Goldman Sachs BDC Inc

NYSE:GSBD

Earnings Call Transcript 2022-Q3

[Austin Neri, Investor Relations]

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. Third Quarter 2022 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 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, Friday, November 4, 2022, for replay purposes.

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

[Alex Chi, Co-Chief Executive Officer]

Thank you, Austin. Good morning, everyone, and thank you for joining us for our third quarter 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 third 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 over 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 third quarter results. Net investment income per share was $0.60. Excluding the impact of asset acquisition accounting, in connection with the merger with MMLC, adjusted net investment income for the quarter was $0.56 per share, equating to an annualized net investment income yield on book value of 14.9%.

This uptick in returns is largely a reflection of the pronounced increases in base rates during the quarter. Nonetheless, we have not yet seen the full impact of higher rates and expect this to be further accretive to earnings.

As we announced after the market closed yesterday, our Board declared a $0.45 per share dividend payable to shareholders of record as of December 30, 2022. Net asset value per share decreased to $15.02 per share as of September 30, a decrease of approximately 3.3% from the end of the second quarter. This decrease was primarily attributable to unrealized losses, reflecting volatility in the capital markets, markdown to certain positions and increases to overall credit spreads.

Although the market continues to exhibit volatile conditions, we continue to be pleased with our platform's ability to deploy capital selectively, benefiting from a wide funnel of opportunities. The [poly] syndicated loan market has remained largely shut, which has only contributed to the deal flow that we see as borrowers have increasingly turned to the private credit market to finance their deals. As a result, while spreads and original issue discounts have widened, we have also been able to garner enhanced investor protections in our deals.

Despite a more muted deal flow environment overall, we have been focused on a significant amount of add-on activity, which highlights our platform's incumbency and strength with existing companies and sponsors. This was evident in 4 such transactions during the quarter, ICIMS, Intoxalock, CSI and CoreTrust.

First, on ICIMS, a steadily growing software solutions company for HR departments, we have been a lender to the company since 2018. This quarter, we provided a commitment for the company through capitalization concurrent with a new minority investor. The transaction reflects the advantage of having an incumbent position in an attractive credit, along with being a preferred lending solutions provider to top-tier financial sponsors.

Second, Intoxalock, the leading provider of ignition interlock devices, we have been a lender to the company since 2017. And during the company's recent LBO financing by a new sponsor/owner, we continued our role as a meaningful lender to the company.

Finally, our transactions with CSI, a bank processing software platform, and CoreTrust, a group purchasing organization, each reflected our integrated platform, enhanced origination capabilities as GSBD co-invested alongside our Senior Loan Fund family and partnered with 2 financial sponsors that are long-standing clients of the broader private credit platform.

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

[David Miller, Co-Chief Executive Officer]

Thanks, Alex. During the quarter, we originated $205 million in new investment commitments, $136 million in new investments to 6 new portfolio companies and $69 million of follow-on investments to 10 existing portfolio companies, primarily to finance M&A activity.

Our new capital investments remain focused on the most senior parts of the capital structure with $203 million of the $205 million in first lien senior secured loans. Sales and repayment activity totaled $212 million, primarily driven by the full repayment of investments by 2 portfolio companies.

Turning to portfolio composition. As of September 30, total investments in our portfolio were $3.6 billion at fair value, comprised of 97.7% in senior secured loans, including 88.4% in first lien, 3.3% in first lien/last-out unitranche, and 6% in second lien debt, as well as a negligible amount of unsecured debt and 2.1% in a combination of preferred and common stock and warrants. We also had $436 million of unfunded commitments as of September 30, bringing total investments and commitments to $4.1 billion.

As of quarter end, the company handled investments in 133 portfolio companies operating across 38 different industries. The weighted average yield of our investment portfolio at cost at the end of Q3 was 9.9% as compared to 8.6% in the prior quarter. The weighted average yield of our total debt and income-producing investments and amortized cost increased to 10.4% at the end of Q3 from 9.0% at the end of Q2.

Turning to credit quality. The weighted average net debt-to-EBITDA of the companies in our investment portfolio remained flat from Q2 at 6.0x at quarter end. The weighted average interest coverage of the companies in our investment portfolio at quarter end was 1.8x versus 2.1x in the 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, where we to use the LTM calculation, then our coverage ratio would be 2.4x.

And finally, turning to asset quality. As of September 30, 2022, investments on nonaccrual status amounted to 0.4% and 1.4% of the total investment portfolio at fair value and amortized cost, respectively. Importantly, the slight increase in nonaccruals is primarily attributable to some names that have been on our focus list for a period of time.

With that, I'll now turn the call over to David Pessah to walk through our financial results.

[David Pessah, Chief Financial Officer]

Thank you, David. We ended the third quarter of 2022 with total portfolio investments at fair value of $3.6 billion, outstanding debt of $2.1 billion and net assets of $1.5 billion. Our ending net debt to equity ratio increased to 1.34x from 1.25x last quarter, which is slightly above our target level of 1.25x.

Our targeted leverage profile remains the same, and we intend to bring our leverage metrics down over time, subject to market conditions. At quarter end, 41% of the company's total principal amount of debt outstanding was in unsecured debt. $449 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 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 Q3, GAAP and adjusted after-tax net investment income were $61.2 million and $56.7 million, respectively, as compared to $49.6 million and $45.9 million, respectively, in the prior quarter. The increase in quarter-over-quarter GAAP net investment income was primarily due to increased in benchmark rates, which were comfortably above our usual benchmark floors.

Moreover, the NII was also enhanced by our policy of limited incentive fees due to unrealized losses resulting from markdowns. On a per share basis, GAAP net investment income was $0.60 and adjusted net investment income was $0.56 as compared to $0.49 and $0.45, respectively, last quarter.

During Q3, we issued approximately 617,000 shares through our at-the-market offering program at an average share price of 17.41, which resulted in net proceeds of $10.6 million, net of underwriting and operating costs of $0.2 million. Distributions during the quarter totaled $0.45. Net asset value per share on September 30 was 15.02 as compared to 15.53 last quarter.

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

[Alex Chi, Co-Chief Executive Officer]

Thanks, David. In conclusion, thank you all for joining us on our call. While we think the environment ahead may exhibit further volatility, we're confident that our unique and differentiated private credit platform in Goldman Sachs will continue to provide attractive investment opportunities for GSBD in the quarters ahead, and we will maintain our focus on the portfolio. We appreciate your time and attention today.

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

[Operator]

[Operator Instructions] And we'll go first to Finian O'Shea with Wells Fargo.

[Finian O'Shea, Wells Fargo]

First question, for David. I appreciate the color you gave on interest coverage, including the sort of current up-to-date ratio. I was wondering if you could do that for your software book, in particular? And understanding there's a bit of push and pull here on what those companies are able to spend or not spend as interest rates go up and perhaps pressure liquidity for them. Maybe more holistically from, say, a fixed charge perspective, but whatever high-level information you would share there, we'd appreciate.

[David Miller, Co-Chief Executive Officer]

Thanks for the question, Fin. Yes, we don't break it out separately by the portfolio. So that's an aggregate number that we break out. I think the point we were trying to make here is that interest coverage declined the way we calculate it from 2.1 to 1.8. But I think a lot of our peers used it as an LTM perspective.

So I just wanted to put that in perspective on the 2.4. But we don't break it out via individual

industry we're living.

[Finian O'Shea, Wells Fargo]

Okay. Fair enough. A follow-up on the nonaccruals. You guys mentioned that these were sort of lower grade or watch list names. Is it -- are they, as a group, sort of therefore taken down and put on nonaccrual due to the valuation environment? Or were there operational or idiosyncratic events that sort of piled on this quarter? Just sort of was it valuation or was it operational?

[Alex Chi, Co-Chief Executive Officer]

Fin, it's Alex. Thanks for the question. The names that we put on, you're absolutely right. These are ones that have been focused on for quite some time. We've talked about this in the past. And these are names that have experienced operational issues for quite some time.

But I think to your question, the valuation environment has spoken. And so this is more just a function of us just taking another look at what the environment looks like and then just taking a conservative view with respect to where those are going to shake out. And so that's really what drove that.

[Operator]

And at this time, there are no further questions.

[Alex Chi, Co-Chief Executive Officer]

Okay. With that, well, thank you very much, and we look forward to giving updates on the GSBD in the future quarters.

[David Pessah, Chief Financial Officer]

Thank you.