Golub Capital BDC Inc (GBDC) 2011 Q1 法說會逐字稿

Good afternoon. Welcome to the Golub Capital BDC, Inc.'s December 31, 2010 quarterly earnings conference call.

Before we begin, I would like to take a moment to remind our listeners that remarks made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements, other than statements of historical facts, mad during this call may constitute forward-looking statements and are not guarantees of future performances or results, and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Golub Capital BDC, Inc.'s filings with the Securities and Exchange Commission.

For a slide presentation that we intend to refer to on the earnings conference call, please visit the Events and Presentations links on the home page of our website www.golubcapitalbdc.com, and click on the Investor Presentations link to find the December 31, 2010 investor presentation. Golub Capital BDC's earnings release is also available on the Company's website in the investor relations section.

I will now turn the call over to David Golub, Chief Executive Officer of Golub Capital BDC.

Thanks, Brian. Good afternoon, everybody, and thanks for joining us today. I hope you have been able to review our earnings release and the investor presentation we posted on our website. I am joined today by Ross Teune, our Chief Financial Officer. Today's call we are going to handle in the following way. We are going to cover four items. The first is I am going to provide an overview of the December 31 quarter and discuss what we are seeing in the current market environment. Second, Ross is going to summarize the financial results for the quarter. Then I am going to make some brief concluding remarks. And finally, we will open up the line for questions and answers.

So with that, let me get started with part one. I am pleased to report we had another solid quarter. Net investment income for the quarter ended December 31 was $0.30 per share, up from $0.25 per share last quarter. And that's primarily due to strong asset growth over the course of the last two quarters. We had another quarter of net realized and unrealized gains on investments. For the quarter ended December 31, net gains were $0.04 a share, down from $0.10 per share last quarter. Accordingly, the Company generated net EPS of $0.34 a share. We are very pleased that our board approved a dividend increase to $0.32 a share.

There are three themes I want to highlight today. I am going to use some parts of the investor presentation to illustrate these themes. So if you could take that out or put that on your computer screen and turn to page two of the presentation. So three themes.The first of the themes, new business was very strong last quarter. Our new investment commitments for the quarter totaled $113.7 million. That was up from what was a strong prior quarter at $83.7 million. From the standpoint of growth in investment in the quarter, we saw the $113.7 million partially mitigated by a high level of payoffs during the quarter, about $64 million. So on a net basis, the total fair value of investments grew by $37.5 million or about 11% from the prior quarter.

As I discussed last quarter, we saw a very high level of deal activity in Q4 2010, particularly in the November/December timeframe after our last call. Driven partly by the expectation of 2011 tax increases. It is normal in our industry to see a pattern were after a particularly busy quarter we tend to see a slowdown. And we are seeing this now. We think this is not just a Golub Capital phenomenon but a middle market wide phenomenon. Having said this, we expect 2011 as a whole to be another strong year for new originations. The fundamental drivers you've heard me talk about in prior quarters, the likelihood of a return to normal or perhaps even strong levels of middle-market M&A activity, as well as a high level of refinancing activity. We think those drivers are going to be there over the course of 2011 and, in turn, they are going to drive demand for our kind of debt capital. That's the first point, strong origination.

Second, I want to shift and talk about mix of our assets. Our plan since our IPO has been to shift the mix of our assets to more unitranche, second lien, subordinated debt and equity investments. During the quarter ended December 31, we made some good progress toward that goal. If you look at the asset mix table on the lower left-hand side of the page, the percentage of the unitranche, second lien, sub debt and equity investments increased from 34% of the portfolio at September 30 to 41% of the portfolio at December 31. Interestingly, this shift, it will have a positive impact on the yield of our investment portfolio going forward. It didn't have much impact this quarter because most of the junior debt investments we made happened to close toward the tail end of the quarter. You can see this if you look at the yield table on the lower right-hand side of the page. The weighted average yield, which excludes the impact of fee amortization, that remained relatively flat quarter over quarter at 8.1%.

But if you flip quickly to page seven, you will see that we are now providing some additional information. This actually came in response to a question that we got last quarter. We are providing some additional information on how our yields on new investments look compared to yields on investments that paid off during the quarter. You can see it in the middle of the page. The weighted average rate on our new investments was 8.8%, and this compared favorably to the weighted average rate of 7.1% on the investments that paid off or were sold. So the higher interest rates that we are seeing on our new investments will help our weighted average yields going forward.

The third theme I want to talk about is credit. Our credit quality remains quite strong . As we did last quarter, we had realized and unrealized gains net of realized and unrealized losses this quarter. We had only one loan in the portfolio that is on non-accrual, and it represents a very small percentage of the overall portfolio by value. If you look at our portfolio rating table on page eight, you will see that the percentage of loans in our two highest-quality buckets, those rated 4 or 5, they represent over 92% of the total portfolio at 12/31. That is actually up from 86.5% at September 30. So I told you in prior quarters to actually expect this ratings chart to start to look not as good, as we add more loans and we start to see a natural progression. It continues to get better. But I will reiterate what I've said, which is we anticipate a downward migration to a degree in these statistics as we add more unitranche and junior debt assets.

I am now going to hand it over to Ross who is going to discuss the financial performance for the quarter in more detail. And them I'm going to come back with some brief concluding remarks and open up the floor for questions.

Thanks, David. As David mentioned, we had a good quarter. As David already touched on the highlights on page two, if you want to turn to page three, I will quickly walk through the quarterly income statement. A few highlights to note. Total investment income for the quarter was $9.1 million. This was an increase of approximately $1.7 million from the prior quarter, primarily due to higher average investments due to the funds growth that David mentioned. On the expense side, interest expense was up from the prior quarter, primarily due to the higher cost of funds on the debt we issued via our securitization. This closed back in mid July, so this was the first full quarter of the debt at the higher rate. In addition, we had higher average debt outstanding this quarter compared to prior quarter.

Professional fees increased during the quarter due to an increase in legal fees, some consulting costs associated with our Sarbanes-Oxley implementation, as well as other costs associated with being a public entity. Base management fees and administrative service fees increased, as these expenses are based on average quarterly assets, which increased, again, due to the funds growth. Toward the bottom of the page, looking at net realized and unrealized gains, net realized gains were $876,000 during the quarter. This was the result of the sale of approximately $13 million in lower yielding broadly syndicated loans. There was a small net unrealized loss of $147,000 for the quarter, which is primarily due to the sale of the broadly syndicated loans which causes an unrealized loss for the quarter as a previous unrealized gain is reversed and flips to a realized gain, which offset a broader improvement in middle market loan valuations.

Turning over to the next slide, the balance sheet. A few highlights. You can see we had total investments of $382 million as of the end of the quarter. Up $37.5 million. Total cash and restricted cash available for investment was $69 million. And total debt increased by about $20 million due to $20 million in new SBIC debentures.

Turning to page five, as David mentioned in his opening remarks, we made progress during the quarter in shifting the asset mix. If you look at the chart on the right, 60% of our new originations during the quarter were in the unitranche second lien subordinated debt and equity investment product categories. Looking at the chart at the left at the end of period assets, as David mentioned, the end of period Investment at the end of December and the unitranche second lien subordinated debt and equity investment product categories increased to 41%, up from 34% in the prior quarter.

Turning to slide six, the investment spread analysis. You can see that our total yield increased during the quarter to 10.6% due to higher income from amortization of fees and discounts as a result of the increase in repayments during the quarter. As David mentioned, the overall yield, excluding the fee amortization remained flat at 8.1%. As David mentioned, the majority of our new junior debt originations occurred at the tail end of the quarter.

Turning over to slide seven. Looking at the top is the funds roll. On the funds roll forward, we began the quarter with about $345 million in investments. We generated about $51 million in payoffs, funded approximately $98 million in new deals, and sold approximately $13 million in lower yielding assets, ending the quarter with $382 million of assets at fair value. In the middle of the slide, David referred to the pricing on our new deals. The weighted average spread over LIBOR of our new investment fundings was 7.1% while the weighted average rate was 8.8%. The weighted average rate takes into account LIBOR floors that exist in a lot of our new investment fundings. In addition, the weighted average fee we received on deals was 2%. These weighted average rates and fees compare favorably to the weighted average rates and fees on investments originated in prior quarters. And also compare favorably to the weighted average rates in investments that were paid off or sold.

As shown in the middle of the slide, the investment portfolio remains predominantly invested in floating rate loans. In addition, we currently only have one no accrual investment which represents less than 1% of the total investment portfolio at fair value.

Turning to slide eight, with respect to portfolio company ratings our credit quality remains strong, with over 90% of the portfolio rated a 4 or a 5. We have only two category 2 loans, one of which is non-accrual.Consistent with prior quarters, independent valuation firms valued approximately 25% of our portfolio. On the chart on the right, the portfolio remains highly diverse by industry.

Turning to page nine, as David mentioned, due to our increasing net income, the Board declared an increase in our dividend to $0.32 per share payable on March 30 to shareholders of record as of March 18.

On to the last slide.We continue to have sufficient liquidity with approximately $69 million in cash and restricted cash available for investment. In addition, we have approximately $35 million in liquid broadly syndicated loans that we anticipate selling in future periods as we fine new, higher yielding opportunities to deploy this capital. In addition, we also have available $28 million in SBIC debenture commitments that can be drawn subject to customary SBA draw procedures.

I will now turn it back to David with some concluding remarks.

Thanks, Ross. So in conclusion, we had a good quarter. We are well-positioned to capitalize on what we think is going to be an attractive rest of 2011. Originations in the December 31 quarter were very strong. We think the pace is going too slow for the March 31 quarter, but we continue to be optimistic about 2011. We made good progress this last quarter toward our goal of shifting the asset mix of the portfolio more toward unitranche second lien sub debt and equity investments. Look for me to talk more about that in future quarters. Credit quality remains real strong with only one non-accrual asset and a very high percentage of credits rated 4 or 5. And we are pleased that our board approved a dividend increase to $0.32 a share.

At this point, I'd like to open up the line for questions.

Thank you. (Operator Instructions) . And our first question comes from the line of Jim Young with West Family Investors. Please proceed with your question.

Yes, hi. Could you talk about the relative risk and how you thought about the new originations which are, on the one hand, yielding a higher average interest rate of 8.8% for the new investments.But it seems you are a little bit lower in the capital stack. And how you are trading off that risk and reward from your perspective. Secondly, on the new originations, can you give us a flavor as to what types of deals these were?

Sure. The first question, which is how do we look at where we want to play in a capital structure, it's a great question, Jim, and a hard one to answer outside of looking at the specifics of a particular transaction. When we look at a new deal, one of the great advantages we have as a market leader in both senior debt and junior debt in the middle market is we get to pick where we want to focus our attention. We will think very strategically about that question right at the outset of our examination of a new deal. Sometimes we will look to play only in the senior, sometimes we'll look to play only in the junior debt, and sometimes we will be interested in working with sponsors on multiple possibilities at the same time.

The fundamental questions that we look to answer when we are looking at junior debt opportunities is, are we comfortable that the company in question is really resilient? Do we think it's quite unlikely that the company is going to have a problem? We are more sensitive on the resilience question in the context of junior debt investments than we are in the context of senior debt investments. And we are also pickier, frankly. It is more challenging to find a good junior debt investment than it is to find a good senior debt investment. Right now we think there is good value in both middle market senior and junior. It's not always the case. There are times when we find one part of the capital stack to be overly competitive while other parts aren't. Right now we think that there are good opportunities in both areas.

If we shift and talk about specific portfolio companies, I'm not sure I want to handle that question right now. We've got 98 portfolio companies in the portfolio, and I think if we get too granular, we run the risk with this forum of having some of the participants feel like we are getting too granular. What I would suggest is that, perhaps, you get in touch with me or with Ross separately and we would be happy to give you some specific examples.

And there are no further questions at this time.

Great. Thank you, everyone. Jim, in the context of there being no other questions --

I do apologize. One has just come in. Would you like to take it at this time?

Sure.

Our next question comes from the line of Bill Allman with Harbor Drive Funds. Please proceed with your question.

Thank you. Congrats on a great quarter. My question has to do with your growth and how you think about what I think you'll probably inevitably do which is raise some more equity capital at some point. And how we as current investors should think about that in terms of what the timing of that might be. And how it relates to, I think the last call you mentioned some sort of premium to book value, but you also have to think about where you are with your cash and your leverage ratio, et cetera. So how are you thinking about that as you go forward into 2011? You didn't like my answer last quarter?No, I just want to hear it again I guess.

I'm just teasing. Our view on this question of growth is very simple, which is we think that it is in our existing shareholders' interest if we can add additional equity capital over time, subject to a couple of key conditions. One of the key conditions is that it be at a good price. And another of the key conditions is that it be at a time when we can deploy that capital in an effective and timely way. So, if one looks at our stock performance, it is clear that all shareholders would benefit from more float and more trading activity to create additional liquidity. But we are not going to do something just to address the float and liquidity question. It's got to fit the two criteria that I just mentioned. It's got to be good for shareholders from a price standpoint, and it's got to be at a time when we have attractive, timely uses for the capital.

That's very helpful. Thank you. And leverage wise, I think there's some structural limitations on where you can go in terms of leverage to maintain your BDC status. Is that right? Can you just remind me of that? And how far you go in terms of pushing the leverage debt to equity number.

So, the technical rule is that as a BDC, we are restricted to a 1-to-1 debt-to-equity ceiling. So, that's the technical rule. I would add the caveat that there is some exceptions to this. For example, many BDCs with SBIC subsidiaries have applied for and received exemptive relief where SBIC debt does not count toward that 1-to-1 ceiling.We have applied for such exemptive relief. We have not yet heard back from the SEC, which is normal. But we anticipate getting that exemptive relief granted.

Our approach to leverage is we believe, most importantly of all, in the right kind of leverage. We are not big fans of 364-day bank facilities or market value triggered leverage of the sort that can cause problems during downturns. We prefer to use the kinds of leverage that we are currently using , which is securitization leverage. We completed a $174 million debt securitization last July, selling AAA rated notes at LIBOR plus 2.40%.These are very flexible, long duration, no market value trigger notes. And we are also users now of SBIC debentures. Again, long-term, highly flexible, reasonably priced. We anticipate utilizing these forms of leverage prospectively, as well. I stress this point, Bill, because, from our perspective, the form of leverage is actually as important, or more important, than the overall level of leverage. As we look at the overall level of leverage, we think that something in the 50% to 70% range is probably right with, frankly, a use of higher levels of leverage prior to growing the balance sheet on the equity side. And we anticipate staying broadly in that range. Another key factor in our thinking is we think that it is safer and better to use more leverage against more senior assets and less leverage against more junior assets. So we would anticipate adjusting our overall leverage levels depending on where we stand from a mix of our total asset standpoint.

That's great. Thank you.

Brian, any other questions?

Yes. Our next question comes from the line of Jonathan Baugh with Stifel Nicolaus.Please proceed with your question.

Hi, guys. Just filling in for Troy and Greg.Just a few questions on some repayments. David, could you provide a breakout of the $64 million of sales and repayments? What percentage were sales and what percentage were prepaid?

I believe that the sales, correct me if I am wrong, Ross, were the $13 million. Don't make me do the percentages in my head, Jonathan, but $13 million of the $64 million would have been sales.

Okay. And talking about the increase in high-yield issuance --

21%.

Thank you. Based on what is perceived to be a pretty high yield market, could you give us some perspective on expected portfolio prepaids over the next several quarters in that middle-market area where you play?

It's a great question. In any environment, and we are in one like this now, in any environment where you are seeing a tightening of credit spreads, you can anticipate that you are going to see a higher than normal level of repayments. We have the great benefit in being a lower middle-market player. We have the great benefit of not really competing head to head against the high-yield market in the vast preponderance of our credits. The vast preponderance of our obligors are too small to access the high-yield market through an offering. But I think that, if I address your question not just as a high yields related question but a repayment related question, our working assumption and expectation is that this year is going to see a relatively high level of repayment activity.

Great. Would you guys happen to have the amount of unearned fee income on your maybe earlier vintage '07 '08 type assets in the portfolio today?

In our scheduled investments, we provide par value. We provide the unamortized costs.The difference between those two is the unamortized fee income for the portfolio.

So we can give it to you in the aggregate, Jonathan.We can't give it to you for specific vintage years.

That's fine. I can pull that. One last question, talking about prepayment protection on those assets. If you have substantial call premium, what do success fees look like on investments that maybe will likely prepay over the next four to eight quarters?

We are not anticipating particularly meaningful repayment premiums on debt that gets prepaid or redeemed over the course of the coming period. In general, we see prepayment protection on junior debt, not on senior debt. And because our junior debt assets, starting last April when we completed the IPO, were relatively low, we have a relatively low proportion of our overall portfolio in securities that have prepayment protection and that are not really, really new. So I don't think that is going to be a big factor for us.

Okay, great. Thanks.

And there are no further questions at this time.

Great. Thanks, everybody.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines at this time.