million, respectively, as compared to $67.6 million and $66.6 million, respectively in the prior quarter. The increase in quarter-over-quarter top-line investment income was primarily due to the increase in benchmark rates. The decrease in net investment income was due to the increase in our incentive fee. As a reminder, our incentive fee calculation is based on a 12 quarter look back inclusive of a total return limiter where any unrealized losses resulting from markdowns offset pre-incentive fee net investment income.

For the current quarter results from Q1 2020 were removed from the calculation, which included results from the initial impact of COVID-19 and meaningfully limited the amount of incentive fees that could be earned during the trailing 12 quarter period. Further, we voluntarily waived a portion of our fees during that same period including the quarter ended March 31, 2023, exemplifying our commitment and orientation to being shareholder friendly.

On a per share basis, GAAP net investment income was $0.46, and adjusted net investment income was $0.45 as compared to $0.66 and $0.65 respectively last quarter. Our spillover taxable income is approximately $85 million or $0.78 on a per share basis, which we believe provides continuous stability on our consistent dividend since inception.

Distributions during the quarter totaled $0.45. Net asset value per share on March 31, 2023 was $14.44 as compared to $14.61 last quarter.

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

[Alex Chi, Co-CEO]

Thanks, David.

In conclusion, thank you all for joining us on our call. While the deal environment was muted again this quarter, we are encouraged by some green shoots developing as our pipeline begins to improve. Moreover, our improved leverage profile allows us to capitalize on new opportunities as transaction volumes evolve. We appreciate your time and attention today.

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

[Operator]

[Operator Instructions].

And we will take our first question from Mark Hughes with Truist. Please go ahead.

[Mark Hughes, Truist]

Yes. Thank you very much. I wonder if you could you refresh me on kind of your maturity schedule on your debt, your credit facility on any motivation to make any changes there on your balance sheet?

[David Pessah, CFO]

Yes. Good morning, Mark. This is Dave Pessah. Looking at our debt stack, we have a senior secured revolving credit facility that has a maturity date of 2027. On the unsecured side, we have two notes, one, 2025 notes and a 2026 notes. They come due in February of 2025 and January of 2026. Right now, I think our liquidity profiles right in the mix of where we want to be between secured and unsecured. Where the market is, we'll continue to assess our liquidity levels and needs. At this time, I don't think we're going to really do anything, but again opportunistically, we'll assess where the market is and in the event, we want to reenter the unsecured market at a given point we will.

[Mark Hughes, Truist]

Makes sense. And then, any sense of spreads, now obviously deal activity was low in Q1. I think you described the pipeline building. How would you characterize both spreads? I think you mentioned leverage, you would look to be lower, but just a little more on what we might anticipate when things start to happen here.

[Alex Chi, Co-CEO]

Hey, Mark, it’s Alex. Thanks for the question and thanks for joining the call. Look, as you described, the environment continues to be very attractive and also leverage levels have come down on average while enterprise value multiple on deals have continued to hold up at very attractive elevated levels. And the leverage levels have come down, as we all know, just given the fact that base rates have gone up. And so these companies can in terms of the debt load that they have to service certainly those amounts have come down.

Look, in terms of spreads are still very attractive. They're still well into the 600s. I would say that to your point, just giving me the pipeline to the extent that there are some very attractive low levered, low LTB deal deals out there, you can see some pressure on spreads. But for the most part spreads continue to hold up quite well. I would not be surprised over time; again, I know we're all in a very, very attractive moment. At some point, spreads will start to go back to more normalized levels, but for the moment we're still seeing quite healthy spreads.

[David Miller, Co-CEO]

Yes. It's David. I might just add from that perspective, look for really attractive assets out there, you are seeing slight spread compression plus an OID going from what was very attractive 97 down to even the 98 to 97.5. So we do anticipate when M&A picks up and you talk to our investment bankers, they've got a decent pipeline of M&A opportunities as we go into the year that hopefully spreads stay where they are an OID, and we can take advantage of very attractive market for private credit.

[Mark Hughes, Truist]

And one final one, within your portfolio, any end market that -- that have -- you've maybe seen a little more deceleration in growth or interest coverage that may not be so obvious where are you seeing perhaps some signs of a little a different performance if anywhere, just sort of curious if anything non-obvious is showing up within the portfolio?

[David Pessah, CFO]

Yes. I wouldn't say there's any broad themes there. Look, it's going to be very company specific and end market specific. But when we take a look at our very first side portfolio, we don't notice any noticeable trends from a slowdown activity. Our portfolios continued -- companies continue to perform well with both top-line and EBITDA growing year-over-year, quarter-over-quarter. So we feel good about that.

[Alex Chi, Co-CEO]

And one other potential trend we're seeing is the fact that although revenues and EBITDA are still growing quarter-over-quarter, year-over-year. I think EBITDA is not growing as quickly as top-line just as companies continue to face some margin pressure. And so we're seeing just a slight bit of margin compression across the portfolio, but other than that, no notable trends.

[Operator]

[Operator Instructions].

We will go next to Arren Cyganovich with Citi. Please go ahead.

[Arren Cyganovich, Citi]

Thanks. Your interest income increased slightly quarter-over-quarter, but I would've expected a little bit more with given the moving the base rates. Is there -- was there anything kind of one-time in nature there, reversal of non-accrual interest or something in the prior quarter that was somewhat elevated?

[Alex Chi, Co-CEO]

Nothing from this quarter in terms of reversal of non-accrual that was sizable. Last quarter did have some non-recurring income from prepayment activity from a couple of names that, that's really the change quarter-over-quarter. That was about $3 million last quarter in repayment activity. Repayment activity this current quarter was pretty muted. If you look at our current levels that did increase quarter-over-quarter by about $4.5 million. So it's really the change in the non-recurring side that's making it look flat period over period.

[Arren Cyganovich, Citi]

Got it. All right. Thanks. And then in terms of the green shoots you're seeing in your investment pipeline, what -- how are these arising? Are these just more normal, natural kind of M&A or they follow-ons or are you seeing any kind of pull-back from traditional banking that where clients might be looking for alternatives relative to how they normally would finance?

[Alex Chi, Co-CEO]

That's a good question. I think that's a couple things. First, with respect to our activity, as you know, it's driven in large part by sponsor M&A. Although, overall levels are still muted certainly versus prior year say that the green shoots we're seeing are the fact that we're seeing more deal flow from the sponsor community. As you know, the amount of dry powder that sponsors have and continue to sit at record levels. I think now that there's a bit more stability in the market. I think that's going to unleash more M&A activity as there's more confidence that's out there. And so -- and for those factors and we're starting to see some more activity. I think as we skew more towards the larger side, I think you're going to see some more take private activity. You're going to see some more divestitures that are coming out of public companies that also are looking for liquidity more value creation. So for all those reasons, I think we're going to see some additional deal flow.

In addition, the existing portfolio companies continue to see very attractive add-on opportunities. So we're starting to see more deal flow from that perspective. So for all those reasons, I think we're starting to see some green shoots and as you know, just given our platform given that we're part of the broader institution, given our dialogue that we have with our investment bankers, they continue to tell us that seeing even more activity, their backlog continues to increase. And so I think that and that sets up well for a better deal flow environment in the second half.

[David Miller, Co-CEO]

Yes. As far as the regional banks and some of the issues going on there, we've seen a few opportunities from that. I think we're early days, we are optimistic about the opportunity set in around credit -- taking credit standards at some of the regional banks, which should bode well for some opportunities in the middle market.

[Operator]

[Operator Instructions].

And it appears we have no further questions at this time. I will now turn the conference back over to today's speakers for any additional or closing remarks.

[Alex Chi, Co-CEO]

Thank you very much for attending our call and have a great weekend.

[Operator]

And this concludes today's call. Thank you for your participation and you may now disconnect.