Golub Capital BDC Inc (GBDC) 2015 Q4 法說會逐字稿

Good afternoon. Welcome to Golub Capital BDC Inc.'s September 30, 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 statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than the statements of historical facts made during this call may 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 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 investor resources tab on the home page of our website, www.golubCapitalbdc.com, and click on the events presentations link to find the September 30, 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 David Golub, Chief Executive Officer of Golub Capital BDC. Please go ahead.

Thank you. Good afternoon, everybody, and thank you for joining us today. I'm joined today by our Chief Financial Officer, Ross Teune, and Managing Director, Greg Robbins. Tuesday evening we issued our earnings press release for the quarter ended September 30, and we posted a supplemental earnings presentation on our website. We'll be referring to the presentation throughout this call. I like to start by providing an overview of the September 30 quarterly results. Ross is then going to take you through the results in more detail, and I'll come back at the end and provide some closing remarks. Then we'll open the floor for questions.

Let me start with the overview. In short, GBDC had a very solid quarter. The results for me are particularly gratifying in the context of the environment. Don't have to tell you that calendar Q3 was a very difficult quarter for most asset classes, and investors had few places to hide. The BDC industry was no exception to this, as many BDCs experienced significant realized and unrealized credit losses, and in some cases, very significant declines in NAV per share. Not true of GBDC. As you'll hear on today's call, at GBDC, our mantra continues to be the same. We're trying real hard to make boring beautiful.

So with that, let's dive into the details. For the quarter ended September 30, net increase in net assets resulting from operations, or net income, was $19.5 million. That's $0.38 a share, and that's compared to $18.3 million, or $0.36 a share, for the quarter ended June 30. GAAP net investment income, or as I told you last quarter, I'm going to begin to call it income before credit losses. Income before credit losses was $15.5 million for the quarter ended September 30. That's $0.30 a share, excluding $0.8 million of GAAP accrual for the capital gains incentive fees. Net investment income was $16.3 million or $0.32 a share. That compares to $15.9 million, or $0.32 a share for the quarter ended June 30.

Consistent with last quarter, we provided net investment income per share, excluding the GAAP capital gains incentive fee accrual, because the GAAP capital gains incentive fee payable as calculated under the investment advisory agreement is zero. So we think that adjusted NII is a more meaningful measure of results than NII. Having said this, we think that more important than NII, because NII at the end of the day is only income before credit losses, is change in net asset value per share. Net asset value per share for the quarter ended September 30 was $15.80. That compares to $15.74 for the prior quarter. So this marks the 13th consecutive quarterly increase in our net asset value per share. The $0.06 of accretion was attributable to quarterly earnings in excess of our dividend.

Net realized and unrealized gains on investments and secured borrowings were $4 million, or $0.08 per share for the quarter. And this was the result of $0.9 million of net unrealized depreciation and $4.9 million of net realized gains. And the net realized gains were primarily derived from the sale of three equity co-investments. This is the 11th consecutive quarter with what we call negative credit losses.

If we flip to talking about new investment activity, I said last quarter that we anticipated that originations in the 6/30 quarter were going to prove to be higher than the September quarter, and that turned out to be the case. Originations for the quarter ended September 30 of $199.4 million were a decline from June but in line with prior quarters. This included about $12 million we invested in SLF. As in prior quarters, investing activity was heavily weighted toward existing portfolio companies and private equity sponsors with whom we've done multiple transactions. If you look at the first three calendar quarters of 2015, over 80% of the deals we completed were with repeat sponsors and over 40% were with repeat borrowers.

Consistent with prior quarters, we continue to focus on one stops. The originations mix this quarter was 19% traditional senior secured, 74% one stops, 6% in Senior Loan Fund, and 1% in equity securities. Total investments in portfolio companies at fair value decreased by $40.9 million during the quarter, as a result of several large payoffs and as a result of some transfers, some sales from balance sheet to SLF.

Turning to slide 3 of the presentation, you can see in the table the $0.38 per share we earned from a net income perspective and the $0.32 per share we earned from a net investment income perspective before accrual for that capital gains incentive fee. You can also see our net asset value per share of $15.80. As shown on the bottom of this slide, the portfolio remains well diversified with investments in 164 different portfolio companies, and the average size per investment remains small at $8.7 million. I'm going to turn it over to Ross now to provide some additional highlights on the quarter and to discuss the financial results in more detail, and then I'll come back with some closing comments before taking questions.

Great. Thank you, David. Beginning on slide 4, as David mentioned, we had total originations of $199.4 million and total exits and sales of investments of $237.6 million. Included in the $237.6 million is $85.9 million of sales of senior secured loans to SLF. Overall investments at fair value on balance sheet decreased by $40.9 million, or 2.6% for the quarter, while investments at fair value for SLF increased by $62.1 million, or 24.3%. As David also mentioned, 19% of our new origination commitments were in traditional senior secured loans, 74% were in one stop loans, 6% was invested in SLF, and 1% in equity co-investments.

Turning to slide 5, these four charts provide a breakdown of the portfolio by investment type, industry classification, investment size, and fixed versus floating rate. Looking first at the chart on the top left-hand side, overall portfolio mix by investment type remained relatively consistent quarter over quarter, with one stop loans continuing to represent our largest investment category at 74%. In regards to industry diversification, the portfolio remains well diversified by industry, and there have been no significant changes in these classifications over the past year.

And looking at the charts on the right-hand side, the investment portfolio remains diversified by both investment size and the debt investment portfolio remains predominantly invested in floating rate loans. We continue to invest in companies we believe have sustainable revenues and EBITDA, and in sectors that are typically resilient to changes in micro-economic conditions. We continue to avoid industries in which there is a high degree of cyclicality or commodity price risk or vulnerability to cheap exports.

Turn to slide 6, the weighted average rate on new middle market investments was 6.8%. This was slightly below the weighted average rate on new investments that were sold or paid off during the quarter of 6.9%. The weighted average rate of 6.8% on new investments was consistent with the previous quarter, as the investment mix of new originations was also consistent, and pricing on new middle market investments remains stable. The weighted average interest rate on new investments is based on the contractual interest rate at the time of funding. For variable rate loans, the contractual rate would be calculated using the current LIBOR, the spread over LIBOR, and the impact of any LIBOR floor.

Shifting to the graph on the right-hand side, this graph summarizes 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 excluding the amortization of discounts and other upfront fees. Primarily due to an increase in prepayment fees of $1.3 million, the income yield increased by 40 basis points from 7.6% to 8% for the quarter ended September 30. The investment income yield, or the dark blue line, this includes the amortization of fees and discounts, this also increased by 40 basis points to 8.8% due to the increase in prepayment fees. The green line, the weighted average cost of debt, remains stable at 3.2%.

Flipping to the next slide, overall credit quality continues to remain strong, although we did experience a slight increase in our non-accrual percentage to 0.4% of investments at fair value due to the addition of one non-earning investment.

Turn to slide 8, the percentage of investments risk rated 5 or 4, our two highest categories remained stable quarter over quarter, and continues to represent over 90% of our portfolio. The percentage of investments risk weighted 1 through 3 increased slightly, but still remains very low. As a reminder, independent valuation firms value approximately 25% of our investments each quarter.

In reviewing the more detailed balance sheet and income statements on the following two slides, we ended the quarter with total investments of $1.53 billion at fair value, total cash and restricted cash of $97.5 million, and total assets of $1.64 billion. Total debt was $813.3 million. This includes $461 million of floating rate debt issued through our securitization vehicles, $225 million of fixed rate debentures, and $127.3 million of debt outstanding in our revolving credit facilities. Total net asset value on a per-share basis increased to $15.80. Our GAAP debt-to-equity ratio was 1.01 times at September 30, while our regulatory debt-to-equity ratio was 0.73 times. These are both consistent with our targets that we've previously disclosed.

Flipping to the statement of operations, total investment income for the quarter ended September 30 was $33.6 million. This is up $3.1 million from the prior quarter, due to higher average investments as well as higher prepayment fee income that I previously mentioned. On the expense side, total expenses of $18.1 million increased by $2.9 million during the quarter, primarily due to an increase in incentive fee expense due to higher net investment income and an increase in interest expense caused by higher average debt outstanding. As David highlighted earlier, we had net realized an unrealized gains of investments of $4 million during the quarter, and net income for the quarter totaled $19.5 million.

Turn to the following slide, the tables on the top provide a summary of our EPS and ROE, both from a net investment income perspective and a net income perspective for the past five quarters. Excluding the GAAP accrual for the GAAP capital gains incentive fee, NII on a per-share basis has remained stable at $0.31 or $0.32 a share for the past five quarters. This is a return of about 8%. Due to strong credit performance and strong equity gains, we have been generating positive realized and unrealized gains which has resulted in an ROE of over 9.5%, on average, over the past five quarters. Furthermore, as shown on the table at the bottom of the page, we have steadily increased our net asset value per share for 13 consecutive quarters.

Turn to slide 12. This slide provides some financial highlights for our investment in SLF. In conjunction with our partner, we continue to focus on growing investments in this fund. And during the quarter ended September 30, net growth in investments at fair value was $62.1 million, a 24.3% increase from the prior quarter. The annualized return for the quarter ended September 30 of 4.8% declined from the previous quarter due to some mark-to-market unrealized losses on some broadly syndicated loans and middle market loans.

Turning to the next slide, as at September 30, we had approximately $140.5 million of capital for new investments. This consists of restricted and unrestricted cash, as well as availability on our revolving credit facilities. Subsequent to quarter end, on October 21, we terminated our revolving credit facility with Private Bank, as its small size and limited borrowing capacity did not provide a lot of economic benefit. Turning to slide 14, we've summarized the terms of our debt financings. And finally on slide 15, our Board declared a distribution of $0.32 a share payable on December 29 to shareholders as of record as of December 11.

I'll now turn it back to David who will talk about our strategy in the current market, as well as some other closing remarks.

Thank you, Ross. So to summarize, despite a challenging and volatile environment for most asset classes, the quarter ended September 30 was another solid, steady performance here at GBDC. There's no shortage of excitement out there right now, both inside and outside the BDC space, but we're working hard to make it so that if you want excitement, you're on the wrong earnings call.

Like our results, our strategy remains boringly consistent. We continue to be focused on using our competitive advantages that arise from our market-leading $15 billion credit platform to make investments in solid resilient companies, backed by high quality partnership-oriented private equity firms. We continue to see the best risk/reward in first lien senior secured loans, and we continue to avoid junior debt and other riskier asset classes like CLO equity or energy, just to name a few. If all that sounds really familiar, it should, because it's what's we've been saying now for years and years.

So that concludes our prepared remarks today. As always, thank you for your time and continued support. And operator, if you'd please open the line for questions.

Thank you.

(Operator Instructions)

And our first question comes from the line of Troy Ward with KBW. Please go ahead.

Great. Thank you, and good afternoon, gentlemen. David, just real quick, as we look at the portfolio, the exits from the balance sheet portfolio and the new investments in the SLF, as you noted in your remarks, some stuff moved from the balance sheet again into SLF.

Is there a -- I thought we would see that in the initial stages of building the SLF. But many of those investments were originated last quarter on the balance sheet, and then moved this quarter. Is there a reason why they make that pit stop on the balance sheet, and is that something we should expect to continue?

We're going to continue to manage the balance sheet. So what we've said in prior quarters is that based on the market conditions we've got right now and the portfolio that we've got right now, We're aiming to titrate the balance sheet so that we're in a roughly 1 times debt to equity ratio for GAAP purposes, roughly 0.75 for regulatory capital purposes. We think that's the right place to be.

And we see the ability with our partners' agreement on each of these sales, our ability to move assets from balance sheet to SLF as a way for us to maintain those kinds of targeted leverage levels, while also managing what's inevitably an origination pipeline that moves up and down over time. So as we think about all the different goals that we've got -- one goal being grow SLF, a second goal being maintain the leverage at targeted levels, a third goal being have an appropriate degree of diversification in both our balance sheet and non-balance sheet portfolios. The use of sales has proved to be very valuable, and I anticipate we'll continue to use that as one of the techniques that we use to grow SLF.

So as we look to the last three quarters, the regulatory -- I'm sorry, the total leverage was 1.01, 1.02, 1.03. That's a point in time, right? That's the last day of the quarter. What do you think the average leverage was during the quarter? Or better asked question maybe is just when were these assets moved and how much income from those assets is currently in the SLF or actually came to the balance sheet this quarter?

I'll answer the question philosophically and I'm not sure I have the information. Ross will take a look for it as I'm talking, to give you more detail on the answer. Philosophically, we're not in the business of creating window dressing, end-of-quarter numbers.

We're in the business of managing to the targets that we set. So we're obviously managing a number of different elements of this picture that aren't always entirely in our control. So we can't manage it to a 1.03 every single day.

But our goal is to maintain our targeted levels. And we're going to look as -- we've got some competing goals that go with that, so we may from time to time deviate from the leverage goal. But all things being equal, we're going to seek to have that leverage through the quarter.

Okay. That answers the question. That's what I was driving at. And then a couple more modeling clarifications on the SLF. Can you remind us, the current leverage is 1.88.

Can you remind us what your targeted leverage is on the SLF? And then similarly also on the yields, you're at [5.8%]. Do you feel like in the current environment that that's representative of the opportunities from a yield perspective that are available in the market today?

I'm going to let Gregory Robbins, who's in charge of SLF from a Golub Capital side address both those questions.

Hey, Troy, how are you?

Doing well, thank you.

So in terms of targeted leverage for SLF, about 2 to 1 is our long-term target with the facility we currently have in place with Wells. So we're very close to achieving that level. It's taking us some time to build up the portfolio so we have diversification and scale to get there. But we feel very good that we've reached that goal.

In terms of yield, I think the yields that you're seeing are very consistent with the yields that we would expect on a go-forward basis. Certainly this quarter, as Ross mentioned, we had some impact from spread widening in the market, which we're not immune from. So as that happens, we do take write-downs in our portfolio.

That if things go well, and we certainly expect that to happen, would reverse themselves in subsequent quarters. As we think about SLF on a run-rate basis, we still believe that this entity should generate low teens-type returns.

Great. Thank you. That's very helpful. And then, David, one last one.

A bigger picture, obviously, you've enjoyed and well deserved institutional shareholder support since your IPO and long before, I'm sure. How do you think -- what do you make of the current activism we're seeing in the BDC sector? And how do you view what's going on with regard to the long-term propects for the BDC sectors in general?

I was waiting for someone to ask that question, so thank you, Troy. Not a surprise, it's something everybody is interested in and talking about.

The average BDC today is trading at approximately 81% of NAV. And quite to your point, we're happy not to be in that category. We traded at a meaningful premium.

But if you think about the average BDC and where it's trading, Mr. Market is saying one of two things, to the management teams of your average BDC. Mr. Market's either saying -- and both of these, by the way, are bad. Mr. Market's either saying we don't believe you, we don't think your NAV is really [100%], we think it's really [81%].

We think you're a liar. That's pretty bad. That's the good case scenario.

The bad case scenario is that Mr. Market is saying to the BDC, well, we believe you. We think your NAV really is [100%]. But not when you're managing it. That's the bad case scenario, and I think that is probably more of what's happening right now.

I don't think that the crisis of confidence that we're seeing in our space is a result of investor disbelief in marks. I think it's principally the result of investor fatigue and lost confidence in management teams. So the way capitalism is responding to this problem, and the good thing about capitalism is it's a self-curing system, is two ways.

There's the slow way and the fast way. The slow way is that Mr. Market is putting the BDCs that aren't performing, that don't have the right fee structures, that aren't acting in a way that's shareholder friendly, Mr. Market's putting those BDCs in the penalty box. And in the penalty box, it's really hard to raise capital.

So they're either staying the same size, or if they have losses, shrinking and becoming less relevant. The fast way is activism, is at some point, discounts become so wide that they attract investors who want to try to catalyze a change. I don't know how the recent letters that have gone into American Capital and Fifth Street are going to work out.

This is new territory for our industry. It's new territory for all of us. But I'm -- I think that the effort on Mr. Market's part to make distinctions between who's doing a good job for shareholders and who's not, I think that's good for our industry.

And I think if we come out of this period of activism with a better neighborhood, an industry that's more focused on shareholder value, that's more focused on doing things that are fair and good for everybody and not just good for managers, I think that's good for everybody.

I appreciate that color, David. Thank you.

Our next question comes from the line of Robert Dodd from Raymond James. Please go ahead.

Hi, guys. First of all, a comment. I really appreciate the use of the word titration or titrate in the context here, as a chemist from years ago, so appreciate that. Anyway, onto the questions.

First of all, the market data tends to indicate that some of the unitranche, not one stop necessarily, but unitranche loans that are getting done our in the market in the third quarter were at pretty high leverage levels, north of 6 times. Could you give us an update on your approach there and your willingness to do higher leverage -- if any willingness to do higher leverage deals on the one stop side?

Sure. Let me take a step back, though, Robert, first and just clarify one thing, because I think it's really important and it's something that people don't often focus on. And the issue is what do we mean when we say unitranche?

What we mean when we talk about unitranches is we mean loans that start with an attachment point of zero and go through an ending attachment point that may be in the [4s, 5s, 6s]. I think increasingly we're unusual in describing unitranches that way. More and more we're seeing other lenders, and in particular, other BDCs call a unitranche something that we call a [last stack].

So if a loan is initially constructed as a single loan but then there's an agreement amongst lenders that creates a first-out position on that loan, and you're actually holding the last-out position, so your starting attachment point may be 2, 3, 4 times EBITDA and then you go all the way to the end, that doesn't have the same risk characteristics as our unitranche loans that start with an attachment point of zero.

So as you, as analysts, think about risk in portfolios, I think one of the things you need to really hone in on and it may require you to ask questions to management teams because sometimes these issues are not described in financial statements, which amazes me, because to me it's an enormously material point. But many things that are being called unitranche out there in the marketplace, in other firms, in other BDCs, are what we would call junior debt.

I agree 100%, David. Last out has all of the characteristics of second lien, which recovery has as more characteristics of mezz or sub-debt than it does first lien. And true unitranche going in at first all zero, is a first lien with a slightly higher last out dollar.

So I agree 100%. And we totally take that into account. Sorry, go ahead.

Second part was just in answer to your question, which is what are we seeing in the marketplace? Are we seeing more competition in unitranche? And the answer is a bit of yes and no, and let me explain what I mean by that.

On the one hand, we are temporarily being helped by the breakup of GE and Ares, and the dismantling of what was our most formidable unitranche competitor, the GE/Ares unitranche fund. That is not to say we don't have competition now. It's not to say Ares is not still a formidable competitor.

It's not to say that Antares isn't trying to get into the unitranche business; all those things are true. But if you look at the period ended September 30, I think as we look at our competitive position in our unitranche product, it was a period we felt we were particularly well positioned. Probably frankly, better positioned than we will be once Ares and Varagon and CIT and PNC work out their various intercreditor relationships and create a better unitranche product.

Having said that, there were deals that were done including some deals that we were involved with, with high levels of leverage. We're very picky about which credits we're prepared to go to those kinds of high levels of leverage on.

They tend to be businesses where there are a lot of tailwinds, and the tailwinds are reflected in quite high acquisition multiples. So again, I'm going to give you just a hypothetical to illustrate the point. Would you rather be a unitranche lender through 6 times in a mission-critical business-to-business software company with 95% recurring revenues and a 20% revenue growth rate that's sold for 15 times EBITDA?

Or would you rather be at 5 times in a unitranche in a business that is a prosaic manufacturing business that competes with China and other parts of the world and was recently sold for 7.5 times EBITDA? I know what my answer to that question is and that's what we've been doing. We've been focused on the more resilient, better companies.

If I can try -- I think I get your point. I agree with you. If I can try and paraphrase that. In a sense, hypothetically a 6 times leverage business in -- or a 6 times leveraged unitranche loan in a business that is a 12 times enterprise value business is a 50% loan to value on an enterprise value basis.

Would you rather do that or a 5 times leverage loan, which has a lower attachment point, obviously, in a business that's an 8 times enterprise value business, which is then north of 60% loan to value? One of those seems worth loan to value protection to me than the other, i.e, the higher leverage for higher multiple business is probably a better security position than the other.

Is that fair to say, to summarize what you're saying?

Yes, I'd add one more element to it, which is in today's M&A environment, one can't just blandly assume that higher price means more value.

Fair enough.

It's an indicator, but we don't make investment decisions based on loan to value. We make investment decisions based on loan to distressed, beaten-up value.

Fair enough. The loan to value today is also loan to value three years from now.

It's not the loan to value when things go wrong, exactly.

Got it. If I can, second question, just on the SLF, the dividend strategy there, obviously, a lot of return comes from the subnotes, which obviously a very good return comes from the subnote. What is your plan, if any, to dividend up proceeds that -- obviously, BDC comparable, NII was about $2.9 million this year. Obviously GAAP income on a comparable basis was about $700,000 this year.

What's your approach as to viewing whether you should dividend up equity proceeds, obviously after the subnote interest has been paid and obviously the senior interest and the other expenses?

So we want to over time be dividending -- after the subnote expenses, be dividending something approximating net income. And we're going to obviously be discussing this with our partner. It's not just our decision.

But philosophically, the approach we've been taking so far is to have a dividend strategy here that keeps the dividend reasonably steady over time and have it approximate net income over time.

Just to clarify. On net income, are you talking -- before or after credit losses, I guess or mark-to-market valuations is for the relevant metric?

After. Count me among the credit managers who think that income before credit losses [isn't] a particularly important measure.

I agree. Thank you.

We have a question from the line of Jon Bock from Wells Fargo. Please go ahead.

Good afternoon and thank you for taking my question. David, I'm curious. Is your thought there was the recent legislative development as it relates to the BDC bill. And I'd imagine a number of folks thought it was going to go one way, but it went a dramatically different one.

And so my question for you is what's your view on the BDC bill in light of the fact that we've received a significant win in Congress? And do you believe that there may be further wins to come as it moves down the Congressional -- understanding that it's a difficult process, but one that appears to have clear bipartisan support?

So for those of you who aren't perhaps as up-to-date on this, let me just provide some context around Jonathan's question. HR1800, which is sometimes called the BDC Reform bill; it's sometimes referred to as the bill that increases the leverage that BDCs can use to 2 to 1. It was passed by the House committee that governs this area last month, in early November.

And it was passed by an overwhelming margin. I think the margin was 54 to 3. My view on the legislation is that it's not well-timed.

We are, as I mentioned earlier in this discussion, we are in the midst of what I'd characterize as a crisis of confidence in the BDC industry. Investors generally are skeptical about too many of the members of the BDC universe, and I don't think this legislation advances the cause of improving the neighborhood.

I'm in favor of many elements of the legislation. I'm not in favor of some of the elements of the legislation. I don't think that it's got a lot of momentum, because so little is being passed of any kind in Congress. So there's been some statements that I think are perhaps overly optimistic about the propects of this legislation passing.

I don't have the capacity to give you a probability assessment on it. But he I can tell you that friends who are very closely connected to things in Washington talk endlessly these days about how next year's going to be a lame duck session and ain't nothing getting done. But we'll see.

Let me also address a question you didn't ask, Jonathan, which is what I wish had happened. What I wish had happened is that the industry and investors and regulators came together in some kind of task force and had an open discussion about what's right, what's wrong, and how do we fix it. And that the bill reflected the results that would come from that task force.

I'm sad that, that didn't happen, and I think perhaps there's still an opportunity for something like that to happen.

Appreciate that. And then one additional question as it relates to portfolio velocity. You touched a bit on it earlier in terms of the competitive dynamic. But as we look forward, how would you characterize the potential repayments, maybe perhaps to date, and then as you're looking and heading into the end of the year?

Do you expect to see an inordinate amount of repayments or would you expect that to -- I'm just excluding the SLF sales. Would you expect that to die down or pick up as a result of more competitors, each hungry, some in Antares' perspective or case, a bit less shackled with [leadening] guidance?

Talk about the ability for assets that might travel out of your portfolio as opposed to investing and dropping something in it.

If you look over time, the rate of repayment of our middle market loans has been pretty consistent. On average, they get repaid between year 2.5 and year 3. And that's been true during most periods for many, many years.

But, if you look at any one quarter, you can get spikes, you can get dips, and I don't have a crystal ball. I don't have a good way to be able to help you assess whether this coming quarter is going to be particularly high or particularly low.

One of the factors that tends to make things particularly high is when credit spreads narrow, because that creates an incentive for borrowers to refinance. We don't really have that situation now. We've had an extended period where spreads have been reasonably stable.

In fact, I'd say in the last 90 days or so, we've seen a little bit of spread widening. So that would argue for some short-term slowdown in repayments. But before you get all excited about that, I'd also tell you there's idiosyncratic deal activity that leads to repayments that makes this a very, very challenging thing to predict on a quarter-to-quarter basis.

Thank you for taking my questions.

We have a question from the line of Doug Mewhirter with SunTrust. Please go ahead.

Good afternoon. My first question, which investment was the one you put on non-accrual, and could you give any details around that or plans to deal with it?

So the investment is a Company called Avatar, A-V-A-T-A-R. It's a company that we've been working with and with the sponsor on for some time. So we just made the determination that it was appropriate to move it from accrual to non-accrual. It actually continues to pay interest and we anticipate that it will, as all watch list workout credits that we work on do, it will go through a process where we work collaboratively with the company and with the sponsor.

Key point I'd make on this is we went from 0.2% non-accruals to 0.4% non-accruals. If in future quarters we're talking about non-accruals at these levels, I'll be really happy.

Thank you for that. Thank you for that detail. Maybe a broader question. Over the years, you've developed a pretty big expertise in the retail consumer-oriented restaurant, food service industries.

Hearing some mixed signals in general about the health of these industries. And I know that's a very broad category. I was wondering if based on your observations, if your portfolio of companies or maybe potential deals out there, what kind of macro signals that you're getting from those areas regarding how it relates to the rest of the economy?

I think you put it really well; it's confusing right now. We published in our Golub Capital Middle Market Index, we published data for the first two months of the quarter ended September 30, which showed for our overall portfolio about 8% revenue growth, 4% EBITDA growth.

We saw weakness in manufacturing, and we saw consumer businesses looking pretty good. If you look at data that has come out since then, certainly the department store data is really concerning. Happily, we don't have department store exposure within the GBDC portfolio.

The news a couple of days ago that the home improvement store results are dramatically different from what's going on in the department store results is intriguing. I'm not sure what to make of that right now.

Maybe everybody's remodeling their kitchen and cooking at home. But I think you put it well; it's confusing right now, and I don't think we have a clear idea what to make of it either.

Okay, thank you for that. My last question, regarding your portfolio, and I second the positive comment on use of titration. Obviously, you seem to have a lot of opportunities out there and it seems like you're able to push some of that excess deal flow, if you want to call it that, into your SLF, which is a good place for your capital, getting good returns.

Is there enough of an opportunity though where you could actually -- your stock price and valuation permitting -- next year actually see where you would want to raise another round of equity? I know that's very hard to call. Is the opportunity that big to grow your portfolio or are you content to keep your aggregate portfolio in terms of the GBD balance sheet and the SLF, max it out and then recycle it with exits?

That's a great question and I guess I talked about this in terms of priorities. So priority one is keep earning a really good return for our existing GBDC shareholders on a risk-adjusted basis. And I guess I didn't realize how much of a nerd I sounded like when I used the word titration.

I'll know better for future quarters. Does come naturally to me. But maintaining the right leverage balance is a key element in achieving that goal number one, that good, solid return for existing GBDC shareholders with appropriate risk.

The second goal is to continue to grow SLF, and I think there will be -- there are opportunities for us to be able to achieve both goal number one and goal number two. The third goal, and it comes after the first two, would be to look at growing the equity base. As I've said on prior quarters, we're only going to do that if it's good for existing shareholders, good for new shareholders, and good for the Company.

So the circumstances under which that might turn out to be the case would be circumstances where we don't have a lot of firepower within the Company; we have a good, strong pipeline of new investments. So we anticipate being able to deploy a significant amount of capital quickly; and the stock is trading at a meaningful premium to book so that we could have the new capital be non-dilutive, be accretive for everybody.

We've done that a whole bunch of times in the past. We haven't done it since early this year. And I think we'll see is the answer to the question, is it going to happen in 2016? I hope so. But it's priority three. It comes after priority one and priority two.

Okay. Thank you very much. That's all my questions.

(Operator Instructions)

We do have a question from the line of David Chiaverini with Cantor Fitzgerald. Please go ahead.

Thank you. My question relates to the deal environment. To what extent has the deal environment improved with all the competitors pulling back from the market, being either fully levered or nearly fully levered?

And you referenced Ares and GE breaking up. I'm just curious, because the yields in the quarter really didn't change all that much on the new investments, so I'm curious as to what you're seeing now.

Well, our main competitors are not other BDCs, with the exception of Ares, they're really -- our main competitors are not other BDCs. Our main competitors are Ares and Antares, and both of them are active, formidable competitors.

We like them both. We think they're both very well managed. We think they both have real strength in credit. We work very frequently with them collaboratively on deals.

The big pullback over the course of 2015 hasn't been, as it affects us, hasn't been other BDCs, it's been banks. It's been the Credit Suisses, the Deutsche Banks, the UBSs, the JPMorgans who have chosen where they're doing leverage lending, have chosen to focus on larger size transactions. We've continued to see that pattern as we've crossed the September 30 quarter end into calendar Q4.

But we're also seeing one other trend, and that other trend is the typical response to the volatility that we all experienced in calendar Q3. A typical response to a lot of equity market volatility is it tends to lead to a slowdown of middle market M&A activity. Buyers and sellers have trouble agreeing on what are appropriate values, what propects are, what's going to happen to revenues and income during periods when there's a lot of volatility.

So what I indicated earlier in the call was that we're expecting that calendar Q4 origination volumes are probably going to be a bit lighter than calendar Q3. Calendar Q3 was pretty good, but it was lighter than calendar Q2. And my expectation would be that it will probably pick up in 2016, because again, the typical pattern is that volatility leads to some slowdown but that slowdown is temporary.

And in terms of the deal terms, are you expecting some of the yields to widen out a little bit in the middle market, or are you not seeing that yet?

Yes and yes. I'm hoping that we see some spread widening in middle market land, that typically we talk about you how we're insulated but not immune in middle market land from trends in the broadly syndicated and high yield markets. Clearly the broadly syndicated and high yield markets have seen some spread widening.

We've seen a little in middle market land but not as much. I hope we'll see a little bit more.

In answer to your second question, am I seeing it yet? Not so much. We're seeing more stability than widening.

Got it. Thank you very much.

Thank you, everyone. I appreciate your questions and your joining us today, and look forward to talking again next quarter. As always, if you have any questions or concerns, please feel free to reach out to us at any time.

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