Goldman Sachs BDC Inc

NYSE:GSBD

Earnings Call Analysis

Robust Returns and Dividend Consistency

The company reported a net investment income per share of $0.67, marking a significant 13.6% rise from the previous quarter. Adjusted net investment income stood at $0.64 per share, signaling a healthy annualized yield of 17.5%. The board declared a stable $0.45 per share dividend, consistent over 35 quarters, emphasizing the company’s dividend reliability. Portfolio health was confirmed by an increase in net asset value to $14.61 per share and dominance in first lien loans at 94.9%, showcasing a risk-averse investment strategy. Despite global uncertainties potentially delaying deal closures, 2024 was forecasted as a dynamic year for private credit. Sales and repayment activity highlighted strategic exits totaling $257.4 million. Non-accrual investments were minimal, pointing to robust portfolio quality. The company's keen focus on maintaining liquidity was evident in its well-managed leverage, operating below its target range.

Strong Performance with Disciplined Dividend Commitment

The company continues to reward shareholders with a consistent dividend, declaring a $0.45 per share payout for the 35th consecutive quarter since its IPO, bringing the total dividends to $15.75 per share, excluding special dividends from 2021 post-MMLC merger. This reflects a stable return to shareholders amidst an evolving market landscape.

Modest Growth in Net Asset Value

Net asset value (NAV) per share saw a slight improvement, increasing by $0.02 to $14.61, propelled by the uptick in net investment income which counterbalanced a rise in unrealized losses. The incremental growth in NAV demonstrates financial resilience and the firm's ability to generate income in a complex market.

Focusing on High-Quality First Lien Loans

The company has directed its investments heavily into first lien loans, which constitute 94.9% of its portfolio. This strategic emphasis augurs well for maintaining a high-quality asset base that's poised to benefit from more favorable vintages in high-quality credits.

Robust Portfolio Activity with Controlled Leverage

The quarter witnessed $168.2 million in new investment commitments spread across 8 new and 5 existing companies, while sales and repayments totaled $257.4 million. This reflects active portfolio management within the firm’s targeted leverage range, with the full repayment of 3 junior lien positions effectively realigning capital towards new first lien opportunities.

Stable Operating Metrics Amidst Economic Fluctuations

Both the weighted average net debt-to-EBITDA ratio of portfolio companies and interest coverage levels showcasing marginal changes, remained flat at 5.9x, and slightly declined from 1.56x to 1.51x, respectively. This points to consistent operating performance, despite SOFR rates affecting the interest coverage ratio.

Asset Quality and Credit Performance

The quality of assets remained largely intact, with nonaccrual investments representing 2.3% and 4.2% of the portfolio at fair value and at amortized cost, respectively. The post-quarter end addition of another nonaccrual position did not meaningfully alter these figures. This keeps asset quality concerns contained within a manageable threshold.

Strategic Capital Structure and Yield Optimization

The overall capital structure has been strategically managed with a total investment portfolio at fair value of $3.4 billion, and an ending net debt-to-equity ratio of 1.13x, which is below the target leverage range of 1.25x. Moreover, the weighted average yield of the investment portfolio at cost stands at 11.6%, confirming the firm's efficacy in yield optimization amid market volatilities.

Future Outlook: Navigating with Cautious Optimism

The leadership remains cautiously optimistic about the future, expecting increased deal volumes and a robust pipeline of new opportunities. The company's ongoing focus on underwriting discipline and credit evaluation anticipates economic cycles and intends to leverage opportunities in private credit across the spectrum into 2024.

Earnings Call Transcript 2023-Q3

[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. Third Quarter 2023 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 close, 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 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, Wednesday, November 8, 2023, 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 third quarter 2023 earnings conference call. I'm here today with David Miller, our Co-Chief Executive Officer; Tucker Greene, 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 and Tucker Greene to describe our portfolio activity and performance before handing it off to David Pessah to take us through our financial results. And then finally, we'll open the line for Q&A. So with that, let's get to our third quarter results.

Our net investment income per share for the quarter was $0.67, an increase of 13.6% over the prior quarter's $0.59. Excluding the impact of asset acquisition accounting in connection with the merger with MMLC, adjusted net investment income for the quarter was $0.64 per share, equating to an annualized net investment income yield on book value of 17.5%. The increase in investment income during the quarter was primarily driven by an increase in repayments and related accretion of discounted positions.

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 29, 2023.

This marks the company's 35th consecutive quarter of $0.45 per share dividend, totaling $15.75 per share since our IPO, excluding the special dividends we paid in 2021 post the merger with MMLC. Net asset value per share increased to $14.61 as of September 30, 2023, an increase of $0.02 from the end of the prior quarter. This was primarily attributable to the increase of net investment income, which was partially offset by an increase in unrealized losses for the quarter.

On a fair value basis, first lien loans are 94.9% of the investment portfolio as of September 30, 2023, which speaks to our continued focus on maintaining a higher quality portfolio. Again, this quarter, we continue to invest only in directly originated first lien, senior secured debt with no participation in the secondary market for broadly syndicated loans.

As our portfolio continues to evolve, we believe it's particularly important to proceed with an abundance of caution with new underwritings as the economic cycle evolves over the next few quarters while base interest rates are expected to remain higher for longer. We've previously expressed confidence that deal volumes will increase as the year progresses. During the third quarter, we reviewed more than 150 investment opportunities across our direct lending Americas platform, which is sizably more than the opportunities seen to start the year.

Although recent macroeconomic and geopolitical headlines may delay the timing of current deal closings by a quarter or so, we believe our existing pipeline of new opportunities remains extremely robust, and we expect that 2024 will be an active year for private credit across the spectrum. Of note this quarter, GSBD was the lead lender in the refinancing of [ Blue Brick ], one of the first investments we made post integration of the BDC platform with the broader Goldman Sachs private credit complex.

[ Blue Brick ] is a provider of data backup and recovery software for enterprise customers and is an existing GSBD borrower. The latest transaction also involved the partial financing of an acquisition, which keeps the company's pro forma capital structure at a very attractive loan-to-value. [ RV Media ] is another example of a new origination in the third quarter where the Goldman Sachs private credit platform was a lead lender and GSBD was able to participate in financing the buyout of the business by a new financial sponsor.

GSBD stands to benefit from deploying into a more favorable vintage in high-quality credits and where we are an incumbent, not only resetting economics to current market pricing, but setting covenants and documentation to align with our orientation towards downside risk management.

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

[David Miller, executive]

Thanks, Alex. During the quarter, we originated $168.2 million in new investment commitments to 8 new and 5 existing portfolio companies. Sales and repayment activity totaled $257.4 million, primarily driven by the full repayment in excerpt of investments in 7 portfolio companies. In particular, we are pleased with the full repayment of 3 junior lien positions, which will allow us to continue redeploying capital in the new first lien oriented opportunities while remaining well within our leverage targets.

Turning to portfolio composition. As of September 30, 2023, total investments in our portfolio were $3.4 billion at fair value, comprised of 97.5% senior secured loans, including 91.3% first lien, 3.6% in first lien last-out unitranche and 2.6% in second lien debt as well as a negligible amount in unsecured debt and 2.2% in a combination of preferred and common stock and warrants.

As of quarter end, the company held investments in 137 portfolio companies operating across 38 different industries. The weighted average yield of our investment portfolio at cost, at the end of Q3 was 11.6%. Amortized cost remained at 12.6% at the end of Q3.

I will now turn the call over to Tucker Greene to discuss our 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 at 5.9x in the second quarter. Importantly, our portfolio companies have both top line 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 declined slightly from 1.56x to 1.51x as SOFR rates continued to increase for the quarter. It is important to note that we calculate our coverage ratios based on current quarter metrics rather than on a trailing or last 12-month basis. Where we are to use the LTM calculation then our interest coverage ratio of the companies in our investment portfolio would be 1.7x.

We continue to monitor interest coverage sensitivity. The quarterly increase in SOFR is slowing and the Fed held rate flat, which creates more stability. We also see our interest coverage levels as a reflection of legacy vintage exposure within the book that will continue to be supported with repayment activity and new deployment in the current environment. And finally, turning to asset quality.

As of September 30, 2023, two new positions were placed on nonaccrual and one portfolio company was removed from nonaccrual during Q3. Investments on a nonaccrual status amounts to 2.3% and 4.2% of the total investment portfolio at fair value and amortized costs, respectively. Subsequent to quarter end, one additional name was placed on nonaccrual status. The size of this position does not constitute a meaningful change to the percentage dated above.

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

[David Pessah, executive]

Thank you, Tucker. We ended the third quarter of 2023 with total portfolio investments at fair value of $3.4 billion, outstanding debt of $1.9 billion and net assets of $1.6 billion. Our ending net debt-to-equity ratio as of the end of Q3 was 1.13x, which continues to be below our target leverage range of 1.25x. At quarter end, approximately 46% of the company's total principal amount of debt outstanding was in unsecured debt and had $671 million of capacity available under our secured revolving credit facility.

Subsequent to quarter end, we executed an extension to the maturity of our secured revolving credit facility from May 2027 to October 2028. As a reminder, we have 2 separate unsecured notes due in February of 2025 and January of 2026, respectively. We plan to address these maturities at the appropriate time. 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 $72.9 million and $69.7 million, respectively, as compared to $64.5 million and $63.1 million, respectively, in the prior quarter.

The increase in net investment income was primarily driven by repayment related activity that was discussed earlier. On a per share basis, GAAP net investment income was $0.67 and adjusted net investment income was $0.64 as compared to $0.59 and $0.58, respectively, last quarter. Distributions during the quarter remained consistent at $0.45 per share. Our spillover taxable income is approximately $124.3 million or $1.13 on a per share basis, which we believe provides continued stability on our consistent dividend since inception. Net asset value per share on September 30, 2023, was $14.61 as compared to $14.59 last quarter.

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

[Alex Chi, executive]

Thanks, David. As you all are probably aware, on September 7, we announced that David tendered his resignation from his position at the company effective November 10 to pursue a new professional opportunity. On [ September 25 ], the Board appointed Stanley Matuszewski as our CFO and Treasurer, effective immediately upon David's resignation on November 10. Stan has been at Goldman since 2013 and has been managing the product controllers team for our entire BDC platform. We want to congratulate and welcome Stan to our management team and wish David all the best for the future.

In conclusion, thank you all for joining us on our call. With that, let's open the line for Q&A. Thank you.

[Operator]

[Operator Instructions] And our first question will come from Maxwell Fritscher with Truist Securities.

[Maxwell Fritscher, analyst]

I'm calling in for Mark Hughes. And I joined a little late, so I'm sorry if you mentioned this, but can you touch on spreads you're seeing currently? A couple of other BDCs have mentioned a contraction in the quarter?

[Alex Chi, executive]

Thanks a lot for the question. So we certainly saw a bit of further spread compression in the quarter. In the prior quarters, I think the average spread that we are seeing was well into the [ $600 ], probably the mid-600s on average. We've seen some spread compression now where more of the kind of standard rate for the middle of the fairway credit is more like 60 basis points, plus or minus. For some of the larger credits, you might see a bit more spread compression. And for some of the more middle market credits, you might see a little bit wider, but it's around [ $600 ] is what we're seeing.

[Maxwell Fritscher, analyst]

Okay. And could you provide a figure for the percentage of your portfolio companies that are below 1x interest coverage ratio?

[Alex Chi, executive]

It's a -- we haven't disclosed that in the past, but it's a very small percentage, single-digit percentage. .

[Operator]

And our next question will Sean-Paul Adams with Raymond James.

[Sean-Paul Adams, analyst]

Quick question. I know you guys talked a little bit about the second lien book. I know you said you had some junior lean possession -- positions that exited. What's the status of the remainder of your second lien book? And what are you guys seeing on the pipeline?

[David Miller, executive]

Yes. I mean from a pipeline perspective, it's not something we're actively pursuing. We look at them from time to time, but it's not the focus where we're expanding. I think as we said in our prepared comments, our first lien book is right around 95%. So the legacy book continues to run down and is a very small percentage of the overall portfolio today. .

[Sean-Paul Adams, analyst]

Excellent. And I didn't notice if you said the 2 new nonaccruals, which companies were those?

[David Miller, executive]

[ Brazil ] and Zodiac.

[Sean-Paul Adams, analyst]

Got you. As far as [indiscernible] has there been any communication between the sponsor as far as...

[Alex Chi, executive]

Yes. So we're in active discussions amongst the lender group with the sponsors behind the company, just a relatively sizable group of lenders that are in the club. So we're in active discussions. And this is a relatively sizable position for us. [indiscernible] is, as you might know, it's a market leader in the online ecosystem where many of the players in that ecosystem are experiencing some issues. And we wouldn't be surprised with consolidation, I don't like the outcome, but more to come on that.

[Operator]

[Operator Instructions] We'll take our next question from Derek Hewett with Bank of America.

[Derek Hewett, analyst]

Most of my questions were already asked and answered. But could you -- from a modeling perspective, could you talk a little bit about what was the impact of the look back on Q3 results, how much on a per share basis was that?

[David Pessah, executive]

Thanks for the question. This is the last of the 2020 look back from COVID impact. It was roughly -- it was about $0.04 of cap to the per share calculation itself. That was remote because of the look back.

[Operator]

That concludes today's question-and-answer session. Mr. Chi, at this time, I will turn the conference back to you for any additional or closing remarks. .

[Alex Chi, executive]

Thanks, everyone, for joining our call. We appreciate the interest and support and then we look forward to closing the year. Thank you very much. .

[Operator]

This concludes today's call. Thank you for your participation. You may now disconnect.

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