Golub Capital BDC Inc (GBDC) 2016 Q2 法說會逐字稿

Good morning and welcome to the Golub Capital BDC Inc. March 1, 2016 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 made during the 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. filing with the Securities and Exchange Commission.

For a slide presentation that the Company intends to refer to on today's earnings conference call, please revisit the Investor's Resources Tab on the homepage of the companies website www.golubcapitalbdc.com and click on the events. My apologies and click on the events presentation link to find the March 31, 2016 Investors Presentation.

Golub Capital BDC earnings release is also available on the Company's website in the investor's resource section. As a reminder this call is being recorded for replay purposes.

I would now like to turn the turn the conference over to David Golub, Chief Executive Officer of Golub Capital BDC.

Thank you operator and good morning everybody. Thanks for joining us today. I'm joined here by Ross Teune, our Chief Financial Officer and Gregory Robbins, Manager Director at Golub Capital.

Yesterday we issued our earnings press release for the quarter ended March 31, and we posted a supplemental earnings presentation on our website we're going to refer to the presentation throughout the call. I'm going to start by providing an overview of the quarter and then I'm going to give the floor to Ross who's going to take you through the results in more detail and then I'll come back and provide some closing remarks and open the floor for questions.

Headline for the quarter is we had a lot of dramatic twists and turns in liquid credit markets in calendar Q1 but GBDC's performance remained pretty boring. In many respects the quarter was a tale of two quarters.

At the beginning of the quarter we saw very significant downdraft in liquid credit markets and this led to a slowdown in deal activity in a widening of spreads on new loans and then over the last couple of weeks in the quarter, there was a very significant recovery. The stabilization that we saw in those last several weeks has continued into calendar Q2 and it's led to a narrowing of spreads on new loans and an increased pace of deal activity.

Amidst this noise, GBDC enjoyed another solid quarter in calendar Q1. I'm going to highlight, Ross and I are going to highlight six elements on this call. First a stable net investment income per share, second solid originations, third continue to focus in our originations on one-stops, forth some improvement in yields on new loans, fifth an improved return on investment in our senior loan fund or SLF, and six, continued solid credit quality across the portfolio.

We did have one negative surprise in calendar Q1. In the December quarter, we'd written up the fair value of one of our watch list investments Avatar as we believed the sale of this company was imminent. There was a letter of intent for that sale that was in hand.

Unfortunately, there were some negative developments at the Company in the early part of Q1 that caused that sale to fall through. The Company subsequently entered into some negotiations that led to a new sale agreement at a lower value. We marked the position up in Q4 in recognition of the letter of intent in Q4 only to market down in calendar Q1.

The good news is that the sale closed earlier this week at a value modestly above our 3/31 mark so we won't have to talk about Avatar anymore. The impact of the Avatar reversal in fair value in calendar Q1 was about a $0.05 a share. With that context lets dive into the details.

So for the quarter ended March 31, net increase in net assets resulting from operations or net income was $14.2 million or $0.28 a share. That compares to $20.6 million or $0.40 a share for the quarter ended December 31. GAAP net investment income or as I call it income before credit losses, was $16.9 million for the quarter or $0.33 a share, excluding a $0.5 million reversal in the GAAP accrual for capital gains incentive fee.

Net investment income was $16.4 million or $0.32 a share. This compares to $16.4 million or $0.32 a share when excluding the accrual for capital gains incentive fee for the quarter ended December 31, 2015.

You'll recall, consistent with previous quarters we provide this information on net investment income per share excluding the GAAP capital gains incentive fee accrual, because we think that this measure is an important one, -- more meaningful one for investors. Per GAAP we're required to accrue the capital gains incentive fee as if unrealized capital appreciation were realized even though unrealized capital appreciation is not part of the calculation of the fee actually payable under the investment advisory agreement.

For the quarter we had net realized and unrealized losses on investments of $2.7 million or $0.$0.05 per share for the quarter ended March 31. As I mentioned earlier this was roughly equal to the hit from Avatar.

For the quarter ended March 31, 2016, net asset value per share decreased slightly from $15.89 per share to $15.85 per share or a 0.25% decline. And this was largely the result of the unrealized loss I just mentioned.

We're a little sad to have broken our streak of consecutive quarterly increases in NAB per share but we're proud that GBDC's achieved increases in NAB per share in 14 of the last 15 quarters. New middle market investment commitments for the quarter totaled $151 million. This included investments, I'm sorry, including investments of $4.9 million for senior loan fund, total new investment commitments were $156 million.

Consistent with prior quarters we continued to focus this last quarter on our one-stop products. You'll see in Ross's remarks that one-stops represented a large proportion of our new originations and you'll also hear that a large proportion of our new originations were in the form of repeat business. Meaning new loans to existing portfolio companies and to companies that are controlled by financial sponsors with whom we've done business before.

Our origination mix for the quarter, to be specific, was 72% one-stops, 24% traditional senior, 3% in senior loan fund and 1% in equities. Overall total investments in portfolio companies at fair value increased by 5.4% or $83.2 million during the quarter after payoffs and sales to SLF. Total investments and portfolio companies at fair value held by SLF increased by about 2% or $6.4 million during the quarter.

Turning to slide 3, you can see in the table that $0.28 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 the capital gains incentive fee and you can see our net asset value per share of $15.85. As shown on the bottom of the slide the portfolio remains well diversified. We've got investments today in 176 different portfolio companies and an average size for investment of $8.5 million.

I'm going to now turn it over to Ross who's going to provide you with some additional information about the financial results and portfolio highlights and then I'm going to come back with some closing remarks and we'll address questions.

Thanks, David. Turning to slide 4, as David mentioned we had total originations of $155.7 million and total exits in sales of investments of $76.5 million which contributed to net funds growth of $83.2 million during the quarter.

Turning to slide 5, these four charts provide a breakdown of the portfolio by investment type, industry, size, and fixed versus floating rate. Looking first at the chart at the top left hand side, overall portfolio mix by investment type, remained very consistent quarter-over-quarter with one-stop loans continuing to represent our largest category at 75%.

In regards to industry diversification, the portfolio remains well diversified by industry and there have been no significant changes in the industry classifications over the past year. 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 weight average rate on new middle market investments was 7.2%, which was above the weighted average rate on new investments originated last quarter of 6.7% and above the weighted average rate of investments that were sold or paid off during the quarter of 7%. Increase in the weighted average rate on new investments is consistent with comments we made on our last quarterly call that we are starting to see some spread widening in the middle market. As a reminder the weight 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 current LIBOR, 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. Looking first at the gray line, this line represent the income yield or the amount earned on our investments including interest and fee income, but excludes the amortizations of discounts and upfront origination fees. This income yield remained steady at 7.6% for the quarter.

The investment income yield or the dark blue line, which includes amortization of discounts and fees, decreased by approximately 20 basis points to 8% primarily due to lower OID amortization as a result of lower run off. The weighted average cost of debt remained steady at 3.3% for the quarter.

Flipping to the next slide, overall credit quality continues to remain strong. Non-accrual investments as a percentage of total investments at amortized cost, declined from 0.9% last quarter to 0.8% of the total portfolio at March 31. Non-accrual investments as a percent of total investments at fair value also declined from 0.5% last quarter to 0.3% at March 31. There were no new non-accrual investments added during the quarter and the overall percentage of non-accrual investments both at cost and fair value continues to remain very low.

Turning to slide 8, the percentage of investments risk graded at 5 or a 4 are our two highest categories, remain stable quarter-over-quarter and continues to represent over 90% of our portfolio. The percentage of investments risk graded a 2, declined because an obligor was upgraded to a 3 as a result every restructuring, and that contributed in part to an increase in the percentage of three risk rated assets. The percentage of investments risk graded a 2, also declined due to the downgrade of the Avatar to the 1 category.

As David mentioned this investment was sold subsequent to March 31 at a value slightly above its fair value as of March 31. As a reminder, independent valuation firms value approximately 25% of our investments each quarter.

In reviewing the more detailed balance sheet and income statement on the following two slides, we ended the quarter with total investments at fair value of $1.61 billion, total cash and restricted cash of $42.2 million and total assets of $1.67 billion. Total debt was $840.1 million which includes $461 million in floating rate debt issued through our securitization vehicles, $231.5 million of fixed rate to ventures and $147.6 million of debt outstanding in our revolving credit facility.

Total net asset value on a per share basis was $15.85. Our GAAP debt equity ratio was 1.03 times at March 31, while our regulatory debt to equity ratio was 0.75 times, both consistent with our targets.

Flipping to the statement of operations, total investment income for the quarter ended March 31, was $30.8 million, up $0.3 million from the prior quarter. On the expense side, total expenses of $13.9 million decreased by $1.3 million during the quarter, primarily due to the change in GAAP capital gains incentive fee expense.

For the quarter ended March 31, the GAAP capital gains incentive fee expense was a negative $0.5 million and this compares to a positive $1.4 million during the quarter ended December 31. As David highlighted earlier, we had net realized and unrealized losses of investments of $2.7 million during the quarter, and net income for the quarter totaled $14.2 million.

Turning to the following slide, the tables on the top provide a summary of our earnings-per-share, return on equity from both a net investment income and net income perspective for the past five quarters. Excluding the GAAP accrual for the capital gains incentive fee, NII on a per share basis has remained stable at $0.31 to $0.32 per share for the past five quarters, representing an annualized return of 8%.

The annualized quarterly return based on net income, was 7% this quarter but remains above 9% on average for the past five quarters due to strong equity gains and strong credit performance. The bottom of the page illustrates our long history of maintaining a stable and increasing net asset value over time.

Turn to slide 12, this slide provides some financial highlights for our investments in senior loan funds or SLF. Total investments at SLF at fair value as of March 31, were $360.9 million, up slightly from December 31. The annualized total return for the quarter ended March 31 improved to 10.8% as the fund is operating in line with its targeted leverage and did not incur any significant net mark to market gains or losses during the quarter.

Turn to the next slide as of March 31, we had approximately $52 million of capital for new investments through restricted and unrestricted cash and availability on our revolving credit facility. In addition we recently received SBA approval to issue another $75 million in debentures through one of our SBIC entities. We did issue $6.5 million of new debentures during the quarter, leaving $68.5 million of debenture commitments remaining subject to customary SBA regulatory requirements.

Slide 14 summarized 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 6.

I'll now turn it back to David who will provide some closing remarks.

Thanks, Ross. So to summarize, despite a volatile calendar Q1 in liquid credit markets, the first quarter of calendar 2016 was another steady one for GBDC. Looking forward some commentators think we're going to see a return to the January, February volatility and others think that the March, April stability is here to stay. I'm not sure but I think our capital is well-positioned for either environment.

Candidly, and this shouldn't be a surprise to longtime listeners on our earnings calls, we've been nervous about credit markets for quite some time. We're seven years into this recovery from the great recession and to us since the fall of 2015, it feels more and more as though everyone's-a-genius part of the credit cycles over. So we think this is a time when it makes sense to continue to be very cautious about taking on too much credit risk and this is the overlay that we're using in our underwriting decisions today.

And this brings me to my last point about our positioning. As you heard on today's call, the credit quality of the underlying borrowers in GBDC's portfolio remains solid. Years ago we decided to deemphasize or to completely avoid riskier asset classes such as junior debt, CLO equity, industries with commodity sensitivities, industries known to be cyclical like autos and steel, and we focused on first lien senior secured loans to solid resilient companies that are backed by high quality partnership oriented private equity firms.

We think this orientation, this positioning, is one of the reasons that investors look at our strategy as an all-weather strategy. And what I mean by that is, if we find ourselves in a position where economic growth accelerates, we'll see more M&A in deal activity and that'll bolster our investment choices. And if the economy falters and we think our portfolio construction puts us in a position where we're going to be able to play more offense and have to play less defense.

So that concludes our prepared remarks for today. As always we thank you for your time and your continued support. And with that operator if you could open the line for questions.

Thank you ladies and gentlemen

(Operator instructions)

Our first question comes from the line of Joe Mazzoli of Wells Fargo.

Good morning, and I am filling in here for John, as he is at the hospital anticipating the arrival of his second child. So very exciting times.

We see that Mills Fleet was a deal that backed KKR's $1.2 billion acquisition of the company. And given the size of the transaction, we assume that it probably could have been underwritten and syndicated by banks. So about $5 million was placed in Golub BDC, but to gain perspective of the capability of the Golub Capital platform, how big was the total commitment across Golub Capital for this deal?

So first off, thanks Joe and our best wishes to John and his family.

Let's go back a step. Let's talk about Mills Fleet. So it's a very interesting deal -- our first ever with KKR. The total transaction size, as you indicated -- our piece was over $200 million for the Golub Capital platform. Why were we in this deal? A couple of reasons.

One, we've now grown as a platform to a level where we can provide financing solutions even for large sponsors. So this deal is a small deal for KKR. But a large deal for a middle-market lending firm, and one that only among the largest middle-market lending firms would be able to offer this kind of over $200 million buy and hold solution for. Second reason that this transaction took place -- it took place in the context of a choppy debt market. I mentioned that the first quarter was marked by a bit of the roller coaster ride in liquid credit markets. I think it's fair to say that many sponsors during the first quarter were loathe to bring their deal to the broadly syndicated or upper middle-market syndicated markets because of uncertainty about what the execution would look like. And so when we were able to, in this case, offer KKR a solution with defined pricing, defined terms, defined owner of the loans on the long-term basis, it was viewed by the sponsor as a compelling solution.

So when you look at this in the context of GBDC, this is, I think it's an example of how the Golub Capital platform brings advantages to GBDC. GBDC, at roughly $1.5 billion in assets, could never provide a solution to KKR of this sort. Golub Capital as a platform does have the ability to do that, and the BDC has the capacity to take a piece of that loan very attractively priced, very attractive original issue discount, to be able to add to its portfolio.

That totally makes sense and thank you for that.

And as a follow on to the first question -- as banks were likely hesitant to underwrite M&A financing amid market volatility as you outlined, we see that market technicals are improving post quarter-end. So do you think these types of opportunities are not going to be -- maybe -- I don't mean to say not going to be available, but maybe banks would step in to take this type of financing in the current environment? Or are we still in a risk-off mode from a bank perspective?

So there are three factors that I think are relevant in thinking about your question. The first is a regulatory environment. So we continue to be in a regulatory environment in which banks are being pushed to do less in leveraged lending. So first element to your question, would banks want to be involved in a transaction like Mills Fleet or others of that ilk? Sure, they would like to, but there's going to be continuing regulatory pressure on banks to do less leverage lending, and as a consequence of that I think they're going to do more of the leverage lending that they do. They're going to be more focused on larger-sized transactions and less focused on the smaller sized transactions where we're focused.

Second element of the picture, beyond the regulatory one, is that there will be ups and downs to syndicated credit markets. When there is the kind of roller coaster ride that we saw in Q1 and markets are dislocated or fragile, then the certainty that we are able to offer in providing buy and hold facilities in scale becomes more compelling. I'm not saying they aren't competitive and compelling during times when syndication markets are hot, but they're particularly compelling when syndication markets are cold.

So I think the right way to look at this is, first there's a regulatory overlay. Things are clearly moving, market share is clearly moving away from banks. The second is that there's going to be a particularly attractive market for Golub Capital during times when credit markets are choppy. And that third piece of this puzzle is about scale. What I mean by that is, is that we are now of a size where it's pretty easy for Golub Capital as a platform to be making commitments in the $200 million to $300 million size range. This was not true five years ago. And our capacity, because of our scale to be able to offer buy and hold solutions in this size range, gives us some capabilities that in some respects are new to the market. And I think sponsors are becoming accustomed to this new capability. They like the new capability. And we're going to gain some share just because of the degree to which buy and hold solutions are often more attractive than syndicated solutions

Okay, thank you for that. That makes sense.

And my final question -- and congratulations on receiving the additional $75 million of SBA debentures. And we know that Golub has had a lot of success with this program historically, and understanding that Golub is cautious when considering economic leverage, we see that in the future this $75 million could be utilized with maybe growth in certain areas. But the omnibus bill increased the family of funds capped at $350 million. So is there still a $50 million of available capacity? Or is that $50 million already used somewhere else within Golub capital?

To remind everyone, the issue that Joe's alluding to is that until late last year there used to be a cap on availability of debentures through the SBIC program of $225 million. And we had, out at GBDC at the time, two SBIC subsidiaries, one of them with $150 million of debentures and one of them with $75 million of debentures. So we had to fully utilized the $225 million of available debentures under the family cap. Late last year, Congress passed and the President signed an omnibus law that included an increase in the family cap from $225 million to $350 million. And under the revised cap, we were able to apply in our smaller SBIC for an expansion of our debentures so that we could fully utilize up to $300 million of debentures.

So we were able to go from $225 million to $300 million. We were not able to go from $225 million to $350 million, because there's another rule. And the other rule is that the maximum size of any one SBIC is $150 million in debentures. So with this $75 million incremental debentures that we received approval for in February, we are now at the cap for the two SBICs that we currently have as subsidiaries of GBDC. In order to get access to the incremental $50 million of debentures, we will have to form and gain approval for an additional SBIC subsidiary. We are in the process of applying, and that process is -- it's a process. It takes some time and it's not assured. There are a number of hurdles associated with gaining approval for a third SBIC and gaining approval for the debentures for that third SBIC.

Okay, great; and that's it for me. Thank you very much for taking my questions.

(Operator Instructions)

Our next question comes from the line Doug Mewhirter of SunTrust Robinson.

Good morning. This is actually Matya Rothenberg on for Doug. Thank you taking my question.

So the SLF only grew a little bit from last quarter; I think about 2%. So first, is that a reflection of the low deal flow in the market? And then the second -- your dividend income from the SLF did grow quite nicely -- I think from $0.8 million last quarter to $1.1 million this quarter. So could you tell us a little bit more about that dynamic there?

Sure. So quite as you say, we grew assets in SLF. If you look at page 12 of the investor presentation, from $354 million to $361 million during the quarter. We now view SLF as being at a scale size, so it is efficient in its capital structure. It is well diversified. We have achieved a first step of our goal in creating SLF, which is to reach a scale size. We continue to look to grow SLF modestly from here, but we do not expect to continue to grow SLF at the pace that we were growing it prior to this last quarter. We think that there will be continuing opportunities to grow SLF, but our aspirations for growth here are modest, relative to the growth that we had in SLF prior to the December 31 quarter.

In terms of earnings power from SLF, we think this last quarter is much more representative of the earnings power of SLF then the prior several quarters. And we're hopeful that we can actually increase the return on equity of SLF from the 10.8% annualized rate that we achieved in the March 31 quarter. We're hopeful that we can increase that modestly. But we are not aiming for the stars on this. We are aiming for a modest improvement on the 10.8%.

Okay, thank you.

And then my second question is in a little bit of a different direction: so since you increased your SBIC commitment, are you planning to grow mostly through that facility? Or would you consider raising equity?

Well, our view on raising equity has been really consistent over many years -- which is, we think that in order for Golub Capital BDC to raise equity, it's got to be good for shareholders. It's got to be good for new shareholders and it's got to be good for the Company. And I've talked before about how it can be challenging to have all three of those line up at the same time. So we look very carefully at whether we are trading at what we view is an appropriate premium at what the pipeline of new investment opportunities looks like at that time. And at what kind of incremental ROE would come with the equity raise that we're looking at. So we plan on continuing to look at equity raises through that lens. And we'll evaluate whether it makes sense or doesn't make sense based on the characteristics of the market for new investments and the market for equity at that time.

In terms of growth from here, absent a new equity raise, we are, as Ross said, very dialed right now in terms of our goals from a leverage standpoint. We're operating right around our goal of 1.0 debt to equity ratio for GAAP; a 0.75% for regulatory leverage. We have some incremental liquidity that we can use to grow investments, as we outlined on this call. But we feel very good about how the balance sheet is tuned right now.

Okay great. That's all I have. Thank you for your time.

Our next question comes from the line of Leslie Vandegrift of Raymond James.

Good morning.

Just a few quick follow-up questions on -- you discussed at the beginning of the call -- I believe you were talking about the repayment level this quarter? Obviously that led to a little bit lower on OID acceleration, et cetera. Was there market issues that led to lower repayments this quarter versus first quarter last year? Is that something specific for you guys?

I think repayments across the market were lower in calendar Q1. I think this was a function of the topsy-turvy liquid credit markets. A portion of repayments in any period on the part of obligors is, in a sense, voluntary. Obligors will seek new financing when it makes sense for them to seek new financing. And in a period when credit markets are a little bit unstable and maybe credit spreads are widening, that almost invariably leads to a temporary slowdown in repayment activity. Over time this tends to balance out. And my expectation would be that we'll see higher repayments later in calendar 2016.

Now, so, more later in the year rather than packed into second quarter as overflow?

Any one quarter, it's really hard to predict levels of repayments, because a lot of repayment activity is idiosyncratic. So I feel much more comfortable making the prediction that we're going to see higher repayments over the course of the rest of 2016 then being specific to calendar Q2.

Okay. And then on another topic -- last quarter we saw some higher one-off deals on the one-stops where you had the higher leverage multiples come in. Did you see any of more this quarter? Did they trend down? Just trying to get some color around that?

I think there was a trend in calendar Q1 toward some higher spreads. We talked about how that's reflected in our average spreads in investments made in calendar Q1. I don't think there was a lot of movement in calendar Q1 in terms of typical leverage levels for new investments. And so I think the data point you're identifying is probably more idiosyncratic then it is indicative of a trend.

Okay. All right. Perfect. Thank you. That's all my questions.

(Operator Instructions)

At this present time we do not have any additional questions. Please continue with your presentation or closing remarks.

Thank you, Operator. I just want to thank everybody again for participating in today's call and for your continued support. As always, if you have any questions that we didn't cover today, please feel free to reach out to Gregory, 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.