Goldman Sachs BDC Inc

NYSE:GSBD

Earnings Call Transcript 2021-Q4

[Operator]

Good morning. This is Gemaria (ph), and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs BDC Incorporated Fourth Quarter and Year-End 2021 Earnings Conference Call. Please note that all participants will be in listen-only mode until the end of the call, when we will open the line up 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 Incorporated, 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 annual report on Form 10-K filed yesterday with the SEC. This conference call is being recorded today, Friday, February 25th, 2022, for replay purposes. I will now turn the call over to Brendan McGovern, Chief Executive Officer of Goldman Sachs BDC.

[Brendan McGovern, President & Chief Executive Office]

Thank you, Gemaria. Good morning everyone and thank you for joining us for our fourth quarter earnings conference call. I'm here today with Jon Yoder, our Chief Operating Officer, and Carmine Rossetti, our Chief Financial Officer. I will begin the call by providing a brief overview of our fourth-quarter results before discussing the current market environment in more detail. I will then turn the call over to Jon to describe our portfolio activity before we hand it to Carmine 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 fourth quarter results. Overall, we are pleased to report another quarter of solid income generation for the portfolio. Net investment income per share was $0.56, excluding the impact of asset acquisition accounting in connection with the merger with MMLC. Q4 adjusted net investment income was $0.48 per share. Net asset value per share decreased slightly to $15.86 per share as of December 31st, a decrease of approximately 38 basis points from the end of the third quarter. As we announced after the market closed yesterday, our Board declared a $0.45 per share dividend payable to shareholders of record as of March 31st, 2022. Looking back, 2021 was a remarkable year in many respects with private credit space broadly and GSBDs specifically. As the loose monetary policy environment fueled a strong economic recovery and a record investment activity. As we discussed extensively over the past several quarters, last year was marked by a record recurring activity as the company saw more than 45% of its portfolio from 2020 year-end turnover in 2021. Despite this unusual repayment activity, the team managed to grow the company's investments at fair value by over 7% year-over-year, which is a testament to the platforms outstanding origination capabilities and hustle over the past year. In addition, our investment activity was highly focused on the top of the capital structure. And as a result, our first-lien exposure increased by about 700 basis points from year-end 2020, ending at about 85% of the total portfolio at the end of 2021. With this improvement in lien type, we believe it's prudent to target a funded debt-to-equity ratio of about 1.25 times. For much of the year 2020, our leverage ratio hovered well below this target at about one times, as we balance the wave repayments with sensible investment activity in the overall competitive environments. We were pleased to see the leverage ratio kick higher in Q4, with ending an average debt-to-equity of 1.16 times and 1.04 times respectively. In this environment of elevated repayment and investing activity, our focus has been on maintaining a high quality book with attractive credit characteristics, which we believe will serve the company well in the long term. We maintain our historical focus on middle-market origination as the medium EBITDA of the company's logbook stayed relatively constant at just under $40 million. Our focus on smaller companies allow us maintain strong document standards as we made only one covenant-light loan during the year, which was a follow-on investments since the company has performed well and has seasoned within our portfolio. That said, the combination of high portfolio turnover in the current competitive market environment, coupled with the higher mix of first-lien assets due to pressure on yields during the year. Q4 origination yields were 7.5%, which compares to 7.7% over the course of 2021, reflecting continued competition for high-quality assets. In addition, the weighted average net debt to EBITDA ratio of our portfolio companies moved higher to 6.4 times at year-end 2021. Compared to six times at the end of 2020, reflecting a trend towards lower leverage portfolio company exposures being refinanced into new deals during the quarter. Our last quarter's call, we discussed the inflationary trends that continue to mark the current environment. And thus far inflationary pressures have not caused significant stress in our portfolio companies, which we believe is reflection of our focus on high-quality companies with value-added products and services that provide a multi-comm of pricing power in the current environment. We are observing, however, that macroeconomic inflationary pressures are creating pronounced insert interest rate volatility. With the yield on the 10-year note currently stands at almost 2% versus 1.5% at the beginning of the year. At the same time, 3-Month LIBOR has more than doubled to 50 basis points from the 21 basis points we saw at beginning of the year. And the forward curve is projecting 3-Month LIBOR at 1.9% by the end of the year. Most economists are predicting seven to nine interest rate hikes by the Fed over the coming year. In light of the changing environment, we want to highlight a few points. First, 99.4% of our portfolio was in floating-rate assets as of the end of the year, typically with LIBOR floors of around 1%. Next, we have been actively managing our debt SAC. And at year-end, more than half of our liability structure was in fixed rate notes. As a result of this asset and liability profile, we would initially expect some pressure on net interest margins as the front of the curve kicks higher, but the contractual LIBOR floors on our assets, because of yields remain stable. However, once LIBOR exceeds those floors, all other things being equal, the rising rate environment should be a tailwind to net interest margins as asset yields move higher, while the majority of our liability costs remain fixed. And finally, turning to asset quality. Non-accrual investments increased to 2.5% and 1.8% of the portfolio costs and fair value, respectively. The increase was a result of the addition of one of our investment in convene to the non-accrual list. As we have discussed previously, convene has been impacted by the reduction in demand for shared meeting space in the COVID environment then benefited from capital support from his owners. Replacing investments on non-accrual this quarter, as we expect to monetize his position this quarter at a discount to our clean value. We don't expect this monetization to have a meaningful impact on that, and we will see to recycle the proceeds back into other income producing loan assets. With that, let me turn it over to Jon Yoder.

[Jon Yoder, Chief Operating Officer]

Great. Thanks, Brendan. The continued strong capital markets environment during the quarter enabled the team to again be active on the new origination front. Our new investment commitments remains elevate -- we remain focused on first lien senior secured loans. During the quarter, we made 32 new investment commitments amounting to $723 million. We originated $461 million in loans to 13 new portfolio companies, and made $262 million of follow-on investments to existing portfolio companies primarily to finance M&A activity. As Brendan mentioned, sales and repayment activity, while below last quarter's record, remained elevated, totaling $296 million driven by the full repayments of investments in seven portfolio companies. Turning to portfolio composition. As of December 31st, 2021, total investments in our portfolio were $3,478 million at fair value, comprised of 97.5% in senior secured loans, including 84.7% in first-lien, 4.7% in first-lien last-out unitranche, And 8.1% in second-lien debt, as well as a negligible amount in unsecured debt and 2.5% in a combination of preferred and common stock and warrants. We also had $442 million of unfunded commitments as of December 31st, bringing total investments and commitments to $3.920 billion. As of quarter-end, the company held investments in 121 portfolio companies operating across 38 different industries. The weighted average yield of our investment portfolio at cost at the end of Q4 was 7.9%, compared to 8.3% as of the end of the third quarter. The weighted average yield of our total debt and income producing investments at cost decreased to 8.4% at the end of Q4, from 8.6% at the end of Q3. Turning to credit quality. The underlying performance of our portfolio companies overall was stable quarter-over-quarter. The weighted average net debt to EBITDA of the companies in our investment portfolio was 6.4 times at quarter-end as compared to six times from the prior quarter. The weighted average interest coverage of the companies in our investment portfolio at quarter-end was 2.5 times, which is flat with the prior quarter. As of December 31st, 2021, investments on non-accrual status increased to 1.8% and 2.5% of the total investment portfolio at fair value and amortized cost respectively, up from 0.10% and 0.7% as of the end of the third quarter. Again, as Brendan mentioned, this is due to putting convene on non-accrual status. I will now turn the call over to Carmine to walk through our financial results.

[Carmine Rossetti, Chief Financial Officer]

Thank you, John. We ended the fourth quarter of 2021 with total portfolio investments at fair value of $3.5 billion, outstanding debt of $1.87 billion, and net assets of $1.61 billion. We also ended the fourth quarter with a net debt-to-equity ratio of 1.14 times, which is an increase from 0.91 times at the end of Q3 as investment fundings exceeded repayments for the first time in several quarters. At quarter-end, 54% of the company's outstanding borrowings were an unsecured debt, and $837 million of capacity was available under our secured revolving credit facility. On April 1, 2022, the company's $155 million, 4.5% convertible notes will come due. Our current expectation is to use the capacity under our secured revolving credit facility to fund the maturity, but we continue to assess market conditions for other alternatives to term out our debt. I note that at 4.5%, the convertible notes are our most expensive liability, and we look forward to optimizing our liability structure with the maturity of these notes. Before continuing to the income statement, as a reminder, in addition to GAAP financial measure -- 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 MMLC. These non-GAAP measures remove the impact of the purchase discount from our financial results. For Q4, GAAP and adjusted after-tax net investment income were $57.3 million and $48.9 million respectively as compared to $64.3 million and $48.8 million respectively in the prior quarter. The decrease in quarter-over-quarter GAAP net investment income was primarily due to a reduction in accelerated accretion. As a result of more normalized repayment levels this quarter as compared to historically high repayments last quarter. On a per-share basis, GAAP net investment income was $0.56 compared to $0.63 in the third quarter. Adjusted net investment income was $0.48 in both Q4 and Q3. Distributions during the quarter totaled $0.45 as compared to $0.50 last quarter, which included the last of $3.05 special distributions that were implemented following the merger with MMLC -1 in Q4 of 2020, net asset value per share on December 31, 2021 was $15.86 per share as compared to $15.92 per share as of September 30, 2021. With that, I'll turn it back to Brendan for closing remarks.

[Brendan McGovern, President & Chief Executive Office]

Thanks, Carmine. As many of you are aware, I recently announced that I'm retiring from Goldman Sachs effective mid-March. In addition, we announced last night that John Yoder is giving up his duties as Chief Operating Officer of our BDC vehicles. Going forward, John will be focusing exclusively on the Goldman Sachs renewable power platform, which he has led with great success since its inception. John and I are delighted to be giving over the reigns to the very capable hands of Alex G and David Miller who become co - CEOs of GSBD effective March 7th, and to Gabriella Skirnick who will become the CEO of GSBD, our other B2C vehicles effective March 7th. As new co - CEOs, Alex and David bring a wealth of experience in leadership to the platform, having collectively served approximately 40 years with Goldman Sachs in investment banking and middle-market lending leadership positions, respectively. Together with Gabriella, Alex and David will bring to bear all the capabilities of the firm and will no doubt improve upon the stewardship of Goldman Sachs BDC. In our decade at the helm of GSBD, Jon and I have been blessed with the opportunity to work with each and every day with an amazing and talented team. There are far too many people to call out individually. But suffice to say, Jon and I are in debt to the many men and women across Goldman Sachs who have consistently and persistently delivered top-notch results for all the stakeholders of GSBD. Over the years, I've enjoyed ending each of these conference calls by thanking you, the shareholders of GSBD. On behalf of John and the rest of the team, it has been a privilege to manage your capital business over the years, and wish you all best. With that, let's turn the call back to Gemaria and open the line for Q&A.

[Operator]

Ladies and gentlemen, we will now take a moment to compile the Q&A roster. [Operator Instructions] Your first question will come from Robert Dodd with Raymond James.

[Robert Dodd, Raymond James]

Hi, guys. And good luck in future endeavors. Brendan, It might seem a little odd asking you this question since leaving, but once you got -- just to clarify in terms of forward strategy, but I presume there's going to be no changes, but I just want to -- would like to get on a call, but the forward strategy type of asset, etc. are good with maintenance say it.

[Brendan McGovern, President & Chief Executive Office]

Yeah, look Robert, I will of course you're right. I think Alex and David at the right time will be speaking with all of you and you and those shareholders specifically about those go-forward plans. I can tell you that in the context of this transition I've been spending a lot of time with Alex and David and Gabriella and the broader team. And I don't think, Robert, you should be bracing for anything dramatically different than what we've been doing over the years. Just for a little bit of context, in our press release that we put out when we announced my departure in December, there's a lot of biographical information on Alex and David; both have been with Goldman Sachs for a long, long time as partners with the firm. David has been leading an investment platform for the balance sheet that has been focused on middle-market lending and origination. That's been the core of what he's been doing for a very, very long time as career, including prior to Goldman Sachs [Indiscernible]. Alex has been here with the firm since 1994 within investment banking. And as you know, Goldman has the preeminent investment banking franchise in the world and Alex has had leadership positions in both leverage finance as well as sponsored coverage. And over the course of the past two years, he's worked within what we historically called our merchant banking division, which is now part of the combined asset management division, focused on bigger cap originations and sponsored transactions benefiting from his very long and deep relationships within the sponsor community. So I think broadly speaking, what you can expect, and certainly as a shareholder we'll hope to expect will be really continued excellence where leadership can bring to bear the full capabilities of Goldman Sachs to originate transactions for the regular vehicles and the BDCs that we manage. I think we can leave it at that for now. I'm sure you'll have lots of opportunities to engage with David and Alex specifically on a go-forward basis.

[Robert Dodd, Raymond James]

I appreciate that. Thank you. Now, more possible interesting question. Debt-to-EBITDA, as you said, there were some -- went up to 64. Some lower leverage loans paid up. Is that 64 the same LTV? is there enterprise value businesses as well, or is there been any shift in the loan to value and then perhaps, has there been any -- when we look at how the buckets going right now in terms of the public equity markets, somebody more techie names the enterprise values of compressing that doesn't mean that private equity multiples are, so can you give us any color around that?

[Brendan McGovern, President & Chief Executive Office]

Yeah. Look, I think first just on the math specifically because I think it's worth just we have more detail as we highlighted and I know Robert, you and I had a detailed conversation on this last quarter. The repayments environment for the market has been significant. I think for GSBD specifically, it's been really, really unusually high. As I said in the remarks, 45% of the book that we came in to January first with were repaid over the course of 2021, which is a really significant amount. And so you think about the normal cadence of a loan, you make a loan, it tends to deleverage over the course of its lifetime. We've been focused on like we talked about good document standards. There's of course deleveraging in those structures, so when you see that repayment activity, naturally that's going to be your lowered levered deals coming out of the book that are getting replaced by a new market origination. So that math this quarter I think was a little bit stark. I will tell you we also had a lot of follow-on investing activity, which typically means you're re-leveraging the business back to the original underwrite. And so the numbers you see are still reflective of the current market environment. To your LTV question, I would tell you at underwrite when you're measuring the actual invested capital in those companies, we'll put aside the mark-to-market for a moment, LTV has been trending down despite that leverage multiple moving up and higher, as we know, our focus in orientation has tended to be away from companies and industries that don't attract high multiples cyclical industries, heavy manufacturing industries, very capital-intensive industries, not a big part of our book, the historical context there. We've tended to focus on technology and software and healthcare, healthcare services and IT services which produce stable recurring revenues and therefore tend to generate higher enterprise value multiples as well. So again, looking at underwrites, notwithstanding the tick-up in that other leverage metric, LTVs have been coming down. I think it is fair to say in the -- if you were to mark-to-market those private equities, just looking at what's gone in the tech space over the course of the past several months, that probably is down. But when you're starting at a 25% loan-to-value range, there's significant and tremendous junior capital beneath you to cushion that loss before you see exposure within our loan portfolio.

[Robert Dodd, Raymond James]

Got it. Thank you. Last one for me, if I can. This quarter is the last quarter of committed waivers to get to $0.48 on adjusted NII. Obviously, you've already declared the March dividend of 45, but should we be expecting anymore waivers? None were disclosed, so presumably not. And what's the comfort level of reaching that 45? Obviously, with the rate curve where it is, pretty good in the second half.

[Brendan McGovern, President & Chief Executive Office]

Yeah. Let me hit that. So look, as we talked about in the script, if you think about the current environment, the changes over the last year or two, clearly there's been overall pressure on yields. I think if you look at this quarter specifically compared to the rest of 2021, we also had dynamic of a reduction in those early repayments therefore the acceleration of the OID (ph). And so I think fair to say those continue to be headwind. I think on the yield portion of the calculus, things will stabilize that has been our experience. You see that running through the numbers, but I think safe to say over over the past couple of years, it's been a lower yield building environments. As I also talked about in the prepared remarks, if you look at last year, leverage was basically stuck at one times for most of the year. And so you start to think about the earnings power of the company going forward, you've got those headwinds on the rate side, we will see what happens and repayment environment as well, but I think there's a couple of other tools than toolkits within the company which is moving back up into the target leverage range, which I think you'll see that happen, probably not getting all the way there this quarter. I think that's a possibility for the firm. Again, I think you've got yields that are normalizing. You've got -- this quarter, as we talked about convene being a non-accrual that's a couple of million bucks of income, we do expect that that will be monetized and put back into earning assets for the quarter on a go-forward basis. I think you all that together in the absence of the fee-waiver, we're still below that 45% -- that $0.45 cents per share number. But I think when you look at the total dollar amounts of the waiver, as you know, we've actually been waiving to [Indiscernible] $0.48 per share. And so I think the delta between the dividend $0.45 versus that waiver, keep that in mind as well. I think the big wildcard for the company going forward becomes that [Indiscernible] environment. And so I talked about it again, and we've got a lot of disclosure in the queue around this. Mathematically, I think the question will be: what happens to the front-end of the curve here? And given the -- given the profile of the business, which is virtually 100% floating rate loans with the one floor. As we talked about, initially there'll be a headwind. And I think you'll probably see that running through in Q1 as we start to move up in rates. But once you get to a LIBOR floor, it becomes a significant benefit to the company. And we've also been active on the liability management front. We've fixed more than half of our liabilities into termed-out fixed-rate notes. So yes, I think not appropriate for me in the context of my departure to talk about fee waiver is going forward, but I think you've certainly seen over the years Goldman Sachs be really thoughtful about -- its approach from a fiduciary perspective. And I think there's a lot of different levers to pull. We will see how things develop over the course of next year. But I think generally when you look at the book, when you look at the company, the asset quality is good. The liability structure is in a really good spot. All which bodes well for a really good foundation for Alex and David to take the business mode from here.

[Robert Dodd, Raymond James]

Okay. I appreciate that. Thank you. And again, good luck in the future. Brendan I appreciate everything, all your comments over the years. Thanks a lot.

[Brendan McGovern, President & Chief Executive Office]

Sure. Thanks, Robert.

[Operator]

[Operator Instructions] And at this time, there appears to be no further questions in queue. Please continue with any closing remarks. Actually, we do have a question in the queue from Finian O'Shea with Wells Fargo. Please proceed.

[Brendan McGovern, President & Chief Executive Office]

Hey, Fin (ph).

[Finian O’Shea]

Hey, and good morning. And congratulations, Brendan, Jon and everyone else coming in as well. Actually, to that matter on the follow-on, Robert's question on platform changes with the new leadership coming from the IOG and banking group, Mr. Yoder is moving elsewhere. So it does feel like there's a lot of writing on the wall that things will be a bit different, whether in origination style or management style, and that doesn't have to be bad, it can obviously be good. But I'd say at a high level, if things are going to be completely the same, then why are the moving pieces so different? Any comment you can provide on how the folks at GCM were thinking about the architecture here in the wake of your departure, Brendan?

[Brendan McGovern, President & Chief Executive Office]

Yeah, look, I wouldn't read too much into the changes, Fin, that you're describing in the context of the broader strategy and structure. As you and I talked about offline, for me, personally, this just felt like a good natural time for me to move on to pursue some different endeavors. And that was, for me, just a personal decision based on how I see this -- the next leg of my career here. I don't think there are broader implications beyond that. Jon, as you know, who was a key architect of this business since inception, has been a really successfully reason that we're now a power business. So while it feels like all this might be coming together, at this point in time, these are actually things that have been kind of behind the scenes taking place for quite some time. And I think there continues to be good stability overall within the group in the firm. Obviously, David, you're quite well has been here with the company for a long time and continues to be focused on the group in the business. And I think when you look at the forward for the business, just like I talked about, I -- having spent a lot of time without from David and their respective teams. What I can tell you is there's a lot of commonality of approach in terms of having a really good credit culture. In terms of having a really good disciplined focus on client service and all the things that we think have contributed to the success of GSBD over the years. So I don't think you're going to see tremendously significant wholesale changes day one strategically, or otherwise, I think if anything, there is, like I said, new resources that get brought to bear to the benefit of the company over time. And so I think as you start to engage and spend some time and meet without some [Indiscernible] and team, you'll see that coming through in states. And so I can tell you, I've a lot of confidence in the go-forward of the company and the team and the platform and I'm sure you'll come to the same conclusion.

[Finian O’Shea]

Absolutely very helpful. And unrelated follow-up on the capital raising side. The strategy you've been pretty successful with, private retail to public with MMLC and such. That style seems to be emphasized by a lot of your peers in the way -- by the way, of the newer non-traded professional private retail strategy, which are unrelated to BDC s, but they are debatedly cannibalizing a fundraising channel. And obviously, there are others. There are public offerings, ATMs, and institutional [Indiscernible], so forth. Just any high-level thoughts on that if you -- sorry. Go ahead.

[Brendan McGovern, President & Chief Executive Office]

Sure. Here's what I would say, Fin, and I think I speak confidently for Alex and David and Goldman on this topic. When you look at the private credit space more broadly, certainly relative to 10 years when we launched this platform, being a scaled participant is just table stakes within space. Having the ability to bring -- to bear different pools of capital to compete in the market for assets that could be whether those are larger cap unit tranche opportunities or more bespoke middle-market lending opportunities, scale is the key. And so as an asset manager, the approach that I've had on the [Indiscernible] Goldman, and I think it's shared by Alex and David is -- our approach is to be agnostic as to how investors want to access our core capabilities, which is the ability to source and underwrite and risk-manage a portfolio of proprietary loans. And there are going to be certain investors who might be institutions, who might want to separately manage accounts over a single investor fund. There might be other investors that prefer the liquidity associated with a public BDC. There might be other investors that are insurance planners; they have regulatory issues that they're trying to accomplish with how they access this asset class. Our job as asset manager is to create on-ramps for all those different clients. And so I think that means that -- I think the observation that we have is there continues to be a really attractive opportunity for investors who want to invest privately into a BDC that might go public later on. Investors on this platform have had really good success and really good returns in doing that. I think there are other investors who prefer the simplicity and liquidity profile of a fund that is continuously offered where you can invest all of your -- all of your capital day one And I suspect that will be a tool, but we'll get that the firm has gone forward as well. But I don't think that really changes anything strategically for the platform in any way, shape, or form. Like I said, the goal is to create as many on-ramps for clients who want to access the very significant capabilities of Goldman Sachs. And I think if we do that, we'll be quite successful.

[Finian O’Shea]

Awesome, hopeful. Thank you and congratulations. Again and best of luck on your next endeavor.

[Brendan McGovern, President & Chief Executive Office]

Thanks, Fin.

[Operator]

And at this time there are no further questions. Please continue with any closing remarks.

[Brendan McGovern, President & Chief Executive Office]

Thank you, Gemaria. Thank you all as always for listening in. If you still have any questions, please don't hesitate to reach out to us directly. And we hope you have a great day and great weekend. Bye, bye.

[Operator]

Ladies and gentlemen, this does conclude the Goldman Sachs BDC Incorporated fourth quarter and year-end 2021 earnings conference call. Thank you for your participation. You may now disconnect.