Golub Capital BDC Inc (GBDC) 2017 Q2 法說會逐字稿

Welcome to the Golub Capital BDC, Inc.'s March 31, 2017, Quarterly Earnings Conference Call. Before we begin, I would like to take a moment to remind our listeners that remarks made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements, other than the statements of historical facts made during this call, may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Golub Capital BDC, Inc.'s filings with the Securities and Exchange Commission. For a slide presentation that 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 March 31, 2017, 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 would now turn the call over to David Golub, Chief Executive Officer of Golub Capital BDC. Please go ahead, sir.

Thanks, very much, Carlos. Hi, everybody, and thanks for joining us today. I'm joined by Ross Teune, our Chief Financial Officer; and Greg Robbins, Managing Director here.

Yesterday afternoon, we issued our press release for the quarter ended March 31, and posted an earnings presentation on the website. We're going to be referring to this presentation throughout the call today. I'm going to start by giving you an overview of the March 31 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 was another solid one for GBDC. For those of you who're new to the company, as investors, our investment strategy today, is and since inception has been, to focus on providing first lien senior secured loans to healthy, resilient middle-market companies that are backed by strong partnership-oriented private equity sponsors. Last quarter, in my remarks, I talked about two macro trends. First, I talked about a continuation of credit market inflation. And what I meant by that was, we were seeing tighter spread, tighter leverage and looser terms in our part of the credit market. The second macro trend I talked about, was that we were seeing mixed data on prospects for the economy. On the one hand equities and confidence surveys pointed to accelerating growth prospects, but on the other hand, earnings and growth data were lackluster. I'm going to come back and talk more about those two trends in my closing remarks. In a nutshell, we're seeing both trends persist and this is creating a challenging investment environment.

With that, let's dive into the details for the quarter. Net increase in net assets resulting from operations, or net income, was $20.7 million, or $0.38 a share and that compared to $19 million or $0.34 a share for the quarter ended December 31. Net investment income, or as I call it, income before credit losses, was $16.5 million for the quarter or $0.30 a share as compared to $16.9 million, or $0.31 a share for the quarter ended December 31. If we exclude a $0.9 million GAAP accrual for the capital gains incentive fee, net investment income was $17.4 million or $0.32 per share, as compared to $17.4 million or $0.32 per share for the prior quarter. Consistent with previous quarters, we've provided net investment income per share, excluding the GAAP capital gains incentive fee accrual, because we think this adjusted NII is a more meaningful measure.

Net realized and unrealized gain on investments and secured borrowings were $4.2 million or $0.08 for the quarter. That was the result of a $0.7 million of net realized gain and $3.5 million of net unrealized appreciation. We're pleased to see another quarter of, what I sometimes refer to as, negative credit losses. Net asset value per share rose to $15.88 at March 31 from $15.74 at December 31. This was due to a combination of net income in excess of our quarterly dividend and accretion from the follow-on common stock offering we did in March, 2017 at a premium to NAV per share.

New middle-market investment commitments for the quarter totaled $97.1 million and of that 53% were in traditional senior secured investments, 38% were one-stop loans, 8% were investments in our Senior Loan Fund and 1% were in equity co-investments. Due to a few larger traditional senior secured investments this quarter, senior secured investments represented the majority of our new investments. But in future quarters, we anticipate that the majority of the originations asset mix is going to shift back to one-stops. We continue to believe that one-stops are the most attractive product from a risk reward perspective in the current market. Overall, total investments in portfolio companies at fair value increased by a little over 2% or $37.7 million during the quarter, after payoffs and sales to SLF.

Turning to Slide 4 in the presentation. You can see in the table the $0.38 per share we earned from a net income perspective, the $0.32 per share from a net investment income perspective before accrual for the cap gains incentive fee, and you can see our NAV per share of $15.88. As shown on the bottom of the slide, the portfolio remains very well diversified. We've got investments in 185 different portfolio companies with an average size of $8.7 million per investment.

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

Thanks, David. I'll start on Slide 5. We had total originations of $106 million and total exits and sales of investments of $73.2 million, which contributed to net funds growth of $37.7 million for the quarter.

Turning to Slide 6. This slide shows that our overall portfolio mix, by investment type, has remained very consistent quarter-over-quarter, with one-stop loans continuing to represent our largest investment category at 77%.

Turning to Slide 7. This slide illustrates the fact that the portfolio continues to remain well diversified with an average investment size of $8.7 million. Our debt investment portfolio remains predominantly invested in floating rate loans, and there have been no significant changes in the industry classification percentages over the past year.

Turning to Slide 8. The weighted average rate of 6.4% on new investment this quarter was down from 6.9% in the previous quarter, primarily due to asset mix, with traditional senior loans representing the majority of new investments. Furthermore, as we noted in our last call, market spreads continue to compress. As a reminder, the weighted average rate on new investments is based on the contractual interest rate at the time of funding. For variable-rate loans, the contractual rate will 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. This graph summarizes investment portfolio spreads for the quarter. Focusing first on the light blue line. This represents the income yields or the actual amount earned on the investments, including interest and fee income, but excluding the amortization of discounts and upfront fees. The income yield remained constant at 7.7% for the quarter. The investment income yield, the dark blue line, which represents amortization of fees and discounts, increased modestly to 8.2% during the quarter ended March 31. The weighted average cost of debt, the green line, increased by approximately 10 basis points to 3.5% for the quarter, which corresponds to an increase in the LIBOR rate.

Flipping to the next slide. Credit quality continues to remain strong, with nonaccrual investments as a percentage of total investment at cost and fair value of 0.3% and 0.1%, respectively, as of the end of the quarter. These percentages were unchanged from the prior quarter, and there were no new loans added to nonaccrual status.

Turning to Slide 10. The percentages of investments risks rated at 5 or 4, our two highest categories, remain stable and continue to represent over 85% of the portfolio. The percentage of 5 risk-rated accounts increased during the quarter, as several large investments were upgraded from a 4 to a 5. We anticipate that this increase is temporary, as a few of these investments are expected to pay off during the quarter ended June, 30.

As a reminder, independent valuation firms value approximately 25% of our investments each quarter.

I'm reviewing the more detailed balance sheet and income statement on the following 2 slides. We ended the quarter with total investments at fair value a little over $1.7 billion, total cash and restricted cash of $43.9 million, and total assets of approximately $1.8 billion. Total debt was $863.7 million. This includes $451 million of floating rate debt, issued through our securitization vehicles, $283 million of fixed rate debentures and $129.7 million of debt outstanding in our revolving credit facility. Total net asset value on a per share basis, was $15.88. Our GAAP debt to equity ratio was 0.96x at March 31, while our regulatory debt to equity ratio was 0.64x. These are slightly below our targets.

Flipping to the statement of operations. For the quarter ended March, 31, total investment income of $33.6 million and total expenses of $17 million were both relatively flat to the prior quarter. As David highlighted earlier, we had net realized and unrealized gains of $4.2 million, and net income for the quarter totaled $20.7 million.

Turning to the following slide. The tables on the top provide a summary of our quarterly distributions and return on equity over the past 5 quarters. Our quarterly distributions have remained stable at $0.32 per share, which is consistent with our net investment income per share, when excluding the GAAP accrual for capital gains incentive fee. The annualized quarterly return based on net income was 9.6% this quarter and has averaged 8.4% for the past 5 quarters. The bottom of the page illustrates our long history of increasing NAV over time. For historical comparison purposes, we have presented NAV per share, both including and excluding the $0.25 special distribution that we paid back in December.

Turning to Slide 14. This slide summarizes some of our financial highlights for our investment in Senior Loan Fund. The annualized total return for the quarter ended March, 31 improved to 10.8%, as there was a net gain on mark-to-mark valuations during the quarter. Total investments at fair value at March 31 were $350.7 million, and this is up 5.2% from the prior quarter.

Turning to the next slide. As of March 31, we had nearly $100 million of capital for new investments through restricted and unrestricted cash, availability on our revolving credit facility and additional debentures available through our SBIC subsidiaries. Subsequent to quarter end, on May 2 we increased capital available for investment by increasing the size of our revolving credit facility with Wells Fargo, from $200 million to $225 million.

As summarized in the bottom of the slide, on March 21, we priced a public offering of 1.75 million shares at $19.03 per share, including the exercise of the underwriter's option to purchase additional shares, we raised approximately $37.2 million in net proceeds. The public offering price per share was 1.21x, our most recently reported NAV per share.

Slide 16 summarizes the terms of our debt facility.

And lastly, on Slide 17, 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 the call back to David, who'll provide some closing remarks.

Thanks, Ross. So to summarize, GBDC had a solid second fiscal quarter of 2017. The key drivers for the quarter were consistent investment income, strong credit quality and access to the Golub Capital origination platform.

I want to shift back to the macro environment, the two trends that I mentioned at the beginning of the call. As I mentioned, the trends we identified last quarter are persisting. We're still seeing signs of credit market inflation, and we're still seeing mixed data on prospects for the economy. Let me give you a quick update on each of these themes.

Let's start with credit market inflation. I've used this term for a couple of quarters to describe what happens to credit markets when we see too much capital chasing too few deals. Spreads go down, leverage goes up and terms get looser. We started to see signs of credit market inflation in 2016, particularly in the second half. And the trend has continued into 2017. I'd estimate that spreads on middle market senior loans have tightened by 25 to 50 basis points in the last 6 months. This leverage on senior and one-stop loans has crept up by 1/4 to 1/2 a turn, and the terms, especially those relating to EBITDA add backs, continue to loosen. We think that smart investors in this environment are treading cautiously. Slowing their investment activity and becoming very selective about new deals. Across the Golub Capital platform, Q1 middle-market origination volume was down about 25% year-over-year. And an unusually high percentage, about 50%, of our Q1 origination volume was in the form of add-on loans to existing portfolio companies. We think this shows one of our competitive advantages, our ability to generate attractive opportunities from our portfolio. But it also illustrates the challenges of finding attractive new investments in today's environment. What about the economic outlook? We're still seeing mixed signals there. In financial markets, in consumer and business confidence indicators, we're seeing -- the confidence indicator is at or near 10-year highs. We're seeing the S&P 500 and the NASDAQ at or near record levels. We saw very strong jobs report this morning. But looking at some of the other economic data, Q1 GDP came in at 0.7%, much lower than prior forecast. Consumer spending indicators have been weak, especially for brick and mortar retailers and Q1 earnings have been mixed. At least in respect of public companies that have reported so far. And the Golub Capital Middle Market Report for Q1 showed margin pressure for middle-market companies, especially those that are in or related to the consumer sector. So there's an inconsistency that we're seeing right now between ebullient equity markets and confidence indicators on the one hand and disappointing consumer spending and profit numbers on the other hand. And our sense is this inconsistency implies that we're going to see one of two futures. The first is, we may shortly see a deacceleration in consumer spending, business investment and economic growth. That's the good side case. And the second is, that we're stuck with muddling growth in the equity markets are overoptimistic. As I said before in last quarter, when we talked about it, our plan's to be prepared for both. We think investing in loans to healthy, resilient middle-market companies at the top of the capital structure will lead to us benefiting if economic growth accelerates, in that scenario we should see more deal flow and better credit results. But if on the other hand growth remains muddling, and my personal view is that's the more likely scenario, then we'll see a marked increase in middle-market defaults and credit losses. But our senior portfolio should continue to perform reasonably well, and we'll be well positioned to be able to take advantage of widening spreads and more attractive opportunities that come out of a more challenged credit environment. No matter the scenario, our goal's the same. We seek to sustain our long-term track record of consistent premium returns.

Thanks for your time this afternoon and for your partnership. I'm going to open up the floor for questions in a moment. But just one before that, that I can predict, it's taking a little longer than usual for us to finalize our 10-Q this quarter, so we anticipate filing that in the next couple of days. Carlos, with that, if you could open the line for questions?

(Operator Instructions) Our first question comes from the line of Jonathan Bock with Wells Fargo.

David, as the means to kind of combat spread compression, BDCs are utilizing nonqualified buckets. There's front end or front end leverage on various transactions. Can you walk through, for us, the view of potential expansion of growth within the SLF facility to perhaps generate better ROEs on what we will all know would be very high quality first lien direct leased senior secured -- directly originated senior secured loans?

Sure. So I want to, before I answer that, just give a philosophical answer through. We at Golub Capital, we don't invest to solve for an ROE, we invest to solve for a level of credit risk that we're comfortable with. So in an environment in which we see spread compression, our first answer won't necessarily be to increase leverage or to find ways to use our Senior Loan Fund more, which is, in essence, a way to increase leverage. Or the shift to higher risk junior debt securities, which is also, in a sense, a way of increasing leverage. Our sense is that, this is a challenging environment that our strategy ought to be a continuation of what it's been, which is to lean heavily on our competitive advantages to identify new transactions that have attractive risk reward characteristics. And if that means slowing origination, so be it. If that means accepting a degree of spread compression, so be it. And I think, our view would be that the 1 strategy that would be the big mistake in this environment would be to respond by being prepared to take on more risk. Having said that, we do see an opportunity to continue to grow our Senior Loan Fund over time. We have grown it now to a substantial size, I think it's at a $350 million in assets today. And we think that there will be opportunities for us to continue to grow that, we're nowhere near our constraint on the use of our 30% bucket. But we're not going to rush it, we're not going to push it, we're going to grow it as we see appropriate loans to put into that joint venture. Obviously, with the approval and consent of our joint venture partner.

Fair enough, and I appreciate the discussion. Then if leverage is or a view of not necessarily solving for an ROE, but looking at a given level of risk, do you believe that the use of the additional SBIC capacity that you're offered makes for a compelling risk-adjusted return or a compelling risk argument, which effectively raises, I think you've laid out like $231 million out. I mean, how should we look at that drawing on that attractive form of financing to finance the sponsored deals going forward? Would you expect to utilize it all here, shortly?

Yes. We have to review -- we have today a fairly significant amount of unused capacity available for investment, we have that in the form of both, restricted and unrestricted cash. Undrawn availability on our bank facility, and SBIC debentures that we have the ability to draw, but have not yet drawn. I think taken together, those today, are about -- well, in excess of $100 million of availability. So we have unused firepower to be able to grow the balance sheet. Again, assuming we find attractive investment opportunities to deploy. One of the ways is to grow our SBIC debentures outstanding. As of quarter end, we have about $65 million of undrawn SBIC debentures, and we do view that program as being a very attractive source of financing. There are, probably everybody knows, there are restrictions on what kinds of loans can go into an SBIC. So it's not as simple as saying, "Hey, we're just going to deploy those in the next few deals we do." We need to match appropriate transactions to ensure eligibility and compliance with all the SBIC rules.

Got it. And not to use a quote from the great cinematic masterpiece, but Legally Blonde, when they use the comment, orange is the new pink. In this context, it seems that it used to be -- writing a $100 million check was a huge competitive advantage. $300 million and now $500 million. David, competition for the large sponsor backed deals that you originate, clearly has increased. Can you talk about whether or not the ability to write a check for it all, which has been a great

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possibly in the current environment. And if not, really talk about the types of sponsor transactions that you win, if a sponsor has the ability to get better term financing in a first lien, second lien option originated by an Antares?

Well, let's take a step back. So we are primarily a buy-and-hold investor. And so when we are in discussions with sponsors about financing one of their transactions, they obviously have a choice between accepting financing from a buy-and-hold investor like Golub Capital or going the syndication route. And syndications are sometimes more attractive or less attractive. Today, we're in an environment where the syndicated market is very receptive and offering very attractive terms. But even at such a time, there are some very large disadvantages to the syndicated approach. So for example, if you're a sponsor and you want to move quickly, or you want to maintain information about your transaction in a very confidential form, or you are seeking to do a lot of acquisitions after you've completed your transaction, you want to do a series of add-on debt investments. Those are all characteristics that would make you, as a sponsor, much prefer a buy-and-hold investor like Golub Capital to a syndicate financier. So I'm very comfortable and confident in our ability to win transactions and make investments that are attractive in any set of market conditions. But having said that, Jon, I think it's prudent for us to be more active and more aggressive in seeking new investments when we see the market environment is really attractive, as we did in the first quarter of 2016. And to be prepared to be more selective during periods when we think that market conditions are less attractive.

And then just a comment on the ability to one-stop a portfolio a large -- I mean that's -- with more competition in the category, would you say that you're starting to see newer names with larger check sizes competing for your deals? Or is it always the usual 2 or 3 suspects?

I don't think we're seeing meaningful change there. I think we're -- we still see ourselves as being very distinctive in our capacity to bring to the table large amounts of capital in single transactions. There always have -- I mean, no sponsor ever says to us, "Hey, we'd like you to lend to our company, whatever pricing and terms you say are fine with us. I'm sure you'll be fair." That's not how our business works. Everything's always competitive. But we still think that we've got some very distinctive, competitive advantages associated with scale. Particularly, in the upper middle-market sized transactions. But in the market like we're in today, sponsors have a choice not just between us and other potential providers of buy-and-hold solutions in that upper middle-market category. They also have the option of going to the syndicated market. And right now, the syndicated market looks particularly attractive to issuers. And we're responding to that, I think, in the way that we should. Recognizing that market conditions change over time.

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

First question has to just deal with -- you touched on it a little bit, but it has to do with the competitive environment. So part of the -- and as far as the -- you mentioned credit market inflation, heated credit markets, part of the value proposition for one-stop and unitranche loans is certainty of close, that's not the only value proposition, but that's one of the value propositions, and not necessarily better pricing. And so if we're in a market today, where we have heated credit markets, sponsors may not be as worried about certainty of close as they were in the past, and may be able to obtain first and second lien combo pricing, or first and second lien combo loans and maybe better pricing. So are you seeing that dynamic where sponsors are choosing to opt more for first and second lien structures versus unitranche pricing in today's environment?

Depends on the transaction. Again, it comes back to what are the important criteria for the sponsor in the particular deal. There are transactions where, in our judgment, as big fans as we are of one-stops, we think that first lien, second lien structures are the right answer. The places where one-stops tend to be most attractive are growth buyouts. So if the sponsor is seeking to serially expand the facility over time, without having inter-creditor conflicts and without having to refi the whole facility, one-stops are particularly powerful, because you can just do add-on transactions as needed. And I think, that's as true today as it was a year ago. But I think your statement, Ryan, is also correct that there are circumstances with transactions that maybe aren't so growth oriented, where the first lien, second lien looks like the right answer today. And those are probably more frequent than they were a year ago, because our first quarter of last year the syndication markets were choppy and sponsors were rightfully concerned about certainty of execution.

Maybe more of a philosophical question on the dynamics of capital raised in today's environment. So with the heat environment, you have kind of two components, you have your stock price trading at a level where you guys have, maybe at the lowest cost of capital that you guys have ever had. So that's very -- it's very accretive to book value, and also you can deploy that capital where you guys are -- investors demand a very low return on that capital being raised today. However, we have an environment where, as you've mentioned, that it's very tough to put capital to work at a good risk adjusted return. So just from a higher level philosophical standpoint, I mean, how are you viewing these conflicting dynamics to source capital raising in today's environment?

To be honest, we don't view this environment as different from prior environments. Our rule of thumb for expanding GBDC's always been the same. Going back to April of 2010, which is we'll raise additional capital if it's good for existing shareholders, new shareholders and the company. And in order for that to be true, we need to be confident that we will be able to deploy any new capital raised reasonably quickly, and to have returns that are incrementally good for existing shareholders and the company. So to us there is kind of the two elements to this, there is the math and there is the pipeline, and we look at those all the time.

Okay. And then just one last one. Ross, I believe you mentioned in your prepared remarks, the portfolio rating schedule where you had an elevated rated 5 investments this quarter. I believe you said that those were a little bit temporary, and some of those were rated 5, or ones that are performing above expectations. And you said that those were expected to, may be, be repaid. If I look at kind of on the last couple of quarters, it looks like you guys have about $125 million higher than you guys have kind of run at the last quarter of rated 5 credit. So should we expect big, big repayments this upcoming quarter if that rated 5 category is about $125 million higher than it was the last couple of quarters? And if so, should we expect some accelerated OID and potentially, fees in the calendar second quarter?

I think -- I can't give you specific quantitative guidance on repayments to be expected in Q2, but I think -- calendar Q2, but I think it is fair, Ryan, to anticipate that we're in a period and we're going to stay in a period of higher than usual attention by sponsors to opportunities to refinance. And so my expectation would be that, we're going to see more repayment activity over the course of the coming quarters than trend line.

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

David, just on your comments, doing more one-stop going forward, just curious if you're anticipating that as your -- expecting M&A to improve and further demand for that to go up? Or just simply because that right now is presenting a better risk adjusted return relative to senior loans on the balance sheet?

Great question. M&A is a real question mark right now. There are -- if you look at the data, new companies coming into the private equity ecosystem through new LBOs is definitely low and has been for some time. And the question of when that's going to change is a great one. I think it will change, I'm not sure that -- I'm not sure when. And one of the factors that I think is impacting the situation right now, is uncertainty about tax changes. If the -- if we could wave the magic wand and be able to kind of tell the universe of business owners, that capital gains rates are or are not going to change and how they're going to change and when they're going to change, that would alleviate a significant degree of this uncertainty. If the resolution was that cap gain rates are going down and if that lower rate is going to become applicable starting in January of 2018, then we're likely to see continued relatively low levels of new M&A until the new cap gains rate takes effect. This will be, effectively, an incentive for business owners to wait. If, on the other hand, it becomes clear that there is not going to be a change to cap gains, that would take some people off the fence -- off the waiting fence and move them to toward engaging in M&A activity sooner. I don't know how to gauge the probabilities on clarity on the go forward tax regime right now. And as a consequence, I'm of the view that we're likely to see the relatively slow environment continue for a while. But I think, we'll probably see a little bit of improvement from Q1 levels, but I think we're likely to see it remain relatively slow for a while until this uncertainty lifts. That's the first part of your question, the second part of your question. I'd say, the degree to which our new originations in Q1 were in traditional senior secured as opposed to [goals] was an anomaly. I think a couple of quarters from now, we'll just look at it and say, natural variation, degree of random variation, that quarter ended up at a little over 50%, but the ratio is going to normalize around the 30%, 70% we've seen previously.

Got it. That's great detail. And also, I was just wondering, how you're seeing the uses of capital for your originations change from calendar quarter one into calendar quarter two, just the new money versus refi next for your originations?

Well, I can't really comment too much on calendar Q2, other than to say that it's, as of now, it's a bit better than Q1 was, calendar Q1 was. But we're not yet at the point in the quarter where we can really predict. We always run into the same issue, which is, much activity tends to take place around quarter end. And if it happens before quarter end, then you get one outcome and if it comes after quarter end, you can have a big swing the other way.

Got it. Well, how would you characterize the change in the -- just the backlog then?

I'm pleased to see that overall level of activity that we're seeing in our pipeline seems a bit better in calendar Q2 than it did in Q1. But I think it's too early to be translating that into any prediction about calendar Q2 originations.

Got it. And is there an ABL component to your retail book that's significant?

No.

Okay, got it. And just curious, just going back for a second, just on the M&A outlook, just wondering if there's any particular industries where there is relatively less uncertainty, where you could see the M&A picking up even if there remains some overhang from tax changes?

I have to give that some more thought, I'm not -- I don't want to give you a flippant answer. I'm not sure I'm able, off the top of my head, to think through a rationale as to why one sector would be different from another. I think business owners who foresee the potential to be able to keep more of their sale proceeds, that tends to be a common theme across different businesses. I want to give that some more thought. I'll come back to you if I think of any further nuance to that.

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

So with the realized gain this quarter, could you give me an indication of spillover income at quarter's end?

I'm sorry, of what?

Of the spillover income at quarter's end after the realized gain?

Yes, the income -- taxable kind of spillover income?

Yes.

I can -- I'll follow up with you separately kind of on that question to kind of give you the tax component. I don't have that kind of in front of me here, so.

Okay. All right. And then kind of a follow up as to what you guys were discussing earlier. We've heard from some of your peers, some commentary that there seems to be seen a bit of a trade-off right now on unitranche-style product and on consolidated Senior Loan Fund, but you guys have a tendency in the past to have higher quarters of originations in both, simultaneously. So, is that something you guys see one do well, while the other suffers a bit, not necessarily, materially, but moving opposite directions on trends? Or is that not a trend you see?

So help me understand your question. You're saying that others are seeing...?

The unitranche versus the SLF, yes.

The unitranche -- in a quarter where their SLF does well, it's hard to originate unitranche. Is that your question?

Yes, at the -- obviously at attractive terms.

Yes. I haven't really thought about those 2 as being correlated in one way or another for us. I think, we tend to think about the environment as being attractive for origination, or more attractive or less attractive, not so much in terms of SLF versus one-stops.

Okay. And then most of my questions have been answered, but just on -- you talked about the SBIC debenture capacity you have left. Is there a feel for the level of activity for those eligible style-loans? Because I know, obviously, the upper middle-market, you've seen spread compression there as they have gotten much more active. But on the smaller business style, have you seen the same there?

I think -- we've got a long-term record that we can look at of in kind of, case of deployment of SBIC capital. My expectation is that the go forward will look a lot like what we've been doing.

Our next question comes from the line of -- it's -- sorry, it's a follow-up question from Jonathan Bock, Wells Fargo.

David and Gregory, Golub has been particularly active in the retail-oriented sectors, and it's -- and only because you hear broad news that, that is a rather difficult operating space, and we think of like, pet superstores or others that either could fall under [border] adjusted taxation or be impacted by Amazon or technological changes in retail. I'd be curious to see how you and your originators are originating credit with those risks in mind and what you're doing to mitigate them?

Sure. So no question, retail is a challenging sector right now. There's excess capacity because of there's just too many retail square feet, there's a continuing shift to online. As you said, there are wage pressures. There's also a new phenomenon we're seeing, which is a much more rapid shifts in consumers tastes, where companies are forced to react much more quickly than have been the case previously. We have some exposure to retail, we've always been very cautious in retail. We tend to avoid sectors with significant fashion risk or that are too trendy or faddy. But I'd say, in the current environment, we're being even more selective in our underwriting in the sector in recognition of the challenges that the sector is facing. You didn't ask your question I expected you to ask, which is, are we worried about our exposures in the sector? And the answer there is, not really. We're watching it very carefully, but we think that -- we think we're in pretty good shape, despite the fact that there are some significant headwinds facing the sector.

Our next question comes from the line of Ray Cheesman with Anfield Capital.

I was -- I hadn't heard anything mentioned during your presentation about...

Can you speak a little louder?

I have not heard anything during the last 45 minutes concerning the actual credit metrics of your portfolio. I wonder if you have anything you could share with us concerning the trends in interest expense coverage or leverage or revenue growth of the companies you're invested in?

Sure. So first, we did cover some aspects of how we look at credit, in looking at both, nonaccrual trends and that our risk ratings are 1 to 5 risk ratings. We think those are actually, in many ways, more powerful in describing what's going on from a credit perspective in the portfolio than financial metrics that are disconnected from the actual credit attributes of borrowers. One additional piece that I'd point you to is, we publish each quarter the Golub Capital Middle Market Index, which is available on our website, and it shows you year-over-year revenue and EBITDA trends for the portfolio for the first 2 months of each calendar quarter relative to prior year. And if you pull up that data, you'll see that the data points to slowing revenue growth in the portfolio, but still very good revenue growth. And it shows an unusual degree of dispersion around EBITDA results where consumer-based businesses showed decreases year-over-year, technology companies showed very significant increases year-over-year, and the average was about flat.

I also wondered, if you have any update on noise coming out of Congress concerning the leverage potential to increase for BDCs?

Yes, the question is about the new proposed legislation related to BDCs. I think it's called the BDC Modernization Act. The new information is that a new version of this has been introduced in the House. I don't have an update on whether that is viewed as a key legislative priority by Republican leadership in the house, nor do I have any information on what's going on with that legislation in the Senate. But I think -- we're tracking it. I think it's going to be interesting to see how the Republican Congress prioritizes the many things in process over the course of the remainder of this year.

And my last question is, with the fed comments this week seeming to cement a 25 basis point increase in June in the interest rates, I'm wondering kind of twofold. How do you think that might play out in your spread compression comments that you made earlier? And then, alternatively, obviously, you're primarily invested in floating-rate assets. So it would probably float through, very quickly, into your assets. I'm wondering if that would mean that there's a potential, later in the year, for expanded earnings power in the portfolio?

So -- you are correct, that almost all of our assets are LIBOR denominated, and I think it's reasonable to assume that if the fed raises rates, that LIBOR will go up as well. The LIBOR forward curve, right now, indicates an expectation of rising LIBOR. If we saw an increase in LIBOR, this would lead to an increase in earnings because we would have higher interest income. We'd have a little bit higher interest expense too, because most of our debt is floating rate, but we would have higher earnings flow through on the equity-funded portion of the loan portfolio, and the fixed rate debt-supported portion of the loan portfolio. 25 basis points is not a lot in the context of the profitability of the company. But I think we're well positioned, if floating -- if LIBOR rate increases continue and become meaningful over the next few quarters or few years. I guess, I would also just throw in a caution, which is, the forward -- the forwards on treasuries have fallen and flattened over the course of the last couple of months. So I'm not sure that the market has any confidence, and I certainly don't have any confidence that we're going to see a series of rate increases over the course of this year. We will be prepared for multiple scenarios. One of the scenarios that we will be prepared for, and the one that if I had to guess, I view as the most likely right now, is one where we see a limited number of increases in the near term.

And I just wanted to mention, it sounds like your building's on fire behind you there.

Sorry. We're calling -- the call is from New York City, and there's always excitement on 5th Avenue.

We have no further questions on the phone line, sir.

Well, I want to thank everyone for joining us again this morning. And if you have any further questions, please feel free to reach out to Gregory or to Ross or to me. Thanks, again.

Ladies and gentlemen, that concludes today's call. We thank you for your participation and ask you to please disconnect your lines.