Goldman Sachs BDC Inc

NYSE:GSBD

Earnings Call Transcript 2024-Q1

[Austin Neri, executive]

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 2024 Earnings Conference Call. Please note that all participants will be in 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 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 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 Resources section which includes 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, Wednesday, May 8, 2024 for replay purposes.

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

[Alex Chi, executive]

Thank you, Austin. Good morning, everyone, and thank you for joining us for our first quarter 2024 earnings conference call. I'm here today with David Miller, our Co-Chief Executive Officer; Tucker Greene, our Chief Operating Officer; and Stan Matuszewski, our Chief Financial Officer. I'll begin the call by providing a brief overview of our first quarter results and then discuss the current market environment in more detail. I'll then turn the call over to David and Tucker to describe our portfolio activity and performance before handing it off to Stan to take us through our financial results. And then finally, we'll open the line for Q&A. With that, let's get to our first quarter results.

Our net investment income per share for the quarter was $0.55. And net asset value per share was $14.55, a decrease of approximately 0.5% or $0.07 from the end of the fourth quarter. Our net investment income again exceeded our quarterly dividend but the excess was offset by net realized and unrealized losses during the quarter, which led to a slight decrease in NAV. On a fair value basis, first lien loans represent 96.5% of our assets as of March 31, which reflects our bias towards maintaining exposure to credits that are higher up in the capital structure. Consistent with prior quarters, all new investment commitments this quarter were the first lien credits.

As we announced after the market closed yesterday, our Board declared a second quarter dividend of $0.45 per share payable to shareholders of record as of June 28, 2024. This marks the company's 37th consecutive quarter of a $0.45 per share dividend totaling $16.65 per share since our IPO, excluding the special dividends we paid in 2021 following the merger with MMLC. Now with respect to broader market conditions, the syndicated loan market rebounded significantly in the first quarter, taking back share from direct lenders, namely in companies with larger enterprise values. We saw this trend on the large cap side of our private credit platform. However, we believe direct lenders will continue to find attractive opportunities to deploy capital where borrowers and their private equity sponsors value the certainty and flexibility that private credit provides.

As an example of that dynamic, we served as the largest lead lender and administrative agent and a loan to EQT in connection with their acquisition of Zeus, a manufacturer of critical components in the medical and industrial end markets. USA DeBusk is another example where our private credit platform was a lead lender and administrative agent. USA DeBusk provides industrial cleaning and specialty services supporting routine maintenance and refurbishments and chemical plants, refining and renewable facilities and other industrial infrastructure. Given our ability to draw on the broader Goldman Sachs platform, including our investment bank, GSBD and the private credit platform are poised to benefit from the significant backlog of sponsor activity that's channeling through our M&A franchise in addition to add-on or refinancing activity from our existing portfolio companies.

We remain confident that the $1.2 trillion of private equity dry powder and the pressure to return capital to LP investors will serve as a catalyst to restart what has been a relatively muted sponsor M&A market and we're starting to see a significant pickup in activity in our pipeline. Despite a lower-than-normal deal environment a year ago, first quarter M&A volumes were up 34% year-over-year off of a 15-year low of sponsor activity in 2023, and we saw a good mix of public to private, sponsor to sponsor and strategic acquisitions of portfolio companies, which also led to some nice harvest. Pressure on sponsors and monetize portfolio companies from legacy vintages will only continue to benefit private credit. It's worth noting that while we're seeing continued spread compression from supply-demand dynamics, credit fundamentals have remained in line with our expectations and recent originations are still exhibiting sensible overall leverage levels and low LTVs. Again, we remain committed to leveraging the broader private credit and Goldman Sachs platform for the benefit of GSBD shareholders in the quarters and years ahead.

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

[David Miller, executive]

Thanks, Alex. During the quarter, we originated $359.6 million in new investment commitments to 7 new and 13 existing portfolio companies. Sales and repayment activity totaled $115.7 million, primarily driven by the full repayment of investments in 4 portfolio companies. In particular, as we continue to upgrade the quality of the portfolio, we are pleased with the full repayment of one junior lien and an exit of an equity position. Turning to portfolio composition. As of March 31, 2024, total investments in our portfolio were $3.4 billion at fair value, comprised of 97.5% in senior secured loans, including 91.9% first lien. 4.6% first lien last-out unit tranche and 1% in second lien.

As well as a negligible amount in unsecured debt and 1.9% in a combination of preferred and common stock and warrants. As of March 31, 2024, the company held investments in 149 portfolio companies operating across 39 different industries. The weighted average yield of our investment portfolio at amortized cost at the end of the first quarter was 11.9% as compared to 11.8% from the prior quarter. The weighted average yield of our total debt and income-producing investments at our amortized cost at the end of the first quarter was 12.7% as compared to 12.6% at the end of Q4.

I will now turn the call over to Tucker Greene to discuss overall credit quality.

[Tucker Greene, executive]

Thank you, David. The weighted average net debt-to-EBITDA of the companies in our investment portfolio remained flat in 6.1x during the first quarter as compared to the fourth quarter. Importantly, our portfolio companies have both top line growth and EBITDA growth year-over-year on a weighted average basis. The weighted average interest coverage of the companies in our investment portfolio at quarter end remained flat at 1.5x in the first quarter as compared to the fourth quarter. And finally, turning to asset quality. During the quarter, specialty dental brands, also known as LCG Vardiman Black, a first lien debt position that was restructured and NPI, a second lien position for both restored to accrual status. As of March 31, 2024, investments on nonaccrual status decreased to 1.6% of the total investment portfolio at fair value from 2.3% as of December 31, 2023 and 3.3% of the total investment portfolio at amortized cost from 3.8% as of December 31, 2023.

I will now turn the call over to Stan Matuszewski to walk through our financial results.

[Stanley Matuszewski, executive]

Thank you, Tucker. We ended the first quarter of 2024 with total portfolio investments at fair value of $3.4 billion, outstanding debt of $1.8 billion and net assets of $1.6 billion. Our ending net debt to equity ratio as of the end of the first quarter was 1.10x, which continues to be below our target leverage of 1.25x. During the quarter, we closed a public offering of $400 million aggregate principal amount of unsecured notes due in 2027. The 2027 notes bear interest at a fixed rate of 6.375%. The net proceeds from the sale of the 2027 notes were used to pay down a portion of our secured revolving credit facility. At quarter end, approximately 68% of the company's total principal amount of debt outstanding was an unsecured debt, and we had $1.111 billion of capacity available under our secured revolving credit facility.

In addition to our newly issued 2027 notes, we have two separate unsecured notes due in February 2025 and January 2026, respectively. We plan to address these maturities at the necessary time. 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 Goldman Sachs Middle Market Lending Corp or MMLC. These non-GAAP measures remove the purchase discount amortization impact from our financial results.

For the first quarter, GAAP and adjusted after-tax net investment income was $60.8 million and $59.5 million, respectively, as compared to $61.8 million and $60.7 million, respectively, in the prior quarter. On a per share basis, GAAP net investment income was $0.55. Excluding the impact of asset acquisition accounting in connection with the merger with MMLC, adjusted net investment income for the quarter was $0.54 per share, equating to an annualized net investment income yield on book value of 14.8%. Total investment income for the 3 months ended March 31, 2024, and December 31, 2023 was $111.5 million and $115.4 million, respectively. The decrease in total investment income was primarily driven by a decrease in accelerated accretion of upfront loan origination fees and unamortized discounts.

We would note, however, that we did see an increase in PIK income as a percentage of total investment income, primarily driven by the restructuring of certain investments. Distributions during the quarter remained consistent at $0.45 per share. Our spillover taxable income is approximately $128.9 million or $1.15 on a per share basis which we believe provides continued stability on our consistent dividend since inception.

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

[Alex Chi, executive]

Thanks, Stan, and thanks, everyone, for joining our earnings call. We remain optimistic about the performance of our portfolio, the current environment and the outlook for deployment into attractive opportunities. With that, let's open the line for Q&A.

[Operator]

[Operator Instructions]. And we'll take our first question from Mark Hughes with Truist.

[Mark Hughes, analyst]

Yes. This is Mark Hughes. Can you hear me?

[Alex Chi, executive]

Yes, good morning.

[Mark Hughes, analyst]

Alex, you referred to a pickup in activity in the pipeline. I didn't quite get your full meaning there, I just didn't hear. Could you repeat that? What were you alluding to? Is that just a pipeline of new deal opportunities?

[Alex Chi, executive]

Yes. Just the pipeline new opportunities has really picked up materially and I think it just points to the themes that we've been talking about, which is the significant amount of dry powder, that private equity firms have that they will need to deploy but also the record amount of portfolio companies that need to get sold due to the DPI pressure that firms have, especially if they want to raise their next vintage of funds. And so that's leading to a pickup in activity in the first quarter, as you can see, we had a very strong quarter of originations actually more than the previous 2 quarters combined. And then if you saw our pipeline activity for the second quarter, it remains at significantly higher levels. And so we remain quite optimistic about deployment activity also just -- I think sponsors are just trying to get ahead of the election and some of the volatility that can come. So we are, again, just expecting quite a busy quarter.

[Mark Hughes, analyst]

You talked about what you're seeing. You talked about a strong rebound in the broadly syndicated market. Any prognostications about where equilibrium will end up in that between direct lenders and broadly syndicated and are we there yet? When will we get to kind of, again, more of an equilibrium in share?

[Alex Chi, executive]

Yes, it's a good question. It's hard to sit here and call the bottom right now. It's certainly, to your point, really it's determined by the supply-demand imbalance, which, again, just based upon the earlier comments about the pipeline activity really picking up. And I think it's -- I think most direct lenders are seeing that across the board. And so that should really help even not the supply/demand imbalance. And also, remember that for GSBD, it continues to be focused more on the middle market and that's not really an ecosystem where the banks play and what the BSL market plays. And so I think you're going to see more of that in the large cap sector. And so we're clearly seeing that on the large cap side of our platform but for the middle market, it's continued to stay steadier.

[Mark Hughes, analyst]

And then any commentary, it sounds like interest coverage is reasonably stable. Down at the tails, the number of companies that are at 1 or below. I don't know if you shared that, but would be curious what you're seeing any kind of stress in the portfolio.

[Alex Chi, executive]

Yes. We -- again, we haven't reported the percentage before, but it remains very stable. It has not ticked up. And again, it's a very small percentage, single-digit percentage of our portfolio.

[Operator]

Then we'll go next to Sean-Paul Adams from Raymond James.

[Sean-Paul Adams, analyst]

Guys can you hear me?

[Alex Chi, executive]

Yes, I can hear you.

[Sean-Paul Adams, analyst]

Perfect. On the portfolio risk side, the categories, it looks like you had a downtick in category 4, but in aggregate, the share of total category 3 and 4 of the portfolio went up. Can you talk a little bit more about the general health of the portfolio? It looks like in aggregate, the portfolio is just shifting up the ladder a little bit?

[David Miller, executive]

I mean I would say, overall, it's relatively stable. As you heard, we saw a couple of names come off nonaccrual, which we were pleased with this quarter. Names will kind of flow between 2 and 3, depending on performance from a -- we kind of look at it from how many material amendments we have this quarter. I would say that was actually down quarter-over-quarter. So we feel relatively good about the stability of the portfolio as we look forward to the rest of the year.

[Operator]

[Operator Instructions]. And there are no other questions in the queue at this time.

[Alex Chi, executive]

Great. Well, thank you very much for listening in on our earnings call, and we look forward to continuing to deploy into this very attractive environment. Thank you.

[Operator]

And that does conclude today's call. Thank you for your participation. You may now disconnect.