Golub Capital BDC Inc (GBDC) 2017 Q3 法說會逐字稿

Welcome to Golub Capital BDC, Inc.'s June 30, 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 June 30, 2017 investor presentation. Golub Capital BDC's earnings release is also available on the company's website in the Investor Resources section. (Operator Instructions)

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

Thank you, Susan. Hello everyone and thanks for joining us today. I'm joined by Ross Teune, our CFO; and Greg Robbins, Managing Director. Yesterday afternoon we issued our earnings press release for the quarter ended June 30, 2017 and we posted an earnings presentation on our website. We will be referring to this presentation throughout the call today. I'm going to start by providing an overview of the June 30, 2017 quarterly financial results. Ross will then 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.

In sum, the quarter ended June 30 was another solid quarter for GBDC, despite a challenging market environment. For those of you who are new to GBDC, our investment strategy is and since 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.

Let me dive into the details for the quarter. Net increase in net assets resulting from operations, in other words, net income for the quarter ended June 30 was $ 20.1 million or $ 0.35 a share, and this compared to $ 20.7 million or $ 0.38 a share for the quarter ended March 31. Net investment income or as I prefer to call it, income before credit losses was $ 17.8 million for the quarter ended June 30, or $ 0.31 a share as compared to $ 16.5 million or $ 0.30 a share for the quarter ended March 31. Excluding a $ 600,000 GAAP accrual for the capital gains incentive fee, net investment income was $ 18.4 million or $ 0.32 a share as compared to $ 17.4 million or $ 0.32 a share for the quarter ended March 31. Consistent with previous quarters, we provided net investment income per share, excluding the GAAP capital gains incentive fee accrual, as we think this adjusted NII as a more meaningful measure.

Net realized and unrealized gain on investments and secured borrowings, up $ 2.3 million or $ 0.04 a share for the quarter ended June 30 was the result of a $ 3.2 million net realized loss and a $ 5.5 million net unrealized depreciation. Net asset value per share rose in the quarter to $ 16.01 at June 30, from $ 15.88 at March 31, due both to earnings in excess of our quarterly distribution and accretion from completing a common stock offering on June 12 at a premium to NAV.

New middle-market investment commitments totaled $ 241.9 million for the quarter ended June 30. This was a surprisingly strong origination quarter for GBDC and I'll talk about the drivers of this in my closing remarks. As expected, our new origination activity shifted back toward one-stops during the quarter, as approximately 88% of our origination activity in the June 30 quarter was in one-stops and the vast majority of the balance in traditional first-lien senior secured loans. Overall, total investments in portfolio companies at fair value increased by approximately 3.9%, or $ 67.8 million, to just over $ 1.8 billion during the quarter.

Turning to Slide 4. 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 an NII perspective before accrual for the capital gains incentive fee and you can see our NAV per share of $ 16.01 at June 30. As shown on the bottom of the slide, the portfolio remains well diversified, with investments in 188 different portfolio companies and an average size of $ 9 million per investment.

With that I'll turn it over to Ross, who's going to provide you some additional portfolio highlights and discuss the financial results in more detail. After Ross concludes his presentation, I'll come back with some closing remarks in which I'm going to talk about origination and then we'll open the floor for Q&A. Ross, over to you.

Great. Thanks, David. Starting on Slide 5. The slide highlights our quarterly origination and net funds growth that David discussed. Turning to Slide 6. This slide shows our overall portfolio mix by investment type, which has remained very consistent quarter-over-quarter with one-stop loans continuing to represent our largest investment category at 79%.

Turning to Slide 7. This slide illustrates the fact that the portfolio continues to remain well diversified with an average investment size of $ 9 million. Our debt investment portfolio remains predominantly invested in floating-rate loans. And there have been no significant changes in the industry classifications over the past year.

Turning to Slide 8. The weighted average rate of 7.3% on new investments this quarter was up from 6.4% last quarter, primarily due to the shift back to higher yielding one-stop loans. Due to a few large payoffs on existing loans with high relative spreads, the weighted average rate on investments that paid off increased to 7.9%. 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 would be calculated using current LIBOR, the spread over LIBOR and the impact of any LIBOR floor.

Shifting to the graphs on the right hand side, this graph summarizes investment portfolio spreads, focusing first on the light blue line. This line 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 origination fees. The income yield increased to 7.9% for the quarter ended June 30. This was primarily due to higher prepayment fees. The investment income yield or the dark-blue line, which includes the amortization of fees and discounts, increased to 8.7% for the quarter, due to an acceleration of OID amortization caused by an increase in pay-offs and run-off in the portfolio.

The weighted average cost of debt or the green line increased to 3.7% for the quarter, due to a corresponding increase in LIBOR.

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 0.6% and 0. 2% respectively as of June, 30. These percentages increased slightly from the prior quarter, as one additional portfolio company investment was placed on non-accrual.

Turn to Slide 10. The percentages of investments risk weighted a 5 or a 4, our 2 highest categories, remained stable quarter-over-quarter and continue to represent over 85% of our portfolio. As a reminder, independent valuation firms value approximately 25% of our investments each quarter.

To review in more detail balance sheet and income statement on the following two slides. We ended the quarter with total investments at fair value of over $ 1.8 billion, total cash and restricted cash of $ 45.9 million and total assets are approaching $ 1. 9 billion. Total debt was $ 883.4 million. This includes $ 451 million of floating-rate debt issued through our securitization vehicles, $ 288 million are fixed-rate debentures and $ 144.4 million of debt outstanding on our revolving credit facility.

Total net asset value was $ 16.01. Our GAAP debt-to-equity ratio was 0.94x, while our regulatory debt-to-equity ratio was 0.63x . These are slightly below our targets due to these small follow-on equity offering that we completed in June.

Flipping to the statement of operations. Total investment income for the quarter ended June 30 was $ 35.4 million. This was up $ 1.8 million from the prior quarter, due to continued portfolio growth, higher fee amortization and an increase in prepayment fees. On the expense side, total expenses of $ 17.6 million increased by $ 0.6 million during the quarter, primarily due to higher interest expense.

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. Ourregular 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 the capital gains incentive fee. The annualized quarterly return, based on net income, was 8.8% this quarter and has averaged 8.7% for the past 5 quarters.

The bottom of the page illustrates our long history of increasing NAV per share over time. For historical comparison purposes, we have presented NAV per share both including and excluding the $ 0.25 special distribution that we paid in December 2016.

Turning to Slide 14. The slide provides financial highlights for our investment in our Senior Loan Fund, which had a disappointing quarter. The annualized total return for the quarter ended June 30 fell to 3.4%, primarily due to an unrealized loss on 1 portfolio company investment. Total investments at fair value declined by just over 8% to $ 322.3 million, primarily due to an increase in prepayments.

Turn to the next slide. As of June 30, we had over $ 115 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.

Let's summarize on that, on the last bullet point at the bottom of the slide. In June 6, we entered into an agreement to sell 1.75 million shares of our common stock at a net price to us of $ 18.71 per share, including the exercise of the underwriters option to purchase additional shares, we raised approximately $ 36.8 million in net proceeds. This price was 1.18x our most recently reported NAV per share at the time of the share issuance.

Slide 16 summarize the terms of our debt facility. And lastly, on Slide 17. Our board declared a distribution of $ 0.32 a share, payable on September 29 to shareholders of record as a September 6.

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

Thanks, Ross . So GBDC had a solid third quarter of 2017. The key drivers were consistent investment income, strong credit quality and access to the Golub Capital origination platform. I want to close by talking a bit on the subject of origination.

As I mentioned at the beginning of this call, we believe the investment environment today is quite challenging. Credit markets are relatively borrower-friendly and we think the combination of relatively slow middle-market M&A activity and robust capital raising in the industry means that these conditions are likely to remain challenging for some time.

So despite these market conditions, GBDC had relatively high originations in the quarter ended June 30. I attribute this to 3 factors. One, a lot of hard work by the Golub Capital origination underwriting team. Two, success in leveraging the firm's competitive advantages. And three, a bit of good luck. Let me say a bit more about each of these.

The first factor I mentioned was hard work. The hard work was finding attractive opportunities in a challenging environment. There is no substitute for shoe leather and our team showed a lot of grit in generating these attractive opportunities. This is the kind of market where we believe being -- [it will] be selective is critically important. And through our origination channels, the Golub Capital team generated almost 1,300 investment opportunities in the first half of calendar 2017, of which we closed about 2%.

Generally, if you look at the new financings we completed, they leveraged our competitive advantages. And this brings me to the second factor I want to talk about. One key competitive advantage we focused on is our capacity to deliver large, scalable one-stop solutions. We believe Golub Capital's one-stop or GOLD facilities can be a win-win solution for both sponsors and investors. For sponsors, the GOLD facility gives them a straightforward capital structure, it's simpler, it's easier on day 1, and it can be scaled up over time easily as the sponsor looks to bring in tuck-in acquisitions. For investors, the scalable GOLD offers us the opportunity to deploy increasing amounts of capital in companies we know and we believe are performing well and are likely to continue to perform well.

As an example, in the last quarter, GBDC invested in a $ 675 million Golub Capital-led one-stop financing for PetVet. We think the Golub Capital solution here beat a number of competing first-lien, second-lien syndicated alternatives, because we offered a faster, simpler, better structure. We were the incumbent lender, so we knew the company and the management team, and we've seen them execute well on their accretive growth strategy. And also helped that the firm has a strong relationship with the sponsor and expertise in the pet care sector. But I think the key piece that made our solution compelling was our ability to deliver reliable, easy-to-access dry powder for future acquisitions.

So what about the third factor, good luck? When we find a deal that we believe plays to our strengths and we partner with a great sponsor in a a competitive sales process, our sponsor doesn't always win. In the quarter ended June 30, our partners won at an unusually high rate. S

o to sum up, we believe our hard work, competitive advantages and good luck all contributed to the strong origination results we had in the third fiscal quarter of 2017.

One thing wasn't a contributing factor and that 1 thing is a lowering of credit standards. Our credit standards remain very high across the Golub Capital platform. Our approval rate for new investments for the first half of 2017 was at the low end of our historical averages. Now we don't believe this borrower-friendly market is going to last forever.

As I've said before, our plan is to sustain our high credit standards through this period and to prepare for a range of potential future scenarios. We think our origination results this quarter reflect the power of the Golub Capital platform to generate attractive investment opportunities even in a challenging environment. We're looking forward to a point in the future where there's is a correction, where there is a less-challenging environment and in that more attractive set of market conditions, we think our senior debt portfolio should continue to perform reasonably well and that we'll be very well positioned to play offense.

Thanks for your time today. Thanks for listening today and for your partnership. Operator, if you could please open the line for questions.

(Operator Instructions) And the first question is from the line of Jonathan Bock with Wells Fargo Securities.

David, Ross, maybe let's go with a quick postmortem on Ignite or Joe's Crab Shack in just a bit more detail, because I know you both limit losses but also learn from them. And then also kind of a discussion on the opportunity for growth in SLF in light of the unrealized loss and perhaps kind of the amplified effect of leverage and how that impacted return this quarter. So thoughts on those 2 investments; Joe's, as well as the SLF, please.

Sure. Let's start with Joe's. So this is a company under the formal name Ignite. If you are looking in our financial statements, you'll find it under its corporate name, which is Ignite. For those of you who aren't familiar with the story here, Ignite's principal asset is a chain of restaurants called Joe's Crab Shack that has not performed well in recent years. The company went into a bankruptcy proceeding this last quarter. It has a stalking horse bid from another large restaurant chain and the courthouse auction to resolve the bankruptcy is expected to take place later this month. We've taken our lumps on it -- our valuation reflects the approximate expected proceeds at the stalking horse bid level. So we have some potential for upside if the auction results in a higher price. We don't have, absent some unusual circumstances, we don't have a meaningful level of downside from here. We were wrong on this credit. We pride ourselves on being wrong infrequently. But we are wrong significant part of the time. And in this case, we underestimated the pace of shift in the restaurant sector. This company saw a very dramatic shift in its same-store sales, which has persisted for an extended period of time. The restaurant space is a challenging space, we approach it cautiously. This one was an unusual one for us, in that, it was a participation in a loan facility that we did not lead and I think one of the learnings -- to go back to your question, Jon, one of the learnings from our standpoint is that in challenging sectors, particularly, we're going to be increasingly stringent about the investment decision to participate and deals led by others. So that's the story on Ignite. I wish it was a happier story. We will see what the final act looks like when we get together next quarter. Second question that you had was about SLF and the prospects for SLF. I'd repeat what I've said in prior quarters, which is it's our intention over time to grow SLF, but we're going to do it if, as and when we identify attractive traditional senior secured loans to go into it. And in this challenging environment, our expectation is that, that's going to be a relatively slow process.

I appreciate that David. And just as a a follow-up, more of an environment question. You talked about the attractiveness of the one-stop product. Oftentimes we look at the compare and contrast that is [sponsoral] face between a one-stop and a syndicate option, which while one-stops offer surety of close, the tightness of the credit markets and just general liquidity sometimes give a surety of close and a lower price to the syndicate-type lender in today's environment, Antares being one. And so understanding there is always an idiosyncratic set of deals that will go one-stop, right, we don't need to talk about those. But for the current option for a sponsor down the fairway transaction, are you finding that the syndicate market is offering better terms and prices and forcing the one-stop product to complete on both price and term today. And if you're seeing that or not, is it also your intention if your sponsors are looking to do syndicate-type transactions where you will step in and be that loan syndicate provider, given the depth of the team that you have?

So couple of different components to your question. So first part if I understood it right was, is the market today competitive in a way that forces us as a leading one-stop provider to be attentive, to making sure that we have a compelling value proposition and that means being competitive on price, being competitive on terms? The answer is yes. I would say that's always true. It is particularly challenging today, because the syndicated market is so strong and pricing and terms have both become meaningfully more borrower-friendly over the course of the last approximately 1.5 years. On your second question, which is if one of our sponsors prefers for any of a variety of different reasons, prefers a syndicated solution as opposed to a one-stop solution, have we put ourselves in a position to be able to offer that solution to our sponsors? The answer to that again is yes. We have a well-developed capital markets group and our goal is to be a solution provider to our sponsors. We think that we will over the long term do better as a lender if we can provide a variety of different potential solutions to our sponsors, inclusive of both syndicated and one-stop buy-and-hold type solutions.

The next question is from the line of Paul Johnson with KBW.

My question today -- I had a couple of questions. The first one was on the SLF. I just kind of want to get a sense of what's going on. I think previously, at least in the past, you've usually paid a dividend up to the BDC that kind of tracks NII. I think this quarter NII was around $ 3.4 million or so in the SLF, but obviously the dividend was lower, a lot closer to that net income level of $ 1.1 million or so. So going forward, I mean should we expect distributions to track more in line with the net income level or be back maybe closer to that net investment income level?

So over time it's our goal to have a distribution policy that's reasonably predictable and steady over time, but we also want the distributions to approximate net income over time. Otherwise, we're effectively de-capitalizing SLF. So in this quarter, which was as Ross indicated, a weak quarter for SLF due to a meaningful credit loss within the SLF portfolio. We determine that it was an appropriate time to reduce the distribution from SLF to GBDC parent, and we want to over time have this be more predictable, but if we have performance as we did this quarter that's weak, we've got to reflect that. NII is not net income, I keep saying this over and over and over again. In the context of GBDC, NII is income before credit losses. So credit losses are part of the business, we've got to reflect credit losses in our distributions from SLF.

Sure that makes sense. Well my next question, I guess, was on 1 of the investments in the SLF. Payless, obviously went on non-accruals this quarter, but it [didn't like] to provide breakdown or anything. Is it safe to assume that the loan there is on non-accrual, because of the bankruptcy process and that we can expect latency debt come back on accrual at some point?

So 2 things. Yes, it's safe to assume it's on non-accrual and yes, it's safe to assume that the mark on the loan within SLF is reflective of the trading value of the loan. That is a traded loan.

Okay. My last question, I guess, it's just on your view, your general thoughts of the market today and competition. I'm wondering sort of how you think about competition. Are you guys comfortable in the face of the high refi activities that you had on the lower M&A activity? Are you guys comfortable with holding or even slowing funding to avoid making any kind of big cycle investments or are you looking at this as a time or I guess more willing to go forward, I guess, at what you might consider a normal rate despite those conditions?

So, a great question. I mean, we think this environment is a really challenging one. And it's particularly challenging in respect of the terms that we're seeing accepted in the syndicated market, terms around definition of EBITDA, terms around covenant levels. And we think that the prudent way to respond to this environment is to increase our degree of selectivity and slow down if that's what's necessary from a new origination standpoint. We did exactly that in Q1. If you review our calendar Q1 results, you'll see that our origination levels were meaningfully down year-over-year. I expected our calendar Q2 originations to be down as well for the 3 reasons I talked about in today's commentary. We actually saw solid originations in calendar Q2, but I don't think all 3 of those reasons are reasons that we're going to be able to sustain. Good luck is wonderful to have, but you can't count on it.

(Operator Instructions) The next question is from the line of Robert Dodd with Raymond James.

Just a follow-up or sort of to Jon's question on the SLF opportunities. Obviously, the on-balance sheet portfolio grew, the SLF portfolio shrank: 1 obviously, net originations; 1 net repayments. Both of them have access to the platform. Both of them have access to the people who, as you say, are working hard. One of your other points was that the one-stops have more flexibility and people are leaning towards some of that in some cases, where they clearly -- there were things sometimes other than pure price that determine a decision about who to use as a financing provider. Obviously the 1 be the SLF and the on-balance sheet have slightly different type ones -- one-stop 1 is traditional senior, as you say. Is there any idea in maybe the SLF to move to something slightly less traditional, still mainly traditional first-lien, but slightly less, a little bit more flexibility that might give it a leg up in the market, where as you point out, right, traditional first-lien is incredibly competitive right now. So a little bit info on the product offering, giving that a tweak to give it a little bit more of a competitive edge.

It's a great question. Its something that we think about a lot and talk about a lot. We want to be careful. We want to accomplish 2 goals, right? One goal is we like to grow SLF and have it generating attractive returns for GBDC and GBDC investors. On the other hand, we don't want to take too much risk in an entity that has a higher level of leverage than GBDC parent. And so managing those 2 goals simultaneously requires finding a kind of optimal middle ground. Just because first-lien traditional senior secured loans are competitive right now doesn't in my mind mean we automatically ought to take more risk in the SLF portfolio by pushing it more in the direction of one-stops. That's the reach for yield that kills lenders. On the other hand, if we find ourselves in a sustained environment in which traditional first-lien loans are -- it's challenging to find attractive ones, then we need to respond to that environment in some way. That may mean reducing leverage and changing the portfolio mix. That may mean other steps.

And there are currently no other questions at this time, sir.

Great. Well, I want to thank everyone again for joining us today. And I appreciate your time and patience. And as always, if you have additional questions, either today or as we move into calendar Q3, please feel free to reach out to me or to Ross or to Gregory. Look forward to talking again next quarter.

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