Goldman Sachs BDC Inc

NYSE:GSBD

Earnings Call Analysis

Strong Net Investment Income Despite Some Portfolio Markdowns

Goldman Sachs BDC reported strong results for Q2 2024, with net investment income per share increasing 7.3% to $0.59. However, net asset value per share decreased by 6% to $13.67, primarily due to unrealized losses in three software investments: Lithium Technologies, Pluralsight, and Zipari. Despite these challenges, the company achieved its highest level of new originations since integrating into Goldman Sachs' private credit platform, originating $440 million in new investments. The board declared a consistent $0.45 per share dividend for the 38th consecutive quarter【4:0†source】【4:1†source】【4:3†source】【4:4†source】.

Earnings Overview

In the second quarter of 2024, Goldman Sachs BDC Inc. reported a net investment income (NII) per share of $0.59, representing a 7.3% increase from the previous quarter. Despite this income growth, the company's net asset value (NAV) per share decreased to $13.67, down approximately 6%, largely due to net realized and unrealized losses linked to three main investments: Lithium Technologies, Pluralsight, and Zipari. Over 70% of the unrealized losses were attributable to these holdings placed on nonaccrual status, indicating underperformance.

Challenges in the Portfolio

The loss in NAV was significantly impacted by markdowns in these specific investments, which are categorized as recurring revenue software loans. For Pluralsight, they are engaged in restructuring efforts alongside other lenders to optimize recovery efforts, a common approach for managing distressed assets within the portfolio. The sentiment within the company emphasizes caution, with a selective approach to new software loan investments, especially considering the economic landscape.

New Investment Commitments Reveal Strong Demand

Despite the setbacks in certain investments, the firm experienced robust origination activity during the quarter. GSBD originated $440 million in new investment commitments across 10 new and 15 existing portfolio companies. This activity marks the highest quarterly origination volume since the integration of the Goldman Sachs private credit business over two years ago and reflects a 4x increase in investment activity compared to the first half of 2023. This surge in deal flow comes at a time when the backdrop of M&A activity appears relatively stable.

Focus on Senior Secured Loans

As of June 30, 2024, approximately 98% of the company's portfolio investments were in senior secured loans, predominantly in first lien positions. This strategic alignment underscores a preference for less risky investments, with a focus on higher up in the capital structure during a challenging economic environment. Moreover, around 64.4% of total outstanding debt remains unsecured, providing flexibility for future investments.

Financial Ratios and Stability

The company's net debt-to-equity ratio stands at 1.19x, slightly below their target leverage of 1.25x, indicating room for additional growth in investments without exceeding leverage thresholds. On average, portfolio companies maintain an interest coverage ratio of 1.5x, stable from the previous quarter. This stability, combined with spillover taxable income of $143.3 million ($1.23 per share), suggests that the dividend payout remains secure.

Dividend Consistency

Continuing a tradition of stable dividend payments, the firm announced a third quarter dividend of $0.45 per share. This consistent distribution to shareholders marks the 38th consecutive quarter at this level, totaling $17.10 per share since the company's IPO, excluding special dividends granted in previous years.

Outlook and Strategy

Looking forward, Goldman Sachs BDC aims to recycle capital by re-deploying resources toward new and appealing investment opportunities, even in light of the recent markdowns. They remain committed to a meticulous evaluation of potential borrowers, particularly those displaying strong profitability and robust growth in mission-critical areas. Management believes that such a calculated approach will maximize shareholder value moving forward.

Earnings Call Transcript 2024-Q2

[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. Second Quarter 2024 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 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 website 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, August 9, 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 second quarter 2024 earnings conference call. I'm here today with David Miller, our Co-Executive Officer; Tucker Greene, our Chief Operating Officer; and Stan Matuszewski, our Chief Financial Officer.

I'll begin the call by providing an overview of our second quarter results and then discuss the current market environment. I'll then turn the call over to 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 second quarter results.

Our net investment income per share for the quarter was $0.59, up 7.3% from the previous quarter. Net asset value per share was $13.67, a decrease of approximately 6%. 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 the decrease in NAV. More than 70% of the unrealized losses in the quarter were related to markdowns in 3 investments within the portfolio, Lithium Technologies, Pluralsight and Zipari. Both Lithium and Pluralsight were placed on nonaccrual status in the quarter.

As it relates to Pluralsight, we're currently working with the other lenders towards an orderly restructuring, which we believe will contribute towards maximizing recovery for our investors. We recognize that Lithium, Pluralsight and Zipari are recurring revenue software loans. As it relates to how we invest in recurring revenue loans following the integration of GSBD into the broader Goldman Sachs private credit platform, we remain very selective, focusing on borrowers who we believe are highly profitable, scaled and display strong growth with best-in-class technology and software products that are mission-critical for their customers regardless of the economic environment.

When evaluating new software investments on the current platform, we leverage both our investment team's experience, where we have professionals dedicated to the software sector as well as the broader engineering expertise of Goldman Sachs, where we have thousands of software engineers who evaluate and implement best-in-class technology every day.

Finally, it is worth knowing again that we have seasoned professionals dedicated towards restructurings with the resources and expertise required to work with our investment teams to handle underperforming names. We believe this assists with maximizing recoveries and contributes to our low annualized loss ratios across the Goldman Sachs private credit platform that's been investing for nearly 3 decades.

Moving forward, we aim to continue to recycle capital as we relieve repayments and bolster the portfolio with compelling new originations. On that front, we're very pleased with our new originations this quarter. As GSBD originated more investments in the second quarter than in all of 2023. In fact, this quarter marks the highest level of origination activity since the integration of the Goldman Sachs private credit business just over 2 years ago when GSBD was able to take advantage of being part of the broader Goldman Sachs private credit platform.

On a fair value basis, first lien loans ticked higher to 97% of our assets as of June 30, which reflects our bias to maintaining exposure primarily to investments that are higher up in the capital structure. And consistent with prior quarters, substantially all new loan commitments this quarter were to first lien credits. As we announced after market close yesterday, our Board declared a third quarter dividend of $0.45 per share payable to shareholders of record as of September 30, 2024. This marks the company's 38th consecutive quarter of a $0.45 per share dividend totaling $17.10 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 significant growth in our originations in the second quarter reflects both the improving M&A environment and the expansive platform capabilities that we've been discussing for a number of quarters. GSBD also continues to benefit from potential origination opportunities through the broader Goldman Sachs franchise, including the Investment Bank. As another example of this, within the quarter, our direct lending platform, including GSBD led and acted as administrative agent on a loan that helped TPG acquire Classic Collision, which is the fourth largest multisite operator of collision repair centers in the United States.

Our Investment Banking division was engaged by Classic Collision as sell-side adviser, which helped us move quickly to evaluate the opportunity, provide a financing proposal and ultimately be selected by TPG for the acquisition financing in a highly competitive environment.

During the quarter, we leaned into the firm's long-standing expertise in the data center sector to lead the financing of U.S. Signal, a hybrid colocation and cloud services provider, operating 9 data centers in the Upper Midwest. Given our ability to move with speed to diligence and execution, we were able to take lead agent position and were awarded a larger hold size in the transaction.

With that, let me turn it over to our Chief Operating Officer, Tucker Greene, to discuss new investments this quarter and our overall credit quality.

[Tucker Greene, executive]

Thanks, Alex. During the quarter, we originated $440 million in new investment commitments to 10 new and 15 existing portfolio companies. And as Alex mentioned, this is indeed the highest level of originations and for GSBD during the fiscal quarter since the integration of our platform in early 2022. Through the first half of 2024, investment activity across Goldman Sachs direct lending Americas platform is up nearly 4x on a dollar basis, and 2x on a deal basis versus the first half of 2023 despite relatively flat M&A activity. Sales and repayment activity totaled $226.5 million, primarily driven by the full repayment and restructuring of our investments in 6 portfolio companies.

Turning to portfolio composition. As of June 30, 2024, total investments in our portfolio were $3.52 billion at fair value comprised of 98% in senior secured loans, including 92.3% in first lien, 4.6% in first lien last-out unitranche and 1.1% in second lien debt as well as a negligible amount and unsecured debt, and 1.8% in a combination of preferred and common stock. As of June 30, 2024, the company held investments in 155 portfolio companies operating across 38 different industries. The weighted average yield of our investment portfolio to amortized cost at the end of the second quarter was 11% as compared to 11.9% from the prior quarter. The weighted average yield of our total debt and income-producing investments at amortized cost at the end of the second quarter was 12.3% as compared to 12.7% at the end of Q1. The weighted average net debt-to-EBITDA of the companies in our investment portfolio remained flat at 6.1x during the second quarter as compared to the first quarter.

Importantly, our portfolio companies had both top line growth and EBITDA growth quarter-over-quarter and year-over-year on a weighted average basis. The current weighted average interest coverage of the companies in our investment portfolio at quarter end remained flat at 1.5x in the second quarter as compared to the first quarter.

And finally, turning to asset quality. During the quarter, and as Alex mentioned earlier, Lithium and Pluralsight were both placed on nonaccrual status. In addition, the Thrasio first lien debt position, which was on nonaccrual was restructured into a first lien second-out term loan and a common equity position. The restructured second-out term loan remain nonaccrual. As of June 30, 2024, investments on nonaccrual status increased to 3.4% of the total investment portfolio at fair value from 1.6% as of March 31, 2024, and 7.6% of the total investment portfolio at amortized cost from 3.3% as of March 31, 2024.

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 second quarter of 2024 with total portfolio investments at fair value of $3.5 billion, outstanding debt of $2 billion and net assets of $1.6 billion. Our ending net debt to equity ratio as of the end of the second quarter was 1.19x, which continues to be below our target leverage of 1.25x. At quarter end, approximately 64.4% of the company's total principal amount of debt outstanding was in unsecured debt, and we had $1 billion of capacity 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 the 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 second quarter, GAAP and adjusted after-tax net investment income were $67 million and $65.2 million, respectively, as compared to $60.8 million and $59.5 million, respectively, in the prior quarter. On a per share basis, GAAP net investment income was $0.59. Excluding the impact of asset acquisition accounting in connection with the merger with MMLC, adjusted net investment income for the quarter was $0.57 per share, equating to an annualized net investment income yield on book value of 16.7%. Total investment income for the 3 months ended June 30, 2024, and March 31, 2024, was $108.6 million and $111.5 million, respectively. The decrease in total investment income was primarily due to investments being placed on nonaccrual status as a result of underperformance during the quarter.

We would also note that we saw a slight decrease in PIK income as a percentage of total investment income quarter-over-quarter. Distributions during the quarter remained consistent at $0.45 per share. Our spillover taxable income is approximately $143.3 million or $1.23 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. While we're disappointed by this quarter's markdowns, we remain determined and optimistic about maximizing shareholder value in the quarters ahead, all while continuing to recycle capital to bolster the quality of the portfolio by deploying capital into the most attractive opportunities using the full breadth of the Goldman Sachs platform.

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

[Operator]

[Operator Instructions] And we'll take our first question from Finian O'Shea with Wells Fargo Securities.

[Finian O'Shea, analyst]

I appreciate your commentary on the nonaccruals in the beginning. I wanted to ask on ARR loans on a high level. Would you say that the EBITDA flip in those structures is what sort of catalyzes the reckoning or the credit event for an underperforming name? And if so or otherwise, like what does the EBITDA flip wall look like? Is it -- were they generally 4 years or 5 years?

[Alex Chi, executive]

Fin, thanks for the question, and thanks for joining, it's Alex. So with respect to the ARR loans, EBITDA flips or approaching EBITDA flips could be a factor. And we've seen that in some of these names where as the company was approaching an EBITDA flip, the company started to potentially cut back on R&D spend, for example, on investing in new technology, potentially cutting back in sales and marketing spend in order to generate EBITDA, all while their competitors might be investing in new technology, which then leads to some churn and some underperformance. And so that could be a factor but it's only one factor.

Other factors could also just be the fact that companies may have just taken on a bit much too much leverage when base rates were low or also you really have to look at the underlying products and the technology that these companies have. Under our current platform, we're very selective and we choose ARR loans and companies where the products are mission-critical, best-in-class technology. And the customers look at this as critical for their operations regardless of the economic environment. With some of these other problems that we've seen, that was not the case.

[Finian O'Shea, analyst]

Okay. That's helpful. Sorry, I put myself on mute. Can you remind us, origination was strong. I think the credit impacted this a little bit, what's the target leverage profile? Are you sort of where you want to be now or prefer to let it run down a little bit?

[Alex Chi, executive]

So our target leverage has been around 1.25x. We are still below that. We finished the quarter at 1.19x. So we still have some additional capacity to make new loans as well as potentially to provide some cushion to the extent we need it. So our target is still at 1.25x.

[Operator]

We'll take our next question from Mark Hughes with Truist.

[Mark Hughes, analyst]

Yes. Maybe another high-level question on the recurring revenue loans. Is there -- are you perhaps looking at those differently on a go-forward basis? And anything in the Pluralsight, their business model that you might incorporate into future underwriting is kind of something to be cautious about? Or do you think this is just unique to that company?

[Alex Chi, executive]

Yes. So in terms of how we approach recurring revenue loans, that has not changed since we've started managing the platform more than a couple of years ago. So we continue to look at because I mentioned companies that have best-in-class technology, mission-critical to their customers. But we also look at margins, we want to make sure that these companies are highly profitable and also have sustainable growth.

So if you look at the loans that we've made more recently in the recurring revenue space, and again, we are very selective about where we choose to do it. It fits all those different profiles. If you look at Pluralsight, at the time of investment, the company was at negative margins and also the product is a good product. But at the same time, what we've seen is that as their customers have pulled back on spending, this company has seen some underperformance as a result.

[Mark Hughes, analyst]

Understood. You had mentioned the deal flow, I think the deal flow up 4x even as M&A was relatively steady. Could you expand on that? Or to clarify what that -- what the 4x was? And then maybe comment on the context of that on selectivity. This quarter, was your success more a function of the deal flow? Or do you just see more that you liked in this case?

[Alex Chi, executive]

So we certainly saw a healthy amount of flow, the number of originations that we've seen this year-to-date has been up significantly versus the same period last year. But also the quality of the businesses that we've seen has also increased. We've talked about how, in the last couple of quarters, we've seen EBITDA growth tick higher than top line growth, and we saw that again this past quarter. So there's been more flow.

So as Tucker mentioned, the number of deals in terms of deal comp that we've had is up double, but also just as a function of the capital that we have, it's been up 4x. And so we're clearly taking share. But if you look at it as a percentage in terms of the deals that we've done versus the number of originations, it's still a mid-single-digit percentage, which again just shows how selective we are and how broad our funnel is with respect to the originations that we see.

[Mark Hughes, analyst]

Understood. And then you mentioned the overall interest coverage steady 1.5x. Any sense of the proportion that are at 1 or below? Has there been any change in that ratio out on the tail?

[Alex Chi, executive]

No, there's been no change to that and still remains in the mid-single digit percentage.

[Operator]

We'll move next to Derek Hewett with Bank of America.

[Derek Hewett, analyst]

So you had mentioned that PIK was slightly lower on a quarter-over-quarter basis, but it's still roughly 11% of revenue, which is moderately above the BDC peer average. So could you talk about your comfort level with PIK at current levels? And could we see it potentially drift higher over the next 12 to 18 months?

[Stanley Matuszewski, executive]

Yes, certainly. This is Stan speaking. So we've been monitoring that -- we always monitor the PIK as a percentage of the total investment income in the portfolio. Certainly, I think we saw about a 50 bp decline period-over-period. We had some onetime PIK items in the Q1 period, some due to restructures or other onetime items. And again, this quarter, we did see a onetime item. So I'd say, normalized for that PIK would have been sub-10%. And we think that we're comfortable with that, and we continue to monitor it.

[Derek Hewett, analyst]

Okay. And then in terms of the portfolio yield on a cost basis, looked like it went down 30, 40 basis points. Was there anything in particular that caused that decline on a quarter-over-quarter basis?

[Stanley Matuszewski, executive]

No, I'd say for the most part, it's due to the yield on -- for our nonaccruals coming out of the portfolio, the reduction in income. So that's the primary driver.

[Operator]

At this time, we have no further questions. I'd like to turn it back to Alex Chi for any additional or closing remarks.

[Alex Chi, executive]

Great. Well, thank you, everyone, for joining our call. Please enjoy the rest of your summers, and we look forward to speaking with you again after our next quarter.

[Operator]

Thank you. This concludes today's conference. We thank you for your participation. You may disconnect your lines at this time.