Golub Capital BDC Inc (GBDC) 2016 Q3 法說會逐字稿

Good afternoon. Welcome to the Golub Capital BDC Inc.'s June 30, 2016 Quarterly Earnings Conference Call. Before we begin, I'd 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 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 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 visit the Investor Resources Tab on the homepage of the Company's website www.golubcapitalbdc.com and click on the events presentation link to find the June 30, 2016 Investor Presentation. Golub Capital BDC's earnings release is also available on the Company's website in the Investor Resource section. As a reminder, this call is being recorded for replay purposes.

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

Thank you, operator. Good afternoon, everybody. Thanks for joining us today. I'm joined by Ross Teune, our Chief Financial Officer and Greg Robbins, Manager Director.

Yesterday afternoon, we issued our earnings press release for the quarter ended June 30 and we posted a supplemental earnings presentation on our website. We're going to refer to the presentation throughout the call today. I'm going to start by providing an overview of the June 30 quarterly financial results. Ross is then 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.

The quarter ended June 30 was another good solid quarter for GBDC. Our steadiness stands in contrast to the market environment over the last six months, which has been marked by violent swings in liquid debt and equity markets and by some major political surprises including, right at the end of the quarter we saw Brexit.

Did we predict this volatility and its causes? Not exactly, but our approach to investing starts with the assumption that there are always going to be surprises and our goal is to deliver steady results despite them. We seek to achieve these steady results by pursuing a steady strategy. You've heard me talk about this before, the strategy focused on first lien senior secured loan investments in steady companies and steady sectors of the US middle market and backed by steady, reliable private equity sponsors.

So before I go into detail, I want to highlight a couple of drivers of GBDC's performance in the third fiscal quarter of 2016 and you'll note that the common theme across these drivers is continuity. First, GBDC continues to have solid credit performance across the portfolio. Second, GBDC continues to focus on one stop loans, which we think are the most compelling place for investing in the middle market today.

Third, GBDC continues to benefit from access to Golub Capital's market leading scale and relationships. Fourth, Golub Capital BDC continues to deploy its capital in Golub Capital led transactions that we believe are attractively priced and structure. And Fifth, GBDC continues to benefit from the optimization of its Senior Loan Fund.

So Ross will discuss many of these themes with greater specificity in his comments and I'll come back and talk a little bit more about them in my closing remarks as I focus on the outlook for the rest of fiscal 2016 and the beginning of fiscal 2017. With that context, let's dive into the details. So net increase in net assets resulting from operations a.k.a. net income for the quarter ended June 30 was $18.3 million or $0.35 a share. That compared to $14.2 million or $0.28 a share for the quarter ended March 31.

GAAP net investment income or as I like to call it, income before credit losses was $15.9 million for the quarter were $0.31 a share. Excluding a $600,000 GAAP accrual for the capital gains incentive fee, NII was $16.4 million or $0.32 a share. This compares to $16.4 million or $0.32 a share, when excluding the $500,000 reversal in the accrual for capital gain incentive fee for the quarter ended March 31.

So consistent with previous quarters, we provide you with net investment income per share excluding the GAAP cap gains incentive fee accrual because that cap gain incentive fee payable as calculated under the Investment Advisory Agreement is zero, and we think this is a measure that, in some respects, is a more meaningful way of looking at income before credit losses.

Net realized and unrealized gain on investments and secured borrowings for the quarter were $2.4 million or $0.04 per share and that was the result of $5.4 million net realized loss and $7.8 million of net unrealized depreciation. The biggest contributors to those two numbers were GBDC's sale of its Avatar stake, which we talked about last quarter. That stake was sold during the quarter at a price a bit higher than its March 31 mark.

For the quarter ended June 30, net asset value per share increased to $15.88 per share as compared to $15.85 at the end of the prior quarter. We're very proud of the fact that GBDC has achieved increases in NAV per share in 15 of the last 16 quarters. New middle-market investment commitments totaled $156 million for the quarter.

Consistent with prior quarters, we continue to focus on repeat business and on one-stops. Over 80% of our origination activity in the June 30 quarter was in one-stops and the vast majority of the balance was in traditional first lien senior secured loans. Overall, total investments in portfolio companies at fair value increased by $16.8 million during the quarter after payoffs and sales turning to SLF.

Turning to Slide 3, you can see in the table, the $0.35 per share we earned from a net income perspective, the $0.32 per share we earned from a NII perspective before accrual for the cap gains incentive fee and you can see our net asset value per share of $15.88 at June 30. As shown on the bottom of the slide, the portfolio remains very well diversified. We've got today investments in a 185 different portfolio companies and an average size of $8.2 million per investment.

With that, I'll now turn it over to Ross who is going to provide some additional portfolio highlights and discuss the financial results in more detail and then I'll come back to talk a little bit of our prospects and open the floor for questions.

Thank you.

Great. Thanks, David. I'll begin on Slide 4. As David mentioned, we had total originations of $156 million during the quarter and total exits and sales of $139.4 million, which contributed to net funds growth of $16.8 million. As shown in the table on the bottom, our originations were predominantly in one-stop investments.

Turn 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 on the top left-hand side, the overall portfolio mix by investment type remained very consistent quarter-over-quarter with one-stop loans continuing to represent our largest investment category at 76%.

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 the debt portfolio remains predominantly invested in floating rate loans.

Turn to Slide 6, weighted average rate on new investments was 7.2%. This is consistent with the way weighted average rate on new investments originated last quarter and was above the weighted average rate of investments that were sold or paid off during the quarter of 6.8%.

As a reminder, the weighted average interest rate of the 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, the spread over LIBOR and the impact of any LIBOR floor.

Shifting to the graph on the right hand side, the graph summarizes investment portfolio spreads for the quarter. Looking first at the grey line, this line represents the income yield or the amount earned on the investments, including interest and fees, but excluding amortization of upfront origination fees.

The income yields remained steady at 7.6% for the quarter. The investment income yields or the dark blue line, which includes the amortization of origination fees increased by 20 basis points to 8.2% as we had higher pre-payments this quarter. The weighted average cost of debt, the green line, remained steady at 3.3%.

Flipping to the next slide, credit quality remained strong with non-accrual investments as a percentage of total investments at cost and fair value of 0.3% and 0.1% respectively. These percentages improved from March 31, primarily due to the sale of Avatar, which incurred in May and was sold at a price slightly above the mark that we had as of March 31. There was one small new non-accrual investment added during the quarter.

Turn to Slide 8, the percentage of investments risk rated at five or a four, our two highest categories, remained stable quarter-over-quarter and continue to represent over 90% of the portfolio. Due to the sale of Avatar, you can see we no longer have any investments that had a risk rating of one at the end of the quarter. As a reminder, independent valuation firms value approximately 25% of our investments each quarter.

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 $1.63 billion. Total cash and restricted cash of $61.9 million and total assets of just under $1.7 billion, Total debt was $862.1 million, which includes $461 million in floating rate debt issue through our two securitization vehicles, $255 million of fixed rate debentures, and $146.1 million of debt outstanding on revolving credit facilities.

Total net asset value on a per share basis was $15.88. Our GAAP debt-to-equity ratio was 1.06 times at June 30, while our regulatory debt-to-equity ratio was 0.74 times, which are both consistent with our targets.

Flipping to the statement of operations, total investment income for the quarter ended June 30 was $32.1 million. This was up $1.3 million from the prior quarter, primarily due to higher average investments outstanding and higher fee amortization from increased run-off.

On the expense side, total expenses of $16.2 million increased by $2.4 million during the quarter primarily due to $1.1 million increase in the capital gains incentive fee expense and a $1 million increase in the net investment income portion of the incentive fee calculation. As David highlighted earlier, we had net realized and unrealized gains of investments of $2.4 million during the quarter and net income was $18.3 million.

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

The annualized quarterly return based on net income was 9% this quarter, which is consistent with the average over the past five quarters due to strong credit performance and strong equity gains. The bottom of the page illustrates our long history of maintaining a stable and increasing NAV over time.

Turning to Slide 12, this slide provides some financial highlights for investment in Senior Loan Fund. The annualized total return this quarter improved to 12.6% as the fund is operating in-line with its leverage targets and the fund recaptured some mark-to-market losses on broadly syndicated loans from prior quarters. Total investments at fair value at the end of the quarter declined slightly to $350.6 million, primarily due to an increase in prepayments.

Turning to the next slide, as of June 30, we had approximately $113.2 million of capital for new investments through restricted and unrestricted cash, availability on our revolving credit facility and additional debentures available through our two SBIC subsidiaries.

Slide 14 summarizes the terms of our debt facilities. And last, on Slide 15, our Board declared a distribution of $0.32 a share payable on September 29 to shareholders of record as of September 5.

I will now turn the call back to David, who will provide some closing remarks.

Thanks, Ross. So, to summarize, GBDC had a steady quarter and a steady first half of calendar 2016, despite a lot of market volatility and an unpredictable geopolitical developments. We don't know, we don't aspire to know what the next big surprise is going to be, but we plan to continue to work to position GBDC to be resilient to the unexpected.

And the simple way we're planning to do that is to stay laser focused on lending to resilient companies in recession-resistant industries backed by top sponsors. Now, let me offer four reasons why I think this strategy will continue to be successful.

First, non-bank lenders continue to gain share from banks. We talked this before, the impact of regulatory pressure on banks to reduce leveraged lending activity started in earnest in the early part of 2015 and we think it's likely to remain a meaningful tailwind for Golub Capital for the next several years.

Second, buy and hold solutions and one-stop solutions continue to gain share over syndicated solutions and complex capital structures. We're a leader in buy and hold solutions and one-stop solutions, so we think these trends play to ours strengths.

Third, our relationships continue to be a key source of momentum for us. In the first half of calendar 2016, over 90% of our origination activity was with sponsors that have already done a deal with Golub Capital and a significant portion of this activity came in the form of add-on transaction with portfolio companies. We believe we'll continue to generate repeat business, attractive repeat business with sponsor clients and existing borrowers.

And finally, if we take a step back and think about Golub Capital as a brand, the core of our brand promise is all about reliability. If you think about when reliability is most valuable, it tends to be most valuable in the future is murky. We don't know where there will be another period of turbulence, as it was at the beginning of this year and it's the rush around Brexit. But we think we're well positioned to play offence the next time reliability is worth a premium.

So that concludes our prepared remarks for today. As always, I want to thank everybody for their time and continued support. And with that, operator, if you can open the line for questions.

(Operator Instructions) Jonathan Bock, Wells Fargo Securities.

Thank you for taking my question and good afternoon. David, so we've seen a substantial percentage of the deals that, no surprise, be one-stop transactions and the question that I know a number of institutional investors have relates to leverage in some of those deals. We don't need to paint it to you specifically but the view was, is that as the value proposition of unitranche continues to show itself to and one-stop show itself to sponsors so has their ability -- increase their ability to get better terms, right.

Clearly pricing is down but leverage is up. Can you walk us through whether you've seen leverage creep in general one-stop transactions across the board and what does that mean for a risk return dynamic going into a potential another credit cycle?

So, let me go back a step and make sure we're all on the same page. So the question was, in a nutshell, what's happening in the one-stop market and are we seeing one-stops become less attractive from an investor standpoint. If you look at a big picture arc since the end of the financial crisis, so may be 2009 to 2014, there is no question that over that period, we saw terms and leverage for middle market transactions become less lender-friendly. So we saw some increase in leverage, we saw some decrease in spreads.

In the last two years, that has been more steady than changing. In fact, in the early part of calendar 2016, we saw some spread widening activity, around Brexit] we saw some spread widening activity. So I'm not sure I'd say uniformly that the trend over the last two years has been a negative trend. I think there has been more flatness than there has been a trend toward things getting worse from a lender perspective.

Where I think the leverage piece gets a bit confusing is that while leverage is absolutely a valid indicator of credit risk, it's only one indicator of credit risks. So for example, we have, in the recent period, been making a large proportion of our one-stop loans to very valuable companies that are being bought and sold at not just double-digit multiples but multiples as high as 15 times EBITDA and higher and they're being sold at that level not because the private equity sponsors are dumb, but because the underlying companies are growing, they're well positioned, they really dominate a niche, they're highly profitable, they are very cash generative and many of these companies are mission-critical business-to-business software companies.

So what we determined is that in many cases if we're dealing with a very high quality company, making a one-stop loan at 5.5 times or 6 times leverage for that kind of company is actually meaningfully less risky than making a one-stop loan to a less well-positioned company at a meaningfully lower leverage level.

So leverage levels in itself, they tell part of the picture, but not all of the picture. This is a long-winded way of -- coming back the core point here, which I mentioned in my remarks, we believe that one-stops have been and remain the most compelling middle-market debt investment for investors in today's environment.

Had there been prior environments where they've been even more compelling? Sure, 2010 looks really wonderful through the review window. But I'd say we're highly confident today that there remain very attractive one-stop debt investments to make.

Got it, thank you and so perhaps a corollary. I know we've talked in a public context here on a BDC that you've raised, I believe through the private markets, and one question will be if there is an update on that portfolio, as well as the process of going through a private capital raise, that is a bit different than some of the other private BDCs that have perhaps been raised in the past. An update on that and then also a view on an eventual disposition or what really happens over the next three years would be helpful to folks that might not be as familiar with that fund as it comes to market.

So, you're correct that we have a private BDC designed for institutional investors that we're very pleased with the level of support that we've received from institutional investors on. As many of you know, we also manage a number of private funds, including a series of private limited partnerships, because all of these are private funds, unfortunately I can't talk about them in this context, but if anyone is interested in learning more about the private funds, I'd encourage them to contact us.

Okay. Then lastly, one question as it relates to Qlik Technologies. So, you have participated in that unitranche and clearly the lots of discussion that the unitranche market can go to very, very high or large-sized deals, and in that case, $1 billion unitranche was a record. Is it your view that that is an exception or the coming rule as the private lending ecosystem is able to do much larger deals, particularly if they work in partnership with other like-minded in respected creditors?

Well, I'd give you two answers to that question. Do I think that larger one-stops are going to continue to take share from syndicated solutions with complex capital structures. The answer is yes. And I'd start not at $1 billion in that answer, I'd start at about $250 million and if you look at the $250 million to $600 million category, we could identify half dozen transactions in addition to Qlik where we'd seen larger one-stops delivered for companies in a compelling way this calendar year.

A recent one we were involved in was for Pet Valu [for work] and that was a -- if my recollection is correct, that was about a $600 million total transaction size. So yes, one-stops are taking some share. I think having $1 billion one-stops, that's unusual. This is the first and only one of that sort. The next largest transaction of that sort that I'm aware of is this $600 million Pet Valu deal.

So I don't think we're going to see a lot of $1 billion deals and I think the circumstances around why that was attractive to us and other like-minded debt providers and it was attractive to the sponsor and it bears a lot on the idiosyncrasies of that deal in that time. So I think we've got great opportunity at Golub Capital to grow our one-stop business in these upper middle market size transactions where the banks are exiting. I tend to doubt that opportunity is going to extend very often to billion dollar transactions.

Ryan Lynch, KBW.

Good morning. Thank you for taking my questions, kind a building off some of Jon's questions. I just wanted to talk about the size of the Golub platform, not just across the BDC but across all your funds, what sort of size of a commitment does the whole Golub Capital platform feel comfortable committing to and generally speaking, of course. And then, what size of that commitment -- out of a typical transaction that Golub Capital would commit to, what percentage of that deal would actually go into the BDC versus be put on the rest of the platform?

So, a great question. So just to update everyone on the phone, across a variety of private funds, separate accounts, funds [of one] as well as the BDC's. Golub Capital today manages about $18 billion in capital. So the GBDC represents about 10% of the total platform. We are big believers in diversification, so we do not feel comfortable making real lumpy commitments.

So we today are frequently looking at transactions as big as the $200 million to $300 million size range, where we would hold the full facilities. Above that range, we will sometimes participate, sometimes bring in some partners, but we're unlikely to hold meaningfully more than the $200 million to $300 million at the current time.

GBDC would get a pro rata share of that investment and if you look at the GBDC portfolio, it's unusual for an investment in the GBDC portfolio to constitute more than about 1.5% to 2% of total investments. As I mentioned in in the call, we today have 185 different positions and an average position size of a bit over $8 million. We really like that degree of granularity. We think that's a very significant risk mitigant.

And then, in July, you guys raised equity capital through a private placement, is that something you guys are looking to continue to do in the future, do maybe some smaller private placement deals or is that just a deal like that, is that just to supplement maybe the more regular larger secondary overnight offerings?

Well I'd say we haven't changed our overall attitude or approach to capital raising and what I mean by that is, we continue to live by our longstanding philosophy that in order for us to want to raise additional capital for GBDC, it's got to be good for the new investors, good for the existing investors and good for the Company. So we saw an opportunity in July to bring on an institutional investor in a size that we could rapidly deploy at a net price to the Company of about 110% of NAV. It fit all of those criteria.

So, I think, a variety of different ways in which we might raise capital. Are under discussion and exploration at different times and we don't want to restrict ourselves to any one method or mechanism, but we do want to make sure that we stay consistent with our philosophy of, it's got to be good for the new investors, good for the existing investors and good the Company.

Robert Dodd, Raymond James.

Can I ask you to pull out your crystal ball if you can. In terms of deployment recently, you guys have been very, very steady over the last three quarters, $150 million, $160 million in a quarter and the overall market environment in terms of activity levels have been relatively subdued.

So looking forward, obviously, I mean the talk varies depending on whom I talk to about whether demand is really perking up, whether there is going to be a spike towards the end of the year, which sometimes happens and sometimes doesn't, especially in an election year. But can give us just what's your qualitative feel about how the market demand, especially with private equity multiples remaining very high in a lot of sub-sectors and obviously we invest when a capital being an issue in that environment. I mean, what's you view for the rest of the year and into maybe early 2017?

So let's contextualize first. So if you look at Q1 of this year, market-wide leverage lending volume was down significantly and that made sense to everybody because we saw a lot of market disruption in late 2015 and into January of 2016, that kind of downward movement in equity and liquid gas prices tends to lead to a slowdown in M&A activity. So the statistics I've read for Q1 indicate, leverage lending activity was down between 20% and 30% for Q1.

I think you choose a little better, I've seen a variety of different statistics that put Q2 still down from prior year, but meaningfully better than the 20% to 30% down. So we're still, call it down 20% for the first half of the year. My expectation is that the second half will be more like Q2 than Q1. What I mean by that is, we'll still see volumes a bit lower than they were last year. But we are unlikely to see volumes as low as they were in Q1.

I'll also tell you, I don't really care so much and that may sound like a statement that you're not expecting. But if you look at our volumes over the course of the first half, what drove them were relationship-based lending, core group of sponsors, about a 150 that we've done multiple deals with have been driving more than 80% of our volume and existing obligors have been driving over the last several years, over 40% of our volume.

So to us, this overall market level of activity is not a critical variable and candidly, we perhaps spend a bit less time than others to on trying to crystal ball the way that you're asking me to right now and focus more on nurturing the relationships and the existing portfolio opportunities that we've got.

Thank you for that color. Just chopping it a little differently on the SLF side in terms of the first lien market versus the unitranche market, are you seeing any developing differences there and whether is competition getting even worse in that side of the market, since obviously yields et cetera we've seen some stability in some areas, but is the volume just there?

We're seeing definite trends in the broadly syndicated market. And as I said before, we're in the middle market. We're insulated, but we're not immune from what's happening in the broadly syndicated market and it's really clear in the period since the Brexit fears peaked in very early July. It is very clear that we've seen a trend toward lower spreads in the broadly syndicated market. So I'm anticipating that we'll see some pressure on spreads in middle market, first-lien lending. I think that's the predictable lag effect of what's happening in the [BSL] market.

If I can follow-up to your response to one of Jonathan's question. In terms of the leverage attachment point and relative to the value of the business kind of a loan to value, I mean, five times on 15 is 30% versus five times on nine is -- one of those is [high 11] and the other one isn't. How much credence do you give to, obviously the total valuation are partly set by the willingness of private equity sponsors to put higher multiple on things and obviously you have more (inaudible) scenario credit and risk averse.

At what point does that become problematic for you in terms of the multiples get unrealistic to the point that the private equity sponsors wants a certain loan-to-value, for lack of a better term, and value is obviously esoteric when it's an enterprise value multiple. Where does that started to really cause your relationships to butt heads, so to speak and you being unwilling to do some of those deals that they want done.

Well, we say no a lot. We've always said no a lot. So our sponsor clients understand that part of the drill of working with us is that we often say no. I think that that's been true, that will continue to be true. And in respect of the kinds of businesses you're talking about, I'd also point out one other thing. We don't put that much credence per se in loan-to-value on day of origination as a great indicator of credit risk. It's an indicator, but it's not a great indicator.

What we really are much more focused on is what could go wrong? How badly could those things go wrong? and if they went wrong, what kind of value would a strategic player be prepared to pay for that company when it's a bit beaten up. It's the distress sale value analysis that really lies at the core of our underwriting decision.

So when you look at a company like the one I was alluding to earlier in this call, a company with a lot of recurring revenues and steady maintenance and subscription volumes that's embedded in many, many clients with a very, very high level of persistence of the products where renewals are 95%-97% or more. That's the kind of company that we find in our analysis stands up to this distressed value, distressed sale value test.

(Operator Instructions) Ray Cheesman, Anfield Capital.

Thank you for taking my question. I noticed you had an uptick in the level three category of your assets this quarter. I wondered if there was any color you could share about that movement?

We are always reevaluating that credit levels for each of our portfolio companies each quarter. You're right, there was a small uptick in three's, there was a downtick into two's, I kind of look at the overall movement and overall level of fours and fives as indicating steadiness as opposed to indicating some trend. If I look at the overall stratification of the portfolio right now, I'd characterize it as unusually and probably unsustainably strong.

So if I was to ask follow-up. So the portfolio EBITDA is growing and the portfolio EBITDA coverage is getting stronger. That is likely to be a yes on your part.

It is a yes. In fact, we published each quarter as I think you know our Golub Capital Altman Middle Market Index where we list those two statistics, in particular revenue growth and EBITDA growth for our portfolio and both for calendar Q2 we're quite positive, yes. In fact, better than the economy as a whole.

We have no other questions at this time.

Great. I want to thank everybody for their time today. And as always, if there are other questions that you come up with over the course of the quarter, please feel free to reach out to Ross or Gregory or myself. Look forward to talking to you next quarter.

Ladies and gentlemen, that will conclude the conference call for today. We thank you for your participation and you can now disconnect your lines.