Golub Capital BDC Inc (GBDC) 2015 Q2 法說會逐字稿

Good morning, and welcome to Golub Capital BDC Incorporated March 31, 2015, 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 statement within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other statements of historical facts made during this call my constitute forward-looking statements, and are not guarantees of future performance 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 Incorporated 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 Investor Resources tab on the home page of our web site, www.GolubCapitalBDC.com, and click on the Events/Presentations link to find the March 31, 2015, investor presentation. Golub Capital BDC's earnings release is also available on the Company's website in the Investor Resources section. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to Mr. David Golub, Chief Executive Officer of Golub Capital BDC. Please go ahead.

Thanks very much. Good morning, everybody, and thanks for joining us today. I'm joined at Golub Capital's offices by our Chief Financial Officer, Ross Teune; and Managing Director, Gregory Robbins. Yesterday evening we issued our quarterly earnings press release for the quarter ended March 31, and we posted a supplemental earnings presentation on our web site. We'll refer to the presentation throughout the call today.

I'm going to start by providing an overview of the March 31, 2015 quarterly results. Ross is then going to take you through the quarter in more detail. And I'll come back and provide an update on our outlook after that, as well as some comments on the recent news that GE will be selling GE Capital, including its middle market sponsor lending business.

With that, let me begin. I'm pleased to report we had a quarter we're really proud of. For the quarter ended March 31, net increase in net assets, or net income, was $17.9 million, $0.38 a share. And that compares to $15.2 million or $0.32 a share for quarter ended December 31, 2014. GAAP net investment income for the quarter was $13.8 million or $0.29 a share. Excluding a $1 million GAAP accrual for capital gains incentive fees, net investment income was $14.8 million or $0.31 per share. This compares to $0.31 a share for the quarter ended December 31, 2014.

I think everybody understands the capital gains incentive fee accrual issue, but let me go over it again quickly. Under GAAP, we're required to include the aggregate unrealized capital appreciation on investments in calculating a capital gains incentive fee accrual, on a quarterly basis. And we're required to do that as if the unrealized capital appreciation was actually realized.

But what's interesting is that under the investment advisory agreement, we can't count that unrealized capital appreciation in determining whether the fee is payable. So in practice, what this means is, the fee is not payable, but we have to accrue it under GAAP. We believe that this expense is unlikely to be payable in the foreseeable future. And consequently, we think it makes sense to provide investors with both measures, with and without the capital gains incentive fee accrual, as a means of assessing our performance.

Let me give you a little bit more detail on the net gains for the quarter. It was our 9th consecutive quarter with what I call negative credit losses. We had $4.1 million of net realized and unrealized gain. That's $0.09 a share. That was the result of $4.5 million in realized gains, and $400,000 of net unrealized depreciation. The realized gains mainly related to the sale of two equity investments. And the net unrealized depreciation included the reversal of net unrealized depreciation on those two equities, offset by some net unrealized appreciation on several middle market debt and equity securities.

In regards to new investment activity, new investment commitments for the quarter, we're $179 million. It was a solid origination quarter, despite what was industry-wide a weak quarter. And it was despite our continued selectivity. Consistent with prior quarters, we continued to focus on one-stops and traditional senior secured investments. And we continued to avoid second lien and subordinated debt investments. We continue to generally view junior debt as unattractive right now, from a risk-rewards standpoint. If you look at the mix of our originations, it was 31% senior secured, 58% one-stops, 9% in our senior loan fund, and 2% in equity securities.

During the quarter, about 80% of our new investment commitments were with repeat sponsors, and about 45% were with repeat borrowers. You've heard me talk many times before about how those two measures, those two metrics, we look at consistently as a signal for how good a job we're doing in keeping our sponsor clients and our obligor clients happy. If we can keep those repeat business metrics up, we think that's a very good sign.

Final point -- we achieved our objective during the quarter of accelerating the ramp-up of our Senior Loan Fund. During the quarter, total investments at SLF increased by $67.5 million to $189 million in total investments. And we also saw in connection with the increase in total investments, we saw an improved return on equity. We achieved an annualized low-teens return on investment in SLF during the quarter.

Turning to slide 3 of the investor presentation, you can see in the table, the $0.38 per share we earned from a net income perspective. And the $0.31 per share we earned from a net investment income perspective, before accrual, for the cap gains incentive fee. Our net asset value per share increased by $0.06 to $15.61.

I'd point out, this is the 11th consecutive quarter our NAV per share increased -- another metric that we look at very carefully and that you've heard me talk about before. As shown on the bottom of the slide, the portfolio remains well-diversified, with investments in 146 different portfolio companies, and an average size of $9.4 million per investment. I'll now turn it over to Ross, who will provide some additional portfolio highlights and discuss the financial results in more detail.

Thanks, David. Starting on slide 4, as David mentioned, we had total originations of $179 million. Offsetting that was total exits and sales of investments of $147 million. Included in the $147 million is $76.7 million of sales of traditional senior secured loans to senior loan fund. Subject to approval by our partner in senior loan fund, we plan to continue to sell senior secured loans to this fund in future periods, to enhance our returns on these lower yielding, lower risk investments.

Overall, net funds growth for the quarter was $22.3 million, a 1.6 increase over the prior quarter. As David mentioned, the mix was 31% senior secured investments, 58% were in one-stops, 9% in Senior Loan Fund and 2% in equity co-investments.

Turning to slide 5, these four charts provide a breakdown of the portfolio by investment type, industry classification, investment size, as well as fixed versus floating rate. Looking first at the chart on the top left-hand side, we saw slight increases in the percentage of one-stops, as well as in our investment and Senior Loan Fund. These increases were offset by a decrease in traditional senior secured loans. These modest changes between the investment categories is consistent with us originating a higher percentage of one-stops this quarter. As well as the impact of selling traditional senior secured loans from GBDC to senior loan fund.

In regards to industry classification, the portfolio remains well-diversified by industry. There have been no significant changes in these classifications over the past few quarters. We continue to focus on investing in highly resilient companies with sustainable revenues and EBITDA, relatively low cyclicality, and low sensitivity to commodity prices. Looking at the charts on the right-hand side, the investment portfolio remains diversified by investment size. And our debt investment portfolio remains predominantly invested in floating rate loans.

Turning to slide 6, the weighted average rate at new middle market investments was 6.5%. This was consistent with the weighted average rate on investments that paid off during the quarter. The weighted average rate of 6.5% on new investments was down from 6.8% from the previous quarter, primarily reflecting some modest mix differences. Our sense is that overall market pricing has been fairly stable. The weighted average interest rate on new investments is based on the contractual interest rate at the time of the funding. For variable rate loans, the contractual rate would be calculated using LIBOR, plus the impact of the LIBOR floor. And for fixed rate investments, it's just the contractual rate on the investment.

Shifting to the graph on the right-hand side, this graph summarizes the investment portfolio spreads for the quarter. Focusing first on the gray line, this line represents the income yield or the actual amount earned on the investments, including interest and fee income, but excludes the amortization of discounts and upfront origination fees. Due to higher prepayment fee income, as well as stable pricing on new investments, the income yield increased from 7.8% to 7.9% for the quarter ended March 31. The investment income yield or the dark blue line -- this includes the amortization of fees and discounts. This increased by a comparable amount quarter over quarter, and was 8.4% for the quarter ended March 31. As shown on the green line, the weighted average cost of debt remained stable at 3.3%.

Flipping to the next slide, overall credit quality continues to remain strong, with non-earning assets as a percentage of total investments on a cost basis at 0.8% and 0.2%, as a percentage of total investments on a fair value basis. During the quarter, we took one additional investment non-accrual, which had a fair value of approximately $1 million at March 31.

Turning to slide 8, the percentage of investments risk rated a 5 or a 4, our two highest categories remain stable quarter over quarter, and continues to represent over 90% of the portfolio on a fair value basis. The percentage of investments risk rated a 1 through a 3 decreased slightly, and continues to remain very low. As a reminder, independent valuation firms valued approximately 25% of our investments for the quarter ended March 31.

Reviewing the more detailed balance sheet and income statement on the following two slides, we ended the quarter with total investments of $1.42 billion, total cash and restricted cash of $57.5 million, and total assets just over $1.5 billion. Total debt was $754.5 million. This includes $461 million in floating rate debt issued through our securitization vehicles, $208.8 million of fixed rate debentures, and $84.7 million of debt outstanding in our revolving credit facilities.

Total net asset value on a per share basis increased to $15.61, as net income exceeded our quarterly dividend. Our GAAP to debt equity ratio was 1.02 times at March 31, while the regulatory debt to equity ratio was 0.74 times.

Flipping to the statement of operations, total investment income for the quarter was $28.5 million. This was up approximately $1 million from the prior quarter. The increase in investment income was primarily attributable to higher fee and dividend income, as shown.

On the expense side, total expenses of $14.7 million increased by $1.7 during the quarter, primarily due to the $1 million GAAP incentive fee accrual that David discussed. There was also an increase in interest expense caused by higher average debt outstanding, and an increase in operating expenses. As David highlighted earlier, we had net realized and unrealized gains on investments of $4.1 million during the quarter, and net income totaled $17.9 million.

Turning to the following slide, the table on the top provides a summary of our EPS and ROE from both a net investment income and a net income perspective for the past five quarters. Excluding the GAAP accrual for the capital gains incentive fee, net investment income on a per share basis has remained fairly stable at $0.31 or $0.32 a share for the past five quarters, a return of approximately 8%. Due to the strong credit performance and strong equity gains, we have generated positive net realized and unrealized gains, each over the past five quarters, increasing our return on equity. And net asset value per share is shown at the table at the bottom of the slide.

Turning to slide 12, this slide provides some financial highlights for our investment in Senior Loan Fund, or what we call SLF. As expected, growth accelerated at SLF this quarter, as we continued to transfer senior secured loans from GBDC's balance sheet to SLF. Net growth in investments at fair value for the quarter ended March 31 was $67.5 million, a 55.5% increase from December 31, as SLF purchased $76.7 million of loans from GBDC at fair value. Due to the increased size, diversification, utilization of third-party leverage, as well as no net mark-to-market losses this quarter, our analyzed return improved from 5.7% for the quarter ended December 31 to 11% for the quarter ended March 31.

Turning to the next slide, as of March 31, we had approximately $112 million of capital for new investments. This consisted of restricted cash and unrestricted cash, undrawn SBIC debentures, and availability on our revolving credit facilities. As of March 31, subject to leverage and borrowing base restrictions, we had $38.4 million of availability under our revolving credit lines with Wells Fargo and PrivateBank. And in regards to our SBIC subsidiaries, we had $16.2 million of additional debentures available, subject to customary regulatory draw requirements.

As previously reported, in early May we closed our small public offering of 3.5 million shares of our public stock, at a public offering price of $17.42 per share. We raised approximately $59.1 million in net proceeds after underwriter discounts and commissions. In early May, the underwriters exercised their option to purchase additional shares, and we raised additional proceeds of approximately $8.5 million.

As we've said before, we will only raise additional capital when we feel it is good for existing shareholders as well as new shareholders, and when we have a value-enhancing and approximate use of the capital. We have been and will continue to be very careful to avoid earnings dilution from too-large or too-frequent equity offerings. Proceeds from the offering will be used to invest in new portfolio companies, as well as to continue to capitalize our growing investment in SLF.

On slide 14, we summarize the terms of our debt facilities. And lastly, on slide 15, our Board declared a distribution of $0.32 a share, payable on June 29 to shareholders of record as of June 18. I'll now turn it back to David, who will provide an update on current market conditions, as well as some remarks on the recent news regarding GE Capital. David?

Thanks, Ross. One of the themes I have talked a lot about over the last few years is increasing bank regulation and how increasing bank regulation was likely to be good for Golub Capital. In the last four months, this theme has really been brought to the fore.

2014, last year, we heard a lot of talk by the FDIC, the OCC and the Federal Reserve about increasingly stringent regulation of [bank-led] leveraged lending, but mostly it was talk. And late last year, the three regulatory agencies came out with renewed leverage lending guidance that suddenly seemed like they were very serious, and that it was time for the banks to listen. In Q1, they did listen. Bank-led leveraged lending fell significantly, and we see it continuing to fall in Q2. In part as a consequence of that, we had a very good origination quarter, despite what was, industry-wide, a low-volume quarter. In fact, I would say that trend is continuing into Q2.

A few weeks ago, a second event happened. A bank that is particularly active in our space announced that it was putting its sponsor finance business up for sale. Which bank am I talking about? You probably know. It's a small jet engine manufacturer called GE. Many folks forget that GE is a bank. GE got its start in GE Capital by using its very low cost of capital to make loans that banks generally didn't want to make. Good loans, smart loans, but loans that didn't fit most bank's lending templates.

The unit grew rapidly under Welch and under Immelt, until the financial crisis, and then the unimaginable happened. Triple A-rated GE found it terribly difficult to roll its commercial paper. So in order to avoid a liquidity crisis, GE took a government bailout and became subject to bank regulation. More recently, GE also became subject to regulation as a SIFI, a systemically important financial institution.

We think the decision by GE to dismantle its GE Capital unit largely relates to regulatory pressure. In an era of increased regulatory scrutiny, it became very tough to run a bank that focused on making loans that banks don't generally make.

We've been asked a lot since the announcement who we think is going to buy GE's sponsor business. And the truth is, we don't know. There are two possible categories. The unit could be bought by a bank, but we think that's unlikely because of the regulatory issues. The second possibility is, the unit could be bought by a non-bank. And here's the rub on the non-bank. A non-bank buyer is going to have a big challenge figuring out how to finance GE's sponsor business.

There are two elements to this financing issue. First, the actual acquisition itself is going to require a lot of new debt capital. Getting the debt needed to affect the acquisition is almost certainly likely to require attracting new lenders to our space. And the second is that the cost of this capital is going to be a lot higher than GE's cost of capital. We estimate the difference is going to be over 200 basis points.

So GE's long been our largest competitor, and we anticipate that its exit from middle market lending is going to create a significant opportunity for Golub Capital. We think we're well-positioned to take advantage of this opportunity. And to illustrate this, I want to just talk about putting ourselves in the shoes of our sponsor clients.

What do sponsor clients today want? They want reliability, they want scale. They want to work with people they know; they want to make sure those people are going to stick around. What they really like is stress-less -- or at least, low-stress -- executions. And that means working with firms they have worked with before.

At Golub Capital, we work very hard every day to have these attributes. It's not so easy, candidly, to have those attributes when you're going through a sales process. We're already seeing an impact on our business from the GE sales process. And we think the result is going to be that we're going to gain some market share. I'd also add, we're in the process of adding a number of people across the Firm to capitalize on this opportunity.

So what I anticipate going forward is a continuation of market conditions, where industry-wide volumes are low. And despite that, we're anticipating that Golub Capital's originations are going to remain strong. That concludes our prepared remarks for today. As always, thanks for your time and your continued support. And operator, if you could please open the line for questions.

(Operator Instructions)

Our first question comes from the line of Doug Mewhirter with SunTrust Robinson Humphrey. Please proceed.

Good morning. First of all, thank you for that overview about GE Capital. I think that was on the front of everybody's minds, given the fact that you compete every day in the market. And that's obviously good news for you, at least in the short- to medium-term.

Shifting gears a little bit, more of a financial question. Your Senior Loan Fund -- it looks like you had a nice uptick in ROE, because you're starting to leverage that a bit. Where do you think that ROE could settle out at current yields, current funding costs, and at your anticipated full-leverage limit?

Great question. The question is, what do we think is an appropriate target ROE for SLF as we continue to grow it? And I think the answer is, low double-digits.

Unlike some other BDCs in respect to their SLFs, we're focused in our SLF on relatively low-spread traditional senior assets. And we're comfortable with a higher degree of leverage against those relatively low-risk, relatively low-spread assets.

But one of the ramifications is that the ROE on the enterprise is impacted by the relatively low spreads on the underlying assets. We're not aiming for a 20% ROE on this; we're aiming for a low double-digit ROE on it.

Okay, great. And if I could just go back to touch on GE Capital, maybe a little more specific in my question. GE Capital did a lot of things in the middle market -- the SSLP, the big units, they did a lot of unitranche, which directly competes with your one-stop. They did a lot of senior loans, senior bank loans.

In terms of the benefit to you, are you exclusively seeing that on the unitranche one-stop business, more of its coming to you? Or is there a way to fit some more of those senior loans that GE Capital did into your portfolio, and putting them into your Senior Loan Fund? I realize it's a bit of a different business. But I don't know if that's an opportunity?

It's absolutely an opportunity. We compete directly and aggressively today against GE, in both their traditional senior and in their SSLP unitranche joint venture with Ares. I'd say our most potent competitor in both senior debt and one-stops over the course of the last couple of years has been GE on traditional senior, and the GE-Ares unit tranche fund on one-stops.

So we anticipate that the coming period of uncertainty and distraction is going to be good for us in both of those areas. And we're not sure what's going to happen after the sale itself.

Okay, great, thanks. That's all my questions.

Our next question comes from the line of Robert Dodd with Raymond James. Please proceed.

Hi, guys. Continuing on the GE theme. One of the things we see is the risk, in a way, if I can, of having an SLF-type structure with one partner, versus a concentration if that partner then proceeds to go through some issues, or decide to get out, or exactly however that's going to play out. So looking at that from the perspective of your SLF, which obviously has one partner in it today, it's small.

What's your appetite for either adding more to diversify the risk, in case one of them has a change of heart? Or add more SLFs or anything like that in terms of diversifying the capital base behind that double-digit ROE?

I think that's a great question, Robert. And I think you make a fine point in talking about how BDCs with SLFs have a degree of dependency on their SLF partner. We certainly view ourselves as having a dependency on our SLF partner.

A couple of different component pieces to my answer. One is, unlike some BDCs -- and in particular, let's talk about Ares and GE -- we are not in a joint venture where we're counting on the origination expertise of our joint venture partner. I think that's an important distinction, because it's easier to replace a joint venture partner when you're not counting on that joint venture partner's origination expertise.

A second element of it is that we have a long-standing and very close relationship with our joint venture partner. And have reasons based on our long-standing relationship and experience to have a lot of confidence in RGA as a good partner.

And the third piece of your question, which is, would we be mindful, would we be amenable to potentially having other partners or other SLFs? I think that's something that we will need to think about going forward, as our Senior Loan Fund, as our RGA partner's Senior Loan Fund grows bigger.

I think your focus on what I'll put in the broad category of counter-party risk makes you sound like one of the members of our Operational Risk Committee. Because we're always thinking about these kinds of dependencies, and ways of mitigating these dependencies in our business.

Okay, great, very helpful. Thank you.

Just to add one more point on that, because I think it is important. And this is Gregory Robbins, by the way. Unlike our SLF, as it relates to Ares' and GE's SSLP, the debt provider in our facility is Wells Fargo.

We have Wells Fargo as the debt provider, and then the equity is provided by GBDC and RGA. In the SSLP program, GE is the debt provider, effectively, and then the equity is provided by both Ares and GE.

Yes, got it. On the pricing, David, you mentioned the GE Capital -- whoever ends up taking it over. If it's a non-bank lender, the cost of capital could shift up by 200 basis points. Obviously that given the spread compression that has occurred over the last three years, give or take, that would -- obviously if that 200, even a portion of that flowed back into widening spreads, that would be pretty significant bump on the spreads you could get on comparable credit risk assets.

I mean, is that realistic to expect? Obviously, probably not the full 200 basis points. GE is not the market, but a decent slug of it.

But is it realistic to expect even a small portion of that to come back? Or do you expect just other competitive pressures, additional fee [LO] activity, even a risk retention move -- a change in there obviously. There's a whole lot of other moving parts. But give us just a little bit more color on that issue, and what the relative scale is?

Sure. The question was, do we think that GE's exit or sale is likely to have an impact on spreads? And the answer is -- not sure. There are two countervailing arguments here.

The first argument is that GE was largely in the underwrite and syndicate business. So every time they underwrote a new loan, their pricing on that loan was at a level sufficient to make them confident that they could sell it, or at least a portion of it, to third parties. That would lead us to believe there is a market-clearing price that is reasonably consistent with current price levels.

The second view would be, we're going to take $16 billion out of the middle market lending universe, and $16 billion is, last I checked, a lot of money. And not just a lot of money in absolute terms, but a lot of money in terms of the size of this market.

So the second argument would say, the need to attract a replacement for that GE money is going to be a force that's going to create some tendency towards spread-widening. I think the truth is, it's too early to tell.

I don't see a scenario in which the GE sale, GE exit is bad for pricing. But I wouldn't want anybody to count on spread-widening right now.

Got it. Thank you.

(Operator Instructions)

Our next question comes from the line of Jonathan Bock with Wells Fargo Securities. Please proceed.

Good morning, and thank you for taking my questions. David, first, trying to understand a delicate balance that occurs between investors providing BDC's capital on equity raises, and investors and folks deploying that capital. Because several folks have issued equity at prices that, in some cases, are NAV-dilutive, and at best, flat to earnings going forth.

So understanding your recent equity raise, we would all benefit from the perspective of why that capital is needed in a relatively tightening spread environment. And how you think that, over time, investors would want to look at potential earnings accretion from it, as I believe there's opportunities to work with SLF from a debt perspective, and to drive ROE through that vehicle. So your views on equity raises, and your most recent one, would be helpful, in light of current investor experience in several names.

Thanks, Jonathan. We've talked before -- and Ross mentioned some of these principles in his remarks. We've talked before about Golub Capital's perspective that, in order for it to make sense for GBDC to do an equity raise, it has to be good for existing investors, and it has to be good for new investors, and it has to be good for Company.

So when we think about that combination, what we've concluded is that the net share price has to be above NAV, we've got to have approximate use for the capital. We can't just be putting it on the balance sheet without incremental investment income, or we're going to create a situation where there's earnings dilution. And we've got to be able to look forward and say that we've got a use for that capital that's going to be accretive from an earnings standpoint, relative to the cost of that capital.

The acid test, in my judgment, for this, is relatively straightforward. We want to look at our dividend yield and our growth in NAV over time. And through the combination of the two, we want to provide a good return for our investors.

If we can accomplish that goal of having a consistent and -- if investment considerations are correct -- a rising dividend yield and a rising NAV over time, then we're doing a good job. And if we don't, then we're not doing a good job.

In this case, we looked at our debt-to-equity ratios and our liquidity at the end of the quarter. And we believe that we were running at the end of the quarter at approximately the levels that we're targeting today -- about a 1-to-1 GAAP debt-to-equity ratio, about a 0.75 regulatory level.

And we saw an opportunity to raise additional capital at a premium to NAV. And to be able to deploy that capital in a pipeline of new investments that we thought was attractive, and that would give us the incremental fire power that we needed, to continue to ramp up SLF. And a combination of those things we believe were accretive for GBDC shareholders.

What we won't do is to raise capital at low prices. We'd rather just recycle the capital that we've got. What we won't do is raise capital in large amounts, because people who do that end up suffering from earnings dilution, because they can't deploy the capital rapidly and get at earning assets.

And what we won't do is raise capital when we don't see a good set of investment opportunities to be able to deploy that capital into. And I think the folks who you're referencing have violated one or several of those rules, and disappointed investors as a consequence.

Much appreciated. One last one, as SLF is a key buzzword, as is SSLP, et cetera. Just trying to understand the potential constraints from a credit facility size in allowing you to further expand and grow the program, given you have a capacity in the non-qualified asset bucket.

You know, now that it's -- can you give us some levels at which the portfolio starts to achieve critical mass? In that, perhaps its diversification, perhaps it's just all-in size, that can allow you to -- if it's 300 million, $500 million. Maybe some of the breakpoints that allow you to effectively lower debt cost, but then also get a bit more flexibility from your lender in the program, in order to drive additional ROE?

I think if we achieve a scale in SLF of $300 million to $500 million, we put ourselves in a position where, in addition to the bank revolving credit facility that we have right now. We could, in addition or instead, put in place a securitization facility akin to the two securitizations that we have on GBDC's balance sheet today.

When we get to that size, we're going to, with RGA, evaluate those options. And if it makes sense to do, we're going to do it. And if it doesn't make sense to do, we're not going to do it.

I don't want to give the impression that there's likely to be an opportunity for a very dramatic savings in interest rate, because I don't really think there is. There may be more of an opportunity to use a little bit of incremental leverage, and it may be advantageous to just diversify lending sources.

Got it. Thank you for taking my questions.

Our next question comes from the line of Ryan Lynch with KBW. Please proceed.

Good morning. It looks like pretty much all the loan growth in the SLF in the quarter came from loans sold down from GBDC into the SLF. Should we just expect the primary driver of growth in the SLF going forward to come from GBDC selling down loans in the SLF? And can you give us some thoughts on selling down investments from GBDC's balance sheet in the SLF versus originating new loans in the market?

Yes, again, I go back to strategy. The strategy that we have here is that we want SLF to hold lower-margin senior secured -- traditional senior secured assets. And I'm less concerned about whether we're acquiring those assets directly or -- whether SLF is acquiring those assets directly or whether SLF is acquiring those assets from GBDC.

What's more important to us -- and I think the same is true of RGA, our partner -- what's more important is that we identify appropriate assets with the right combination of risk and reward for SLF. I think from a GBDC shareholder perspective, likewise, it doesn't really matter whether we're looking at direct acquisition or acquisition from GBDC balance sheet.

Okay. Just a follow-up on that. Are there any assets right now on GBDC's balance sheet that are a little bit lower-yielding that you would look to continue to place in the SLF?

Yes.

Can you quantify that at all, that amount?

It's a large number. I mean, I think if you go through our schedule of investments, they're reasonably easy to identify. Many of the assets are our lower-spread assets.

Then we have some assets that perhaps started out as one-stops, but that have de-leveraged significantly. From a leverage standpoint, they're now akin to traditional senior secured assets, from a risk standpoint.

So again, one of our strategies is to continue to look to optimize both SLF and balance sheet. Including as one of the tools that we're going to use to do so, by looking, again, with our partners approval, to move some assets from balance sheet to SLF.

Okay, thanks, David. That's all for me.

Our next question comes from the line of Jim Young from West Family Investments. Please proceed.

Hi, David. You had mentioned that the origination volume in this current quarter is basically on-pace with the March quarter. Could you also give us a sense, though, as to how prepayments are shaping up at this time?

Just to clarify, I said that originations this quarter looked good. I didn't say they are on-pace with last quarter. I just repeat what I'd say. I'd say that we're anticipating this quarter is going to be another strong origination quarter.

In terms of repayments, that's not something that we comment on intra-quarter. Sorry, Jim.

Okay. And then secondly, regarding your capital raises, following up on Jonathan Bock's question. You appear to time your equity raises after the dividend goes ex, as opposed to many BDCs that will raise capital and then a week or so later, go ex. Could you share with us your thinking in that process, and why don't you give the new shareholders a so-called dividend? Thank you.

We look at this simply from a cost-of-capital standpoint. And I think some BDCs raise equity prior to a dividend because they're trying to comply with the rule of issuing shares above NAV. They're comparing their issuance NAV to their prior-quarter-end NAV, and it's a little bit of a trick to issue shares just before a dividend, when your shares are artificially high because your share price reflects the fact that you're about to pay a dividend.

So we're not really interested in that kind of trick. We think if we're comparing our NAV to a prior-quarter-end NAV, that, that prior-quarter-end NAV, in order to be comparable, needs to be comparable in terms of where we sit relative to the dividend. So we're not trying to do anything other than do well by the Company and existing shareholders, and avoid a unnecessary incremental cost.

If you believe in efficient markets, efficient markets would tell you -- doesn't matter when you issue. And maybe that's true. I think it depends. I don't think there is a clear lesson here. The one thing that is clear to me is that, if you're only trading above NAV because you're about to pay your dividend, you're not really trading above NAV.

Thank you very much.

We have a follow-up question from the line of Robert Dodd with Raymond James. Please proceed.

Hi, guys. Just actually a follow-up to Ryan's question on transfers from the BDC to the SLF, in terms of accounting. When you originate a loan, obviously you get, on average, 1.5 points up front. Does that stay with Golub or get transferred or sold down as well, as a part of the loan sale? Because obviously, if it stays at Golub, it's better to originate on balance sheet and then sell down, such as originating the SLF.

Transfers to -- sales to Senior Loan Fund are done at fair value, whatever fair value is at that time. And are done, as I said, at a price that's got to be acceptable, not just to us, but to our joint venture partner.

Got it. Thank you.

So I think -- sorry if that's not more clear other than -- it depends.

Yes, got it.

Mr. Golub, there are no further questions at this time. Please continue with your presentation or closing remarks.

Thanks, everybody, again, for joining us this morning. Really appreciate your time. As always, if you have any further questions after some reflection, please feel free to reach out to Ross or to me. Look forward to talking to you next quarter.

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. Have a great day, everyone.