Golub Capital BDC Inc (GBDC) 2016 Q4 法說會逐字稿

Welcome to Golub Capital BDC, Inc., September 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 filings 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 Presentations link to find the September 30, 2016, 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'll now turn the call over to David Golub, Chief Executive Officer of Golub Capital BDC. Please go ahead.

Thanks, Jose, and hello, everyone. Thanks for joining us today. I'm joined by Ross Teune, our Chief Financial Officer; and Greg Robbins, Managing Director.

Yesterday afternoon 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 the call today. I'm going to start by providing an overview of the quarter. 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. With that, let's begin.

The quarter ended September 30 was another solid quarter for GBDC. It closed out an excellent fiscal year. For those of you who are new to GBDC, our investment strategy is, and since our inception has been, to focus on providing first-lien senior secured loans to healthy resilient middle-market companies backed by strong partnership-oriented private equity sponsors. I'm going to start by providing an overview of GBDC's results for the fourth fiscal quarter of 2016. Ross is going to take you through the results in more detail.

I'll begin my overview by repeating some headlines from last quarter, and I think they're worth repeating because they again ring true for this quarter. First, GBDC continues to have solid credit performance across the portfolio. Second, GBDC continues to focus on one-stop loans, which we believe 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. And, fourth, GBDC continues to deploy capital in new Golub Capital-led transactions that we believe are attractively priced and well structured. It's interesting. These headlines have been very consistent throughout FY16 despite the fact that the year's brought a variety of different geopolitical surprises, including Brexit, despite year-to-date M&A volume in the middle market being down about 25% compared to last year, and despite default rates ticking up for broadly syndicated loans, high-yield bonds, and middle-market junior debt. So, with that by way of context, let's dive into the details on the quarter.

Net increase in net assets from operations, or net income, for the quarter ended September 30 was $16.1 million or $0.30 per share as compared to $18.3 million or $0.35 a share for the June 30 quarter. Net investment income, or, as I call it, income before credit losses, was $17.2 million for the quarter ended September 30 or $0.32 a share, and that compares to $15.9 million or $0.31 a share for the quarter ended June 30. The numbers I just gave excluded a $0.1 million GAAP reversal in the accrual for capital gains incentive fee. I'm sorry; I misspoke -- excluding a $0.1 million GAAP reversal in the accrual for capital gains incentive fee, net investment income was $17.1 million for the quarter or $0.32 -- it stayed $0.32 -- as compared to $16.4 million or $0.32 when excluding a $0.5 million accrual for the cap gains incentive fee for the quarter ended June 30.

Consistent with previous quarters, we provided net investment income per share excluding the GAAP cap gains incentive fee accrual because we believe that the cap gains incentive fee payable under the investment advisory agreement is zero, and we think, as such, that adjusted NII is a more meaningful measure of income before credit losses.

Net realized and unrealized loss on investments in secured borrowings were $1.1 million or $0.02 for the quarter. And that was primarily the result of $6.5 million of net realized gain and $7.6 million of net unrealized depreciation.

For the quarter ended September 30, our NAV per share increased to $15.96. That's a new high for GBDC and compares to $15.88 for the prior quarter. The increase was primarily the result of raising additional equity capital at a premium to NAV. We're very proud of the fact that GBDC has achieved increases in NAV per share in 16 of the last 17 quarters.

New middle market investment commitments totaled $179.4 million for the quarter. Consistent with prior quarters, we continue to focus our origination efforts on one-stops. Approximately 85% of our origination in the September 30 quarter was in one-stops, with the vast majority in traditional first-lien senior secured loans. Overall total investments in portfolio companies at fair value increased by $32.1 million or about 2% during the quarter after payoffs and after sales to SLF.

On November 14 our Board declared our regular quarterly distribution of $0.32 per share. In addition, in light of the fact we've earned taxable income in excess of distributions over the past couple of years, our Board also declared a special distribution of $0.25 per share. This special distribution will reduce the need to incur a 4% excise tax, which is payable on taxable income that has not been distributed. So we believe this is a positive for both shareholders and the Company. Both our regular distribution and our special distribution are payable on December 29 to holders of record as of December 12.

Turning to slide 3, you can see in the table the $0.30 per share we earned from a net income perspective, the $0.32 per share we earned from a net investment income perspective before accrual for the cap gains incentive fee, and our NAV per share of $15.96 at September 30. As shown on the bottom of the slide, the portfolio remains well diversified, with investments in 183 different portfolio companies and an average size of $8.5 million per investment.

With that, I'm going to turn it over to Ross, who will provide you some additional portfolio highlights and discuss the financial results in more detail.

Thanks, David.

Starting on slide 4, as David mentioned, we had total originations of $179.4 million and total exits and sales of $151.3 million, which contributed to net funds growth of $32.1 million. Turning to slide 5, these four charts provide a breakdown of the portfolio by investment type, industry, investment size, and fixed versus floating rate. Looking first at the chart on the top left-hand side, overall portfolio mix by type remains consistent quarter over quarter, with one-stop loans continuing to represent our largest category at 78%. With regards to industry diversification the portfolio remains well diversified by industry. There have been no 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 portfolio remains predominantly invested in floating rate loans.

Turning to slide 6, the weighted average rate of 7.6% on new investment was up this quarter from 7.2% last quarter. The increase was largely the result of several higher-spread loans originated during the quarter and not a general market move towards higher spreads. As a reminder, 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. Looking first at the gray line, this line represents the income yield for the actual amount earned on investments, including interest and fee income, but excluding amortization of up-front origination fees. The income yield increased 20 basis points to 7.8% for the quarter. This is primarily due to an increase in prepayment fees, as well as higher pricing on new investments over the past few quarters.

The investment income yield, or the dark blue line, which includes amortization of fees and discounts, increased by 30 basis points to 8.5%. This is due to the higher prepayment fees and higher spreads on new originations, which I just mentioned, as well as higher OID amortization that occurred during the quarter. The weighted average cost of debt, the green line, increased modestly to 3.4%, and this is due to the increasing LIBOR rate.

Flipping to the next slide, credit quality remains 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 were unchanged from the prior quarter. And there were no new loans added to non-accrual status during the quarter. Turning to slide 8, the percentages of investments risk-rated at 5 or at 4, our two highest categories, remained relatively stable quarter over quarter, and continues to represent about 90% of our portfolio. 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 $1.66 billion, total cash and restricted cash of $89.5 million, and total assets of $1.76 billion. Total debt was $864.7 million. This consisted of $461 million of floating rate debt issued through our securitization vehicles, $277 million of fixed rate debentures, and $126.7 million of debt outstanding in the revolving facility. Total net asset value on a per share basis was $15.96. Our GAAP debt to equity ratio was 0.99 times at September 30, while our regulatory debt to equity ratio was 0.67 times. These levels are slightly below our longer-term targets as the equity raises during the quarter resulted in some short-term deleveraging of our balance sheet.

Flipping to the statement of operations on the next slide, total investment income for the quarter was $34.5 million. This was up $2.4 million from the prior quarter due to higher average investments outstanding, higher fee amortization, and an increase in prepayment fees. On the expense side, total expenses of $17.3 million increased by $1.1 million. This was primarily due to a $0.7 million increase in incentive fee expense. As David highlighted earlier, we had net realized and unrealized losses on investments of $1.1 million during the quarter, and total net income was $16.1 million.

Turning to the following slide, the tables on the top provide a summary of our EPS and ROE, both from a net investment income and a net income perspective for the past five quarters. Excluding the GAAP accrual for capital gains incentive fee, NII on a per share basis has remained stable at $0.32 per share for the past five quarters, representing an annualized return of 8%. The annualized quarterly return based on net income was 7.5% this quarter, but remains above 8.5% on average over the past five quarters due to strong equity gains and strong credit performance. And the chart on the bottom illustrates our long history of increasing net asset value over time.

Turning to slide 12, this slide provides some financial highlights for investment in senior loan fund, which had a disappointing quarter. The annualized total return for the quarter was 3%. This decrease was primarily due to an unrealized loss on one portfolio company which was put on non-accrual status. Total investments at the end of the quarter for SLF were $323.5 million, a decrease primarily caused by an increase in prepayments.

Turning to the next slide, at the end of the quarter we had approximately $143.3 million of capital for new investments. This was available through restricted and unrestricted cash, availability on our revolving credit facility, as well as additional debentures available through our SBIC subsidiaries. Subsequent to quarter end we amended our 2010 debt securitization. This amendment included, among other things, a one-year extension in the reinvestment period from July 2017 to July 2018.

Slide 14 summarizes the terms of our two common stock issuances that we completed during the quarter. Through the two issuances we raised approximately $58.6 million in net proceeds. The net price per share to the Company for both issuances was at or above 110% of our most recently reported net asset value per share. Slide 15 summarizes the terms of our debt facilities. And lastly, on slide 16, we have summarized the two distributions, both the regular distribution as well as the special distribution David mentioned, that was declared by our Board.

I'll now turn the call back to David, who will provide some closing comments.

Great. Thanks, Ross.

To summarize, GBDC had a solid quarter and an excellent fiscal year in 2016. I want to close with some thoughts on our outlook for FY17. The private debt direct lending industry faces a clear challenge in the coming period, and the challenge is the result of a lot of new investor capital that's been coming into the space. If you go back to when you took economics 101, we all learned that when there's too much money chasing too few goods, prices go up. It's just inflation.

In the credit market, inflation works a little differently. In credit market inflation three things happen: spreads go down, leverage goes up, and terms become more borrower-friendly. So, a reasonable question would be, are these things happening today? And industry data suggests they are, at least to some degree. For the year through September 30, middle-market data from S&P LTD show that average spreads are about 25 bps tighter, leverage is up by about a quarter turn, in both cases compared to 2015. And while it's harder to find objective data on terms, anecdotally we're seeing pressure on covenant cushion levels and on definitions.

So, in this environment, it's my view that some middle-market lenders are better positioned to manage than others, and the simple reason is that some have real competitive advantages. Our base case outlook for 2017 is that there are three macro trends and three micro trends that will continue to play to the strengths of Golub Capital and help GBDC continue to find attractive investment opportunities by dint of Golub Capital's competitive advantages. So, let me start with the three macro trends.

First, we believe non-bank lenders are going to continue to gain share from banks. As we have said before, we think the impact of regulatory pressure on banks is likely to remain a tailwind for the next several years. Now, there's more uncertainty on this post the election, and we may get into some discussion of this in the Q&A, but we still believe the likely case is continued pressure on banks in the world of leverage lending. Second macro trend: we believe buy-and-hold solutions are going to continue to gain share over syndication solutions because buy-and-hold solutions are better for sponsors. They offer more ease, more reliability, both at close and through the life of the deal, and more certainty. Third macro trend: we think one-stop solutions are going to continue to deliver a superior value proposition and gain market share relative to complex capital structures. So, it's a good time to be a non-bank lender with strong capabilities in one-stops and buy-and-holds.

In addition to that, we think there are three microtrends that are going to impact Golub Capital in particular. First of those micro trends is upper middle-market transactions. We've seen a big shift in the upper middle market. Larger deals that until recently tended to be led by banks are now being done, with increasing frequency, by a small group of non-bank lenders, including Golub Capital. In calendar Q3 fiscal Q4, Golub Capital originated six one-stop deals that were more than $100 million in facility size, and two of them were above $200 million. We think these opportunities are very attractive, that they are going to continue, and that we're going to see more such opportunities in FY17.

Second micro trend: add-on transactions. This year's been unusually active for add-on transactions. Nearly 25% of Golub Capital's new investments for the year through September 30 have been in add-ons. We believe add-on transactions are a win-win solution that help sponsors take advantage of opportunities, typically acquisitions, and give Golub Capital and GBDC more exposure to credits that we like, that are well-priced, that are well-structured. As a significant lender to over 250 middle market companies now, we think Golub Capital is well-positioned to see more add-on business in FY17.

And then the third micro trend is momentum from relationships. We're very proud of the high rate of transactions that Golub Capital does with sponsors that we've done multiple transactions with before, and transactions with portfolio companies that have been previous obligors. In each of the last four years over 75% of Golub Capital's new loans have come from repeat sponsors, and over 40% have come from repeat obligors. For the year through September 30 those percentages are closer to 85% and 45%, respectively.

So, to sum up, we think GBDC's access to Golub Capital's competitive advantages will help insulate GBDC from the risks of credit market inflation, but we're very conscience of those risks. And we further believe GBDC's fee structure aligns well the interests of shareholders and its manager in a time that requires cautiousness and selectivity.

Thank you for your time this afternoon, and for your partnership, for those of you who are shareholders. And, Operator, if you could please open the line for questions.

(Operator Instructions)

Our question comes from the line of Jonathan Bock of Wells Fargo Securities.

Hi, guys. This is Finn Oshane for Jonathan this afternoon. How are you? Congratulations on another great quarter. First question, we saw the $0.25 special as effectively paying out spillover to shareholders. You mentioned this as a positive given the tax dynamic, but can you give us a little more color as to why you feel this makes sense given the majority of the industry chooses to retain this capital and pay the excise tax?

Sure. For those of you on the phone who are perhaps not experts in BDC tax matters, let me take a step back and describe the tax regime we operate under. First, we have to distribute a certain portion of our income in order to qualify as a RIC, and to not have to pay corporate level taxes. Virtually every BDC does that.

Then there's a second test. The second test is that each year we have to measure whether, on a cumulative basis, we have paid out an amount equal to our taxable income. And I emphasize this is taxable income, not GAAP income. As everybody knows, there's some natural differences, for instance, between GAAP or book income and taxable income.

When we were doing that analysis for this year, we determined that there was a significant amount of non-distributed taxable income. So, we had two choices. We could either pay a special distribution, which is the choice that we decided to make, or we could retain this non-distributed taxable income. The tax cost of retaining non-distributed taxable income is you have to pay a 4% excise tax.

So, let's say there was $12 million of this non-distributed taxable income. We could either distribute that $12 million or we could pay a 4% excise tax on that $12 million. And as to that $12 million for FY17, it would be like starting on the negative 4% yard line and trying to earn an adequate return for shareholders on that $12 million.

So, I can't speak to why other BDC managers choose to retain this kind of capital and pay the excise tax, but for GBDC, as we looked at it, we determined that shareholders would be much better off receiving that capital back in a special distribution. And if we concluded that we could deploy more capital on behalf of shareholders effectively, and it made sense, that what we could and should do is to raise additional capital through some kind of follow-on offering.

So, the choice is relatively straightforward and simple once you've calculated all the numbers. The choice is, would you prefer to make a distribution to shareholders and seek to raise capital when, as and if it makes sense to do, or do you want to retain that capital and pay a 4% tax on it every year.

Very well, thank you. And one more, there's some very interesting market color you gave, and I think the read was that things are generally getting more frothy, more inflated given the capital coming in. I think you also mentioned that we'll see more of the one-stop variety of financings. Just piecing that together, does that mean more disintermediation, more control by the private side of the market?

Let me take a step back. There's two things going on right that are, I think, really striking. One is that middle market M&A volumes are depressed. They've been depressed all year, they continue to be depressed.

So, we're seeing new transactions, new LBOs being done at a relatively low rate. And we're simultaneously seeing new capital entering the middle market direct-lending private-debt space. And we're also seeing significant spread compression in the broadly syndicated market vis-a-vis the beginning of the year.

So, market conditions have clearly changed significantly from the relatively lender-friendly environment of December, January, February to what I would characterize as a relatively borrower-friendly environment that we're seeing right now. I don't think that's a question of just supply or just demand. I think it's a combination of those two.

And, as I've said before, I don't think this is a unique to the middle market phenomenon. I think what we're seeing in the middle market parallels what we're seeing in liquid credit markets, with a little bit of a delay and a little bit of mitigation, a little bit of insulation.

So, then the next question becomes -- how do we as managers respond to an environment like this. And our answer is we're going to lean heavily on our competitive advantages and focus on areas where we can bring those competitive advantages to bear to find transactions that are particularly attractive to finance, even in a more competitive context.

As one looks at where our competitive advantages are strongest, we tend to move toward one-stops, toward larger buy-and-hold transactions where our scale and our capacity to provide reliable solutions is challenging for other market participants to compete against. In many cases, those transactions are one-stops, not all, but we're going to continue to focus on the areas where we have the biggest competitive advantages.

Appreciate that. And just one more for us -- with new SPA regulation giving the potential for increased SBIC-related leverage, does this change your view or your target 1.0 times economic leverage for the BDC?

I'm sorry can you repeat that question?

Does the potential for increased SBIC leverage change your target 1 to 1 economic leverage, as you've stated in the past?

I think we are comfortable going a little bit higher than 1.0 GAAP leverage. We tend to focus more heavily on regulatory leverage. We've talked before about having targets in place of a little bit of over 1.0 on GAAP leverage and approximately 0.75 on regulatory leverage.

Okay, very well. That's all for us and thank you so much.

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

Hi, guys. On just the market, first, then I've got a question about the portfolio, this is the first quarter, if I look on page 6 of the presentation, the first quarter in five quarters where we have seen the LIBOR spread move up, only 10 basis points, and the weighted average interest rate move up in the third quarter. At the same time you're saying obviously spreads are down generally, doing a few larger transactions which generally have lower spreads. Obviously there's the unique relationships but is there anything to read into that dynamic in Q4 that have we turned a corner in terms of the realizeable spreads that you guys can collect despite what the market is doing?

And then second to that, again, granted it was 10 days since the election, but treasury rates, at least, have moved materially higher. Have you seen any shift in the market over the last week or so as a result of that?

Let me answer the first question first. Let's talk about page 6 and what's going on with spreads. Robert pointed out something that's absolutely true and interesting to look at. If you look at the first line on page 6, weighted average interest rate on new investments 7.6%, that looks high relative to prior quarters. And he also pointed out, and it's true, that I've said there's pressure on spreads. So, those seem inconsistent, what's happening.

The answer is the quarter happened to have an unusual mix of investments, and it included a meaningful number of our late-stage lending investments that have a bit higher spreads. So, I would not draw the conclusion from this data that we're seeing a sustainable trend toward higher spreads. I think this is just an unusual quarterly mix this quarter.

The second question was what are we seeing post election. Obviously very early, so probably too early to reach any real conclusions. We have seen a marked increase in interest rates on government securities, a very striking increase in a very short period of time. Makes me very happy to be managing a portfolio of floating rate loans because anybody who's been an owner of fixed-rate loans in the last two weeks is suddenly looking at some fairly significant, at least unrealized, perhaps realized, losses. So, it's a nice reminder of the value of floating rate loans.

You will note, also on page 6, that LIBOR has crept up significantly over the course of the last year from 0.3% at the end of Q4 2015 to 0.9% this last quarter. So, we have seen an increase in LIBOR. And quite soon it will come above what is our LIBOR floor on most of our loans. So, quite soon, once it breaks about 1%, we'll start seeing LIBOR increases improve our net interest income.

To date, it's not been a meaningful contributor. In fact, it's been a slight negative because our liabilities are largely floating rate and don't have LIBOR floors.

So, if I were to speculate, I see a couple of scenarios here that are worth planning for. One scenario is that we're in for a period of rising rates. And if that's the case, then I think we're well positioned as a manager of floating rate loans.

A second is that we're in for a period of a lot of volatility. Again, there, I think that argues for conservative strategies.

And the third is this is a market head fake and we're going to continue to be back into the world of lower for longer that so many of us thought we were firmly ensconced in over the summer. And in that last scenario, I guess now is a good buying opportunity for long duration bonds. I don't think I have the right disposition to be acting on that even if I believe that that third scenario was likely.

So, all that's a very long-winded way of saying I don't know what's going to happen going forward. I think there's an enormous amount of uncertainty about the new administration's priorities, about whether Congress is going to share those priorities or not, about new appointments. I think right now what we are doing is focusing on scenario planning. The unlikely keeps happening in our world over the course of the last year, and the lesson we've taken to heart from watching that is it pays to be prepared for many different scenarios, including scenarios that you might think are unlikely.

Okay, I appreciate that color a lot. I like to run scenarios, as well. Last question, on the portfolio, on page 8, category 2 assets ticked up fairly meaningfully from June to September. Any color you can give us on that? Anything we should read into that in terms of how concerned you are there, because obviously non-accruals are still at lows and very stable? So, what should we read into that tick up in the 2 level?

It's interesting. The fact that we're talking about a 0.5% increase as being really significant, I count as a victory, to start with. You're right, in percentage terms it's a big increase; in dollars terms much less so.

We're doing what I think we should be doing, which is we're applying a tight screen to our portfolio right now and being aggressive in identification of credits that we have some concern about, and aggressive in trying to work those credits out. So we have a number of credits that we shifted from 3 to 2 this quarter, one in particular that was the bulk of that increase.

I'm cautiously optimistic about that particular loan. But I think that if one thinks about this business with a long-term perspective, the 0.1% that was in category 2 at June 30, that's not a sustainable level.

Got it. Thank you.

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

Good afternoon and thank you for taking my questions. The first one just has to do with the senior loan fund. This is the second straight quarter that assets or loans in the senior loan fund have decreased. Meanwhile, you guys have still been able to expand and grow your balance sheet loan portfolio. So, can you just provide some color of exactly what's going on and why you are able to expand and have success growing the balance sheet portfolio, meanwhile the senior loan fund is stalled out and actually has shrunk the last couple quarters?

I think it's by design. These aren't accidents, they are by design. We've talked about how we think in the environment that we're in right now that the best risk/reward opportunities are in one-stop loans. And we've been expanding through new origination, primarily of one-stop loans. And we've talked about how the senior loan fund is designed to be primarily a portfolio of additional senior loans, so not one-stops, using a bit higher leverage.

S, I think you're absolutely right, Ryan, in your insight that we've been growing the balance sheet portfolio and not growing senior loan fund. I think a big factor there is just the macro trend, the macro view that we have that one-stops are more attractive than traditional senior right now.

Having said that, this is both a story about macro trends and about individual loan decisions. And I'd anticipate that we're going to, over time, grow senior loan fund to the level that's larger than the $383 million asset balance that we had in it at its peak in March. I view the recent declines as being the right thing to do under the circumstances we face but I don't want you to read it as a long-term decision.

Got you. That makes a lot of sense. Switching back to the conversation about the competition, you said competition is pretty strong right now in the market. Can you just provide some color of where your main competitor is coming from -- meaning, are there new players that are dipping down into the space, raising funds and dipping down into the direct middle market lending? Or are you seeing more existing players start ramping up, growing AUM, and starting to just deploy more capital from raising new funds?

And from a competition standpoint, if there are new competitors in the space, obviously you said spreads are getting a little tighter and terms are maybe getting a little worse, but are they still acting fairly rational or are they being very aggressive with new deals?

A couple of reactions to your question. I'd say the first would be the biggest problem we see right now is a shortage of attractive deals as opposed to competition per se. The environment not only is one where middle market M&A volume is down order of magnitude 25%, but if we were looking at the number of what we would view as attractive deals from a credit perspective it's down more.

The second piece to the puzzle is that to answer your question we really have to segment the market a bit. At the lower end of the middle market, in the $10 million to $25 million EBITDA company size range, the market is particularly competitive right now. And the reason is, you not only have the players who have been active in that market for a long time, but you have a number of new players who have funds or platforms of a size range where they can provide solutions for those smaller companies, they can't really do so for larger companies.

So, we're seeing a bit of an in version where normally you'd expect to get paid a premium from a spread standpoint when you're lending to smaller companies, and we're seeing, actually, in some cases, that the spreads are lower in that segment. Consequently we're not terribly active in that segment right now.

Where correspondingly we're seeing a lot of opportunity is in the upper middle market where, before leverage lending guidance, say, a Credit Suisse, UBS, Goldman Sachs, JPMorgan would have led a syndicated answer, today they're not doing so. Their desks are smaller, their commitment to lending is shifted to larger-sized transactions, and it's created a bit of a market vacuum that we've been able to step into.

In that sector, our large buy-and-hold capabilities and our one-stop capabilities are particularly valued by private equity sponsors. And in that sector, I'd say, while there's been a bit of pressure on spreads and leverage and terms, we're still finding large numbers of attractive opportunities.

Okay, that's good color. And then just one last one on the election. You mentioned it in your prepared remarks. With a new President coming in and a new Congress taking over, the consensus in the market seems to be that there's going to be lower taxes, higher rates, less regulation on banks, among other factors, and a lot of it still undecided and to be determined.

But I would just love to hear your insights, particularly around the less regulation for banks, because we've gotten questions about if this new administration does come in and reduce regulations for banks, particularly around maybe leverage lending guidance or other things, how could that potentially affect your business? Is that something that you're worried about considering you guys have been -- you, in particular, Golub -- has been a really big beneficiary of actually taking a lot of market share from banks?

Great question. two answers. One is, we're ready. If deregulation took hold and all three bank regulators stopped their leverage lending guidance and gave free reign to banks to come back into the world of leverage lending, we're ready for that. I don't think that would be a terrible thing for us.

We really have quite a differentiated product versus what they're doing. We're not offering another syndication solution. We're offering a buy-and-hold solution. Today we compete against other parties who are syndication players -- Antares Capital, Jefferies, others who are non-banks who are providing bank-like syndicated answers.

It's not my first choice. I would prefer for there to continue to be bank regulation in place. To your point, Ryan, I think it's been good for us. But we're ready.

The second point I'd make is I think it's way too early to count on leverage lending guidance going away. Yes, it's true that the President-elect seems to have a bias against regulation and has talked about dismantling Dodd-Frank, but a lot needs to happen between now and a change in the way in which leverage lending guidance is implemented.

It's not clear this is going to be an administration priority, it's not clear it's going to be a Congressional priority. it's not clear that the administration will have the capacity to be able to influence all three bank regulatory organizations in a timely manner. It's not clear that anybody's going to want to take the heat to be looking at helping banks who are not viewed today as politically popular.

Dodd-Frank has very strong support in some circles in Congress. Even Republican leadership has been very favorable toward regulation and legislation that limits too-big-to-fail banks, and that shifts risk from government-backed FDIC insurance to shareholders.

So, I think there's a lot of reason to anticipate that we're more likely to see continued trends along the lines of what we have seen in the past, continued regulatory pressure on banks to reduce leverage lending. But, as I mentioned when I was answering Robert Dodd's question, we think the lesson to all management teams from recent events -- Brexit, the US election, other phenomenon -- is that the unlikely happens regularly these days, and our job as management teams is to be prepared. So, here at Golub Capital, we have scenario planning in place for a wide variety of potential outcomes, including ones where Dodd-Frank sticks around in current form and ones where Dodd-Frank goes away entirely.

Great, that's great color. And I appreciate you providing some color because we do know, obviously, that everything is very early on, it's still to be determined exactly what's going to happen from a regulatory standpoint. So, thanks for taking my questions and good quarter.

Our next question comes from the line of Christopher Testa of National Securities Corporation.

Good afternoon. Thank you for taking my questions. I was just wondering if you could provide some detail on the exit multiples you saw for the realized gains during this quarter compared to earlier in the year, and whether those have continued to move up pretty strongly with the rebound in loan prices.

I just want to clarify your question. In our case, the realized gains came principally from companies that were sold, and the realized gains were on equity co-investments associated with those companies that were sold. So, are you asking about the EBITDA multiples that those companies were sold at?

Yes.

We're seeing, both in the equities that we've realized on through sales, and we're also seeing through new transactions that we're engaged in, we're seeing a continuation of relatively high purchase prices in new buyouts, particularly in respect of companies that have a proven track record and good prospects for continued revenue growth. The thing that sponsors increasingly are prepared to pay up for is revenue growth.

And that's not surprising to me because, if you look at the economy generally and companies generally, the challenge that most management teams have had over the course of recent years is in raising prices and in generating unit volume growth. For companies that are well enough positioned to be able to grow significantly in a relatively slow growing economy and in a low interest rate world, they are worth a big premium.

So, if your question is, are we seeing meaningful changes in trends of sponsors paying high prices, the answer is no. And I'd put, in particular, sponsors are particularly prepared to pay high prices for companies that have a proven track record and good prospects for continued revenue growth.

And aside from the revenue growth, David, are you seeing sponsors typically pay more for what they would deem as more recession-proof industries as opposed to things that could be considered more cyclical?

Yes, I think that's fair. I think, in part, my honest answer would be we're not in the best position to gauge that question because our sponsors know well that we're not the right lender for cyclical type businesses. We just say no to those opportunities. Most of our core sponsors -- we've got about 150 sponsors that constitute the preponderance of our business -- most of those sponsors know us well enough that it's unlikely they are coming to us if they happen to be looking at a cyclical business.

Got it. And just your commentary earlier on the call that the buy-and-hold position is more favorable to the syndication model, just wondering how your thoughts on that might change, or if they do change, rather, given the risk-on mentality that's happening with the loan markets.

To answer your question, I want you to imagine for a moment that you're a sponsor and you're looking at buying a company, and you've just been asked to submit your final round bid, and the instructions for your final round bid say that you're being asked to provide a bid with no financing out. You're committing to close the transaction within days of their selecting you, and you're committing to do so regardless of whether you have difficulty or no difficulty finding financing for your transaction.

That's the scenario most of our sponsor clients face in today's market for purchasing companies. In that environment most sponsors would prefer a solution where they know how much debt they can have for their purchase, they know the rate that that they are going to have to pay on that debt, they know the terms including the covenants, they know who's going to hold the debt afterwards so they know what kind of a partner they're going to have as they try to grow the business. All of those sources of reliability and certainty are very attractive.

Compare that to a syndicated solution where they might have a commitment letter from a financial institution, and the commitment letter might say -- well, we think we can get your transaction done on the following terms but we may have to increase the interest rate significantly, or we may have to shift a portion of the loan from first lien to second lien, or we may have to increase the equity that you're contributing, and we're not sure who's going to be in the syndicate. Those folks who are going to be in it may or may not be supportive of continued growth and add-on acquisitions. And we're not sure how much of your time is going to be required to have syndicate meetings and talk to lenders and go on a road show associated with the debt.

So, you can get a sense from what I'm describing for the choice the sponsors face. It's not close. If they can get a proposal from a buy-and-hold lender on terms similar to what they think they can get in a syndicated solution that goes well, it's just a better answer for them.

So, your point is fair, that the calculus gets a little bit harder when syndicated markets are robust and when maybe there's less concern or uncertainty about a deal getting hung or needing to flex. But even in that scenario, the buy-and-hold answer has a lot of appeal.

Got it. That's great color. Thank you. And just last one from me, a housekeeping item, should we expect any one-time charges from the amendment of the securitization?

No. There were some costs associated with it which are part of this quarter's financial results. The costs were modest. No.

Okay, great. That's all for me. Thank you.

There are no further questions at this time.

Great. Thanks, everyone, for joining us today. As always, please feel free to reach out to me or Gregory or Ross if you have any questions. And we look forward to talking to you next quarter.

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