Goldman Sachs BDC Inc

NYSE:GSBD

Earnings Call Analysis

Goldman Sachs BDC sees strong originations and optimistic M&A outlook for 2025.

In the third quarter of 2024, Goldman Sachs BDC reported a net investment income of $0.58 per share and a net asset value per share of $13.54, a slight decline of 1%. The company has declared a fourth-quarter dividend of $0.45, continuing its streak of stable payouts. Originations increased significantly, totaling approximately $376.6 million, marking the second highest quarterly deployment since early 2022. As M&A activity recovers, the company remains optimistic for 2025, citing a 17.5% year-over-year growth in sponsor M&A volumes. Sales and repayments activity also rose sharply, up 45% from the prior quarter.

Quarterly Performance Overview

In the third quarter of 2024, Goldman Sachs BDC, Inc. (GSBD) reported a net investment income per share of $0.58 and a net asset value (NAV) per share of $13.54, representing a slight decrease of about 1% from the previous quarter. This decline is attributed primarily to realized and unrealized losses during the quarter. Notably, GSBD declared its fourth-quarter dividend at $0.45 per share, continuing an impressive streak of 39 consecutive quarters at this level, accumulating to a total of $17.55 per share since its IPO.

Market Conditions and M&A Activity

The broader market landscape shows signs of M&A recovery, with sponsor M&A volumes experiencing a significant year-over-year growth of 17.5%. Factors including $1.4 trillion in private equity dry powder and pressure for private equity firms to return capital to investors are fueling this rebound. Although GSBD anticipates some moderation in M&A activity in the fourth quarter due to election-related pauses, there is an optimistic outlook for continued robust M&A volumes in 2025.

Investment Activity and Portfolio Performance

During Q3, GSBD recorded gross originations of approximately $376.6 million across 34 new investment commitments, marking one of the most successful quarters in the past two years. The company's strategy remains focused on maintaining high-quality investments, with 98.1% of originations in first lien loans. Furthermore, sales and repayments surged by 45% quarter-over-quarter to a total of $329 million, highlighting GSBD's proactive approach to portfolio management. Crucially, 72% of repayments stemmed from investments made in 2021 or older, underscoring efforts to recycle the portfolio and capitalize on newer opportunities.

Credit Quality and Portfolio Composition

At the end of Q3, GSBD's portfolio consisted of investments valued at $3.44 billion, predominantly in senior secured loans (97.6%). The weighted average yield across the investment portfolio was 10.9%, a slight decrease from the previous quarter. The weighted average net debt-to-EBITDA ratio for portfolio companies increased to 6.3x from 6.1x, yet top-line and EBITDA growth continued across the board. Positive momentum is further supported by improved interest coverage, rising to 1.7x.

Future Outlook and Strategic Position

Looking ahead, management is optimistic about the prospects for M&A activity as market sentiment improves post-election. The expected high demand for private credit in correlation with sponsor M&A engagement could significantly benefit GSBD. While the first quarter of 2025 may see preparatory efforts by the team, actual deployment of funds is anticipated to Commence in the second quarter of 2025. Emphasis will continue on recycling older investments while capitalizing on new, attractive opportunities within Goldman Sachs' extensive platform.

Concluding Thoughts

In summary, GSBD's performance in Q3 2024 has shown resilience despite minor setbacks in NAV. With active measures in place for portfolio turnover and a favorable outlook for M&A and private credit markets, the company is strategically positioned for future growth. Stakeholders can expect continued solid dividends, prudent management of credit quality, and an agile approach to changing market dynamics.

Earnings Call Transcript 2024-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 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 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, Friday, November 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 third 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 third 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 third quarter results. Our net investment income per share for the quarter was $0.58 and net asset value per share was $13.54, a decrease of approximately 1% relative to the second quarter NAV, which was largely due to net realized and unrealized losses in the quarter. As we announced after market close yesterday, our Board declared our fourth quarter dividend of $0.45 per share payable to shareholders of record as of December 31, 2024. This marks the company's 39th consecutive quarter of a $0.45 per share dividend totaling $17.55 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, M&A continued to recover in the third quarter, with growth of 17.5% year-over-year in sponsor M&A volumes. We noted earlier in the year that we anticipated a rebound in sponsor M&A driven by the $1.4 trillion of private equity dry powder and the DPI pressure that private equity firms are facing to return capital to LP investors. We saw these factors drive higher activity in the second and third quarter. And although we expect the fourth quarter to be somewhat muted as market participants took a pause given the election. We anticipate that this dynamic will continue to enhance M&A volumes in 2025. GSBD has certainly benefited from this overall trend, which was further enhanced by our platform capabilities.

Our third quarter gross originations more than doubled year-over-year and is the second largest deployment quarter since the integration of GSBD into the broader Goldman Sachs private credit platform with the highest being this past second quarter of 2024. We continue to originate new investments with sound credit fundamentals and low LTVs.

Finally, our sales and repayment activity increased 45% from the prior quarter, totaling $329 million. We're focused on harvesting older vintage investments and recycling into new originations. To that end, 72% of our payments were 2021 in older vintages. Our recycling efforts are enhanced by our proactive portfolio management and the breadth of our private credit platform to consistently originate new and attractive investment opportunities.

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

[David Miller, executive]

Thanks, Alex. During the quarter, we originated approximately $376.6 million and 34 new investment commitments comprised of 15 new and 19 existing portfolio companies. As Alex mentioned, this was indeed the second highest level of quarterly originations for GSBD since the integration of our platform in early 2022. 98.1% of our originations were in first lien loans, which continues to reflect our bias and primarily maintaining exposure to investments that are higher up in the capital structure. Sales and repayment activity totaled $329.1 million, primarily driven by the repayment and refinancing of our investments in 10 portfolio companies.

During the quarter, we also selectively sold names in the portfolio with majority at or above their mark. When we received an attractive bid and sought to rotate out of legacy names, all with a focus on recycling the book into new originations. As the portfolio continues to turn over, we will lean into our position within the Goldman Sachs ecosystem for what we believe should be a rebound in M&A activity volume into 2025. Turning to portfolio composition. As of September 30, 2024, total investments in our portfolio were $3.44 billion at fair value, comprised of 97.6% in senior secured loans, including 91.6% first lien, 4.7% in first lien/last-out unitranche and 1.3% in second lien debt as well as a negligible amount of unsecured debt and 1.9% in a combination of preferred and common stock.

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

[Tucker Greene, executive]

Thanks, David. As of September 30, 2024, the company held investments in 167 portfolio companies operating across 41 different industries. The weighted average yield of our investment portfolio to amortize cost at the end of the third quarter was 10.9% as compared to 11% from the prior quarter. The weighted average yield of our total debt and income-producing investments at amortized cost at the end of the third quarter was 11.8% and as compared to 12.3% at the end of Q2. The weighted average net debt-to-EBITDA of the companies in our investment portfolio increased slightly at 6.3x during the third quarter compared to 6.1x during the second quarter. Importantly, our portfolio companies have both top line growth and EBITDA growth quarter-over-quarter and year-over-year on a weighted average basis.

At the same time, the current weighted average interest coverage of the companies in our investment portfolio at quarter end increased to 1.7x in the third quarter compared to 1.5x during the second quarter. And finally, turning to asset quality. During the quarter, there were changes to accrual status for 2 portfolio companies. [ Earl Sight ] was restructured and on first lien position remained on nonaccrual status and another first lien position was restored to accrual status. Additionally, we exited Zodiac Intermediate, also known as [ Apri ], which had previously been on nonaccrual status through a sale of the company.

As of September 30, 2024, investments on nonaccrual status decreased to 2.2% of the total investment portfolio at fair value from 3.4% as of June 30, 2024, and to 4.5% of the total investment portfolio to amortize costs from 7.6% as of June 30, 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 third quarter of 2024 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 the third quarter was 1.16x, which continues to be below our target leverage of 1.25x. At quarter end, approximately 66.7% of the company's total principal amount of debt outstanding was in unsecured debt, and we had $1.1 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 our 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 third quarter, GAAP and adjusted after-tax net investment income were $68.2 million and $67.2 million, respectively, as compared to $67 million and $65.2 million, respectively, in the prior quarter.

On a per share basis, GAAP net investment income was $0.58, 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 16.8%. The Total investment income for the 3 months ended September 30, 2024, and June 30, 2024, was $110.4 million and $108.6 million, respectively. The increase in total investment income was primarily due to the incremental deployment during Q2 and Q3.

We would also note that we saw PIK as a percent of total recurring investment income decreased to 9% for the third quarter ended September 30, 2024, 11% in the second quarter of 2024. Distributions during the quarter remained consistent at $0.45 per share. Our spillover taxable income is approximately $158.8 million or $1.36 on a per share basis.

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

[Alex Chi, executive]

Thanks Satan, and thanks, everyone, for joining our earnings call. We're excited by our pipeline prospects and remain focused on turning over the portfolio into new attractive opportunities using the full breadth of the Goldman Sachs platform.

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

[Operator]

[Operator Instructions] We will take our first question from Mark Hughes with Truist.

[Mark Hughes, analyst]

Yes. Thank you. Alex, spoken about your recycling effort. How much more opportunity do you have there to recycle, improve the portfolio?

[Alex Chi, executive]

Yes. We -- so we had a very strong quarter of sales and repayments. As you heard, it's the largest quarter we've had in over a year. So we were able to have full exits in at least 4 portfolio companies, all of which were originated in 2021 or earlier. So we feel good about the pace of repayments and recycling. And just given also the very strong quarter of originations we had just the outlook we also have [indiscernible] M&A that's coming. We feel good about just the shift in the portfolio, and we also added a net 12 new names as you saw as well, which further diversified the portfolio.

[Mark Hughes, analyst]

Understood. How about the repricing activity? How much have you seen in the portfolio? How much more can we expect perhaps?

[Alex Chi, executive]

Well, we saw a pretty decent wave just across the industry as we saw spreads compress. But in the quarter, we saw spreads stabilize and so just the level of repricing activity also came down versus the flurry that we saw earlier in the year. And so there may still be some room to go. But having said that, we would expect the pace of pricing to slow down.

[Mark Hughes, analyst]

Yes. And then anything your view, the Vibe immediately following the election last couple of days as it pertains to potential deal activity, do you feel like there's more energy in the air last just sort of curious your subjective impressions?

[Alex Chi, executive]

Look, the market obviously has been pretty exciting. Post-election. We've all been circling up and talking to our bankers within Goldman Sachs and just other participants in the industry. And again, people feel quite energetic and optimistic about the level of M&A, particularly from the sponsor community that's going to come in 2025. So I think just broadly speaking, there just continues to be optimism.

[Operator]

We will take our next question from Derek Hewett with Bank of America.

[Derek Hewett, analyst]

I have a question on credit, specifically on looking at Slide 7. And it shows that risk rated 3 and 4 totals increased that despite kind of what we saw with the meaningful reduction in nonaccruals. So could you provide some additional color on kind of where you were seeing that negative credit migration and then were there any specific sectors where you saw that decline?

[Alex Chi, executive]

And really, if you look at the aggregate of our rating 3 and 4 buckets, it ticked up around 1% period-over-period. And it's really due to 1 name that had some underperformance that continued throughout the quarter that we thought prudent to reassign to a risk rating 3. [indiscernible]

[Derek Hewett, analyst]

And could you provide the sector of that was in?

[David Miller, executive]

It was in the business services sector.

[Alex Chi, executive]

So it was not related to ARR or health care.

[Operator]

We will take our next question from Robert Dodd with Raymond James.

[Robert Dodd, analyst]

First, on the kind of the pipeline. I mean, you point to being optimistic about that 2025 now and Q4 being muted, should we expect the '25 to be unusual. I mean is it going to be a relatively strong Q1, i.e., an early '25 because it's deals that maybe we're waiting for the election and going to happen early in '25? Instead of -- or is it going to be normal like but still the first half is going to be soft and [indiscernible] ?

[Alex Chi, executive]

It's a really good question, Robert. Thanks for the question, and thanks for joining again. And so look, we're absolutely optimistic about overall M&A volumes in 2025. Having said that, private credit, as you know, deployment is highly correlated to sponsor M&A activity. And if you look at the cycle of how these processes play out, we would expect that they're going to be any opportunities that pop up in the first quarter. But having said that, it takes a little bit of time for these companies to actually transact to get to a deal and then to fund. So if we had to guess, we would expect our team to be very busy assessing new opportunities in the first quarter. But in terms of actual deployment, it's likely going to be the second quarter or later when you start to see a real pickup in activity.

[Robert Dodd, analyst]

Got it. And then on the recycling you're recycling [ 21 ] and older. So the question is really adverse selection, right? Should I know how, when I look at your portfolio by vintage, be more concerned about the remaining older assets because those haven't been as hard as we get rid of a more tricky asset than it is a good asset. So is there -- how are you dealing with the adverse selection risk in the recycling and the concentration of risk in the older vintages on some of those assets, if that's going to occur?

[David Miller, executive]

Yes. No. I mean, look, in the last couple of quarters, we saw a very healthy activity of that. I think we'll continue to see that play out over the next 12 months from now. I'm not too concerned with the adverse selection issue as we continue to address it. Look, I mean as you know, some of these private equity firms paid pretty high multiples of these way back when. We're continuing to see nice top line as well as EBITDA growth in the portfolio. they'll kind of earn their way into those valuations and then you should see some M&A activity to either those companies will sell or get refinanced as they earn into some of those higher valuations.

[Operator]

We do not have any further questions. I would like to turn the call back to Alex Chi for closing remarks.

[Alex Chi, executive]

Thanks, everyone, for joining our call, and we look forward to speaking with you at the end of the next quarter.

[Operator]

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