Golub Capital BDC Inc (GBDC) 2021 Q4 法說會逐字稿

Welcome to GBDC's September 30, 2021, 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 GBDC's filings with the SEC.

For materials the company intends to refer to on today's 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. GBDC's earnings release is also available on our 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.

Thank you. Hello, everybody, and thanks for joining us today. I'm joined by Chris Ericson, our Chief Financial Officer; Greg Robbins, Senior Managing Director; and Jon Simmons, Managing Director here at Golub Capital. Before we begin, I want to welcome Chris Ericson. Chris has been a key member of the Golub Capital team for over a decade. He's deeply familiar with GBDC. He was instrumental in driving a number of key strategic initiatives, including the company's merger with Golub Capital Investment Corporation in 2019. We're delighted to promote Chris to the company's leadership team. And I also would be remiss if I didn't, at the same time, thank outgoing CFO, Ross Teune, for his many contributions to our shared success over the last 13 years.

With that, let's get started.

Yesterday afternoon, we issued our earnings press release for the quarter and fiscal year-ended September 30, and we posted an earnings presentation on our website. We're going to be referring to that presentation throughout today's call. For those of you who are new to GBDC, our investment strategy is, and since inception, it 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.

The headline for this quarter is that GBDC had another strong quarter, capping off a strong fiscal year. For the quarter, adjusted NII per share was $0.30, adjusted EPS was $0.42, and ending NAV per share rose to $15.19. The Board also approved an increase in GBDC's quarterly distribution to $0.30 per share, up from $0.29 previously.

Slide 5 describes 3 key themes that contributed to GBDC's success, both in the quarter ended September 30 and for the full fiscal year. These 3 key themes, they probably sound familiar because we discussed them on our last several earnings calls. I'm going to summarize the themes now, and we'll go into greater detail on them later in the presentation.

The first theme is strong portfolio performance. Credit metrics improved consistently over the last 12 months, and we're now back to pre-COVID levels. The second theme is continued balance sheet optimization. In my view, the company's liquidity position and balance sheet flexibility has never been better. The third theme is robust origination. The Golub Capital platform is having its best year ever from an origination perspective, even as we remain highly selective on credit, and that's led to robust portfolio growth at GBDC.

Now I'll hand the floor to Gregory, Jon and Chris to elaborate on GBDC's performance for the quarter and for the fiscal year. Following that, I'm going to come back and provide some closing commentary, and then we'll open the line for questions. Gregory, over to you.

Thank you, David. Let me elaborate on the key drivers of GBDC's strong results. I'm going to start on Slide 7. Two key themes I want to highlight. First, our portfolio continued to perform well. I'd call your attention to the Golub Capital Middle Market Report, or GCMMR, for September 30, which we published several weeks ago. The GCMMR compared the revenue and earnings of Golub Capital Middle Market borrowers in July and August 2021 to those same company's results in July and August 2019.

The results were once again striking. The median revenue and EBITDA growth rates from 2019 to 2021 exceeded 20%, which we believe are remarkable levels given the strength of the economy back in Q3 2019. Strong earnings growth across GBDC's portfolio was reflected in the 4 positive credit quality trends listed on the right-hand side of the slide. We'll go into them in more detail shortly.

Second, middle-market new deal activity remains stronger across the Golub Capital platform. As you will see later in the presentation, record middle-market loan originations at Golub Capital and, by extension, at GBDC drove robust net funds growth at the company. Importantly, Golub Capital remained highly selective throughout the year, closing less than 4% of new deal opportunities reviewed on a calendar year-to-date basis.

Let's now drill down on the 4 positive credit quality trends listed on the right-hand side of the slide, starting with our internal performance ratings on Slide 8. We've seen continued upward migration in credit quality; a steady increase in categories 4 and 5, which are loans performing at or better than our expectations at underwriting; and a corresponding decrease in Category 3, which are loans that are performing or expected to perform below expectations. Categories 4 and 5 increased to 90.9% of the portfolio as of 9/30, an improvement of 12 percentage points year-over-year and right in line with fiscal year-end 2019. Similarly, Category 3, which represented 8.1% of the portfolio as of 9/30, is right in line with our pre-COVID normal of around 10%, as you can see from the fiscal year-end 2018 and 2019 data on the far left of the slide.

Equally important, portfolio company's performing materially below expectations in categories 1 and 2 remain very few in number. Those 2 categories constituted only 1% of the portfolio at fair value as of 9/30. A second key indicator of continued credit improvement is the fact that nonaccruals remain very low, just 1% of investments at fair value at quarter end. The nonaccrual rate was unchanged quarter-over-quarter but about 40% lower year-over-year. We'll come back to this point in our usual discussion of GBDC's financial results.

Slide 9 shows 2 other indicators of improving credit quality, net realized gains as well as net unrealized gains. This slide provides a bridge from GBDC's $15.06 NAV per share as of 6/30 to its increased $15.19 NAV per share as of 9/30.

Let's walk through the bridge. Adjusted NII per share was $0.30, in line with the increased quarterly dividend that David mentioned earlier. No net realized losses were recorded during the quarter. In fact, there were $0.02 per share of net realized gains. And net unrealized gains were $0.13 per share, reflecting the continued reversal of unrealized losses incurred in the March 2020 quarter.

Let's now take a closer look at our results for the quarter. And for that, let me hand the call over to Jon to walk you through the results in more detail. Jon?

Thanks, Gregory. Slide 11 summarizes our results for the quarter. Adjusted NII increased to $0.30 a share, and credit results remained strong as GBDC generated $0.12 per share of adjusted net realized and unrealized gains. As a result, our net asset value per share at September 30 increased to $15.19. On November 19, 2021, our Board declared a $0.01 increase to our quarterly distribution, raising it from $0.29 to $0.30 per share. This $0.30 per share distribution is payable on December 30, 2021, to stockholders of record as of December 10, 2021.

Turning to Slide 12. As Gregory noted, the quarter ended September 30 was another record originations quarter for GBDC as new investment commitments totaled $971.4 million. After factoring in total exits and sales of investments of $383.8 million, as well as unrealized appreciation and other portfolio activity, total investments at fair value increased by 10.3% or $455.3 million during the quarter.

Also as of September 30, 2021, we had $42.2 million of undrawn revolver commitments and $298.5 million of undrawn commitments on delayed draw term loans. These unfunded commitments are relatively small in the context of GBDC's balance sheet and liquidity position. As shown in the bottom of the table, the weighted average rate on new investments decreased slightly, and the spread over LIBOR on new floating rate investments remained flat quarter-over-quarter.

Slide 13 shows that GBDC's portfolio mix by investment type remained consistent quarter-over-quarter, with one-stop loans continuing to represent almost 80% of the portfolio at fair value.

Slide 14 shows that GBDC's portfolio remained highly diversified by obligor, with an average investment size of less than 40 basis points. As of September 30, 95% of our investment portfolio was comprised of first lien senior-secured floating rate loans and defensively positioned in what we believe to be resilient industries.

Turning to Slide 15. This graph summarizes our portfolio yields and net investment spreads for the quarter. Focusing first on the light blue line, this line represents the income yield or the actual amount earned on our investments, including interest and fee income, but excluding the amortization of upfront origination fees and purchase price premium. The income yield decreased by 20 basis points to 7.2% for the quarter ended 9/30. The investment income yield or the dark blue line, which includes the amortization of fees and discounts, also decreased by 20 basis points to 7.7% during the quarter.

Our weighted average cost of debt, or the aqua blue line, remained flat at 2.8% when excluding certain onetime accelerated issuance costs on debt we retired early. Please note that these onetime costs were offset by a $4 million management fee waiver by our adviser. Our net investment spread, or the green line, which is the difference between the investment income yield and the weighted average cost of debt, decreased by 20 basis points to 4.9%.

With that, I'll now hand the call over to Chris to continue the discussion of our quarterly results. Chris?

Thanks, Jon. Flipping to the next 2 slides, nonaccrual investments as a percentage of total debt investments at cost and fair value were 1.3% and 1%, respectively, as of September 30. During the quarter, the number of nonaccrual investments remained unchanged at 6 portfolio company investments. As Gregory discussed in his opening commentary, as a result of continued strong portfolio company performance, the percentage of investments rated 3 on our internal performance rating scale decreased to 8.1% of the portfolio at fair value as of September 30. As a reminder, independent valuation firms value at least 25% of our investments each quarter.

Slides 18 and 19 provide further details on our balance sheet and income statement as of and for the 3 months ended September 30.

Turning to Slide 20. The graph on the top summarizes our quarterly returns on equity over the past 5 years, and the graph on the bottom summarizes our regular quarterly distributions as well as our special distributions over the same time frame.

Turning to Slide 21. This graph illustrates our long history of strong shareholder returns since our IPO. As illustrated, investors in GBDC's 2010 IPO have achieved a 10% IRR on NAV since inception.

Slide 22 summarizes our liquidity and investment capacity as of September 30, which remained strong with over $420 million of capital available through cash, restricted cash and availability in our various credit facilities. We also highlight our continued progress in optimizing the right-hand side of our balance sheet. Three key highlights include: first, on August 3, we issued $350 million of 2027 unsecured notes, which bear a fixed interest rate of 2.05% and mature on February 15, 2027. We subsequently redeemed all of the $189 million of notes issued under the 2020 debt securitization, which were priced at 3-month LIBOR plus 2.44% on August 26 and all of the $97 million of outstanding SBIC VI debentures on September 1, which had a weighted average interest rate of 2.3%.

Second, on October 13 and 15, respectively, we issued an additional $200 million of 2026 unsecured notes at a price resulting in a yield to maturity of 2.667%, and an additional $100 million of 2024 unsecured notes at a price resulting in a yield to maturity of 1.809%.

Third, on November 19, we amended our revolving credit facility with JPMorgan primarily to increase the accordion feature, which now allows us to increase the facility up to $1.5 billion. In addition, we entered into agreements on October 14 and November 23 to increase the aggregate commitments under the facility to $687.5 million and $1.0375 billion from $475 million as of September 30.

Slide 23 summarizes the terms of our debt facilities as of September 30, 2021.

Slide 24 summarizes our recent distributions to stockholders. And most recently, our Board declared a quarterly distribution of $0.30 per share payable on December 30 to stockholders of record as of December 10.

With that, I'll now turn it over to David for some closing remarks.

Thanks, Chris. So to sum up, GBDC had a strong quarter. Adjusted net investment income supported an increase in our dividend, realized and unrealized gains were substantial, and robust new origination enabled the portfolio to grow nicely. Let's talk about our outlook for fiscal 2022, and then we'll take some questions.

I want to highlight 4 tailwinds that lead us to have optimism about the prospects for Golub Capital and GBDC in the coming period. I've spoken about several of these before, but I think they bear repeating.

The first tailwind is GBDC's strong portfolio performance. We've highlighted throughout today's presentation the positive credit trends that we've seen since March 31, 2020. Our pre-COVID underwriting has proven to be strong. Net realized and unrealized gains and losses for the period from Jan 1, 2020 through September 30, 2021, have netted to an annualized gain of about 80 basis points to the portfolio at cost. And as Gregory described, the portfolio today has very low nonaccruals and minimal category 1 and category 2 loans. We won't be distracted by needing to play defense on a troubled portfolio.

Our second tailwind is the strength and flexibility of GBDC's balance sheet. Low-cost, highly flexible, unsecured debt now constitutes about 50% of GBDC's debt funding pro forma for the October unsecured issuances. With this in place and with the first lien-oriented focus and health of our portfolio, we're comfortable slightly raising GBDC's target leverage range, raising it to 0.85x to 1.25x debt to equity. And we think that's very much in line with that of our peers. As of September 30, GBDC was operating at a 1x debt-to-equity ratio. So we have some room to grow from here.

A third tailwind is the continued growth of the private equity ecosystem. We believe the private equity ecosystem continues to grow for a very simple reason that the asset class has delivered for investors, both on a long-term basis and during the COVID period. Research by Cliffwater suggests that private equity has been the top performing asset class for state pension funds over both the last 10 years and the last 20 years. This success keeps driving investors to allocate more capital to private equity, and you can see this in reported fundraising results. Private equity funds have raised around $750 billion year-to-date, and that's brought the total stock of private equity dry powder to over $1.7 trillion according to data from Preqin.

So based on this growth in private equity fundraising and the current level of dry powder, we think the private equity ecosystem is on a flight path to likely double in size over the next 3 to 5 years. And the Sponsor Finance business, well, it's going to grow alongside the private equity business. We believe Golub Capital is a market leader, and so it's well positioned to capitalize on this growth, and that as a result, Golub Capital will be able to provide an even greater number of opportunities for GBDC.

The last tailwind we'd highlight is that the growth of the private equity ecosystem plays to our competitive advantages. We think leading private equity firms, they generally want all the same things. They want relationship-oriented lenders that they can trust to be reliable and rational, committed to win-win solutions and shared success. They want lenders that can handle a lot of different kinds of deals for them, small deals and large deals, one stops and traditional first lien, second lien deals, both buy and hold deals and syndicated deals, both U.S. deals and multicurrency deals. They want lenders with the creativity to deliver distinctive solutions. They want lenders who can scale up debt facilities as portfolio companies grow. They want to work with experts, they want to work with underwriting teams that have real expertise and don't need to get up to speed on the new situations that we're looking at. They want underwriting teams that can add value during the underwriting process.

They also want discretion. They want to work with lenders who can be decisive and reliable when they're pursuing preemptive bids or proprietary targets. And they want to keep the situation under wraps. And they want to know that their partners have the experience and resources to navigate unexpected challenges because, as we've all seen through this COVID period, unexpected challenges come around. If this all sounds familiar, it's with good reason. At Golub Capital, we built our whole business around being the partner of choice for private equity sponsors. And we think our scale, our capabilities, our long-term track record, our reputation, all these put us in a very strong position to be one of a small number of lending partners in key sponsors' inner circle.

Two final thoughts. First, I've never been prouder of the Golub Capital team. GBDC's strong performance is only possible because of the caliber of our team. And in my opinion, the last 12 months have been the best in the firm's history. And I'm grateful for the perseverance and dedication through the challenges and travails of COVID, the commitment to excellence that our team demonstrates day in and day out. Second, I want to thank all of our shareholders for their confidence.

With that, operator, please open the line for questions.

(Operator Instructions) And your first question is from Paul Johnson with KBW.

Congratulations on another good quarter. My first question was as far as the yields on new investments this quarter, it was fairly below the current portfolio yield. You guys obviously operate close to the low end of your hurdle rate. I'm curious, does this compel you to run with higher leverage to maintain the same ROE? And I'd just like to get your thoughts on how Golub, I guess, thinks about spreads in the market versus its effect on pre-incentive fee income.

Honestly, we don't really think about those 2 as related. And I think it's premature to be looking at the spreads from calendar Q3 and thinking that, that represents a meaningful change from prior periods. My sense is that spreads are reasonably stable and that this is more a mix issue than a spread issue. So I do think it makes sense. And we talked about it in our prepared remarks. I do think it makes sense for GBDC to take on some more assets. We're now running at a 1:1 debt-to-equity ratio. I think that's lighter than optimal. And I think when we do that, we'll be very much in the catch-up, which I like to be in because it provides a lot of safety around dividend coverage of the -- of NII per share. So I think we're in very good shape on where we're headed from a leverage standpoint, a bit higher than the 1:1 that we're at right now, but not too much higher. And I think that puts us in a very good position from an ROE and a return on net investment income standpoint.

That's a great answer. And as far as your portfolio companies go, I mean, there's been a pretty massive growth and recovery in EBITDA over the last year or so. As you look out into 2022 and 2023, where do you set the bar for your portfolio companies? Are you expecting, again, this continued robust growth? Do you expect more challenges? How do you look at that?

It's a good question. I mean their -- you're correct that if we look at the Golub Capital -- I mean index data for the last several quarters, we've seen very significant growth in both revenues and EBITDA for the median company in our portfolio, north of 20% in both in the recent periods. That is not in all likelihood a sustainable level. We're likely to see that come down some. That's okay, right? I mean at the end of the day, we're lenders. So we do well in a slow-growth environment, in a fast-growth environment. The only environment we really don't do so well in is a deep downturn scenario. So I don't see signs right now of a meaningful likelihood of a deep downturn. In fact, I think some of the supply chain shortages that we're all reading about mitigate risk of a deep downturn because we've got inventory shortages through the system. So we've got a macroeconomic need to rebuild inventory that's countercyclical. So I'm cautiously optimistic about the coming period. I'm not going to tell you that I anticipate that we're going to see sustained 20-plus percent growth. I think that's unlikely. But I think we're going to see sustained growth.

Great. Good to hear. And the last question, as you're one of the, obviously, the largest middle market lenders out there, I was wondering if you could talk about briefly on the shift from LIBOR to SOFR. And whether you think that's a potential challenge over the next year or 2? Are you leaving an option to switch reference rates and new loans? What about existing loans? Just any thoughts you had on that would be great.

Sure. I don't think it's going to be a big deal. I think everybody is going to switch to SOFR. I think enough work has been done by the industry association. The LSTA has been very involved in this and preparing the industry for the transition. I don't mean to minimize the amount of work that's gone into and going into preparation for the transition, but I think it's going well, and I don't anticipate any meaningful issues.

Your next question comes from Robert Dodd with Raymond James.

Congratulations on the quarter and the continued NAV growth. One, another question, not on spreads per se, but yields. I mean spreads' stable with last quarter, to your point. But it does look like there may be some incremental pressure on LIBOR floors given the delta between the yield and your spread compressed on new originations compared to this quarter versus, again, that being very stable in prior quarters. So can you give us any color on what you're seeing maybe beyond the raw spread potential stability and are there components of pricing out there in the market? And is that being influenced or driven by mix or by you guys moving upmarket to doing multibillion-dollar unit tranches instead of nearly 1 billion unit tranches?

I think you make a good point, Robert. I think in the upper middle market and the large end of the scale of transactions that we work on, and that's maybe, I don't know, 15%, 20% of our mix, we're not -- there are other lenders in our business who are much more focused on that upper middle market component. Our mainstay is companies that are in the $20 million to $50 million EBITDA range. I'm talking about transactions meaningfully -- for companies that are meaningfully larger than that.

For those upper middle market, small BSL-type transactions, there is pressure on LIBOR floors. It used to be very standard for deals to have a 1% LIBOR floor. It's increasingly common in that larger size loan category to see 75 basis points, in some cases, even lower than that. So there is a bit of pressure there. Again, I hesitate to call this really meaningful for GBDC because it's a portion of deals and a portion of our mix. But I think it's a fair observation that there is some competitive pressure to reduce LIBOR floors that fundamentally is coming from competition from the broadly syndicated market.

Got it. And on that question as well, when we look at -- I mean, as you say, 20% is upper middle market. There's a lot of cov-light business done in the broadly syndicated market. Are you seeing indications of those cov-light structures moving down into the private credit world or becoming more common in the upper middle market of that? Obviously, only 20% new portfolio. And do you have any concerns, if that is the case, about those kind of structures moving down deeper into the market and maybe into the other 85% of your portfolio that is not historically done that kind of stuff?

Yes. So I'm going to answer that as 2 questions. The first is what are we seeing in terms of covenant packages in the small BSL, large or upper middle market, and then we'll talk some more about documentation trends in the traditional middle market.

On the first question, there's always been pressure on documentation terms in those larger deals because the underlying borrowers and the sponsors are weighing a private solution against a broadly syndicated solution, wherein the broadly syndicated solution, they can get cov-light or they can get traditional broadly syndicated market terms. So I would say, in many cases, the terms that we're seeing in those larger deals are more reflective of traditional broadly syndicated terms than they are reflective of traditional middle market terms.

And I mean, I think that's to be expected because the borrowers have their choice as to which market they want to go to. In the traditional middle market, we've always seen a bit of a pendulum swing in the sense that conditions are, at any given point in time, always getting either more borrower-friendly or more lender-friendly. And in the period since, I'd say, August of 2020, they've been shifting to become more borrower friendly. They became sharply more lender-friendly at the onset of the pandemic.

I think the overall documentation trends that we're seeing in the traditional middle market, they're not moving much. There's a little bit of change around the edges, but I'd say overall, we're not seeing really meaningful movement. And I would tell you that I think the benefits of the strong economy, the strong economic performance, the strong M&A market that we've seen, the proof of sponsor value that we experienced through the early COVID period, I mean all those lead me to the conclusion that market conditions right now are actually quite favorable for lenders.

And if I can one more, not about pricing environment. On the balance sheet side, I mean, congratulations. I mean, but of course, call it, a little bit more than a year, you've gone from essentially 0 unsecured to slightly over 50, I think, today. Should we expect that to continue rising? I would certainly -- correct me if I'm wrong, I expect the pace of that to slow. Or would we -- should we expect, given the most -- one of the add-ons in October was at a yield to maturity of under 2, which is obviously extremely compelling, would you -- should we expect that you take that 50 up perhaps meaningfully higher to take advantage of the borrowing rates that you can get right now, or expect that to slow given you've now crossed the 50% line.

So I think we see where we are right now, Robert, as being a very good place. We've got a nice mix of unsecured notes of a very low-cost revolver, a very low-cost securitization liabilities. And we like having all 3 of those different kinds of debt. So at this point, I would characterize what we're going to do from here as being tweaking and optimizing as opposed to large-scale shifts. And that tweaking and optimizing is going to be premised on what are market conditions in the different places that we can borrow just because, to your point, the cost of borrowing and the mix of different maturities, those are key elements in making the decisions.

Your next question is from Finian O'Shea with Wells Fargo.

David, I wanted to ask about the new -- or at least proliferation of nontraded BDCs in the marketplace. You've talked a bit about the asset side or the origination competition on the call and the Q&A. So I'll move to the BDC product or capital base part of the discussion. What sort of impact do you think this has on new BDC formation as one of the managers who have grown the private to public way? Is this new form of BDC capital raising, is it disruptive? Does it cannibalize that channel? Or are they able to live in harmony?

Look, I think there always have been lots of different ways in which capital is formed to invest in the direct lending space. And I think for so long as we and other managers do a good job, we're going to see more capital entering the space, just as we're seeing in the private equity universe, right? The private equity ecosystem keeps growing in the recent period. It's been growing very rapidly. So I think the important element, Fin, is not that this is a private BDC or even the structure that some of the new private BDCs have taken. The key issue is that this is a sign of the success of the asset class and the success of individual managers in the asset class. I think at the end of the day, we and other managers are going to have to understand that our success or failure is going to be premised on our performance. That's what we're focused on.

Sure. That's helpful. And then just a follow-on on the new leverage target with -- we mentioned earlier, you're on the low end of the hurdle. I assume that next quarter will be closer to the middle as usual, given the strong origination this quarter, correct me if I'm wrong. But in terms of levering to the higher end or to a higher midpoint, do you think -- is that a near-term goal? Like do you think the best time is now given how much new money there is, how good credit there is, how good the credit backdrop is? Or do you think waiting for a more volatile time in some sort would be better to push up the leverage?

So I guess I don't view this as being as major changes your question implies. We're looking at what I would view as a small tweak. We were running below our target at the end of fiscal Q3, calendar Q2. So we were seeking to increase the size of the balance sheet. We did that in this most recent quarter. I anticipate that we're going to continue to grow the balance sheet a bit, but I don't think any -- I would not expect us to go to the high end of our range. I only anticipate that we go a little higher than where we are now, but not to the high end of our range. And I think to your point, Fin, that the combination of the asset growth in the portfolio over the course of calendar Q3 and the asset growth in this quarter will meaningfully increase our net interest income. So we'll be well into the catch-up, I anticipate.

Your next question is from David Miyazaki with Confluence Investment.

Kudos that are well deserved for progress and your outlook for both sides of the balance sheet. I wanted to just follow up a little bit on the conversation you're having with Robert with regard to LIBOR floors, which to me have always seemed to be a little bit of a mystery as to why they're so common in the industry. In a lot of ways, BDC managers seem to use this as a way to protect against lower interest rates on the asset side of their portfolio, even if they have floating rate liabilities on the right side. So it becomes a bit of an interest rate play. And it works great when the rates are coming down, but when we're looking at a period when rates could be going up, a lot of people are going to facing this headwind. So I'm curious, is this something that the sponsors prefer? Or is it something that the managers put in? And if it's something the manager are putting in, wouldn't it make more sense just to not put the floor in at all and then just take a wider spread and float your liabilities and assets together?

So it's an interesting question, David. And if we go back in time, the origin of LIBOR floors goes back to when interest rates fell very low following the financial crisis. And the place where it started was the broadly syndicated market. So in many ways, the traditional middle market followed the broadly syndicated market into adopting a convention of LIBOR floors. Today, I'd describe it more as an expectation or a norm than I would as something that's being pushed by either sponsors or by lenders, respectively.

And you're right that if one could transfer all of the current difference between the LIBOR floor of 1% and current LIBOR, if one could transfer that into spread that, from a lender's perspective, that would be better, the obvious retort to that is, yes. And from a borrower's perspective, it would be worse. And so there'd be a negotiation over what level is the right level reflective of the expectations about future interest rates.

For us, I would make one other point, which is we have a meaningful degree now with our unsecured notes of fixed rate debt exposure. And that gives us, in some ways, a bit of a buffer against the impact of rising LIBOR. So I don't anticipate that rising LIBOR is going to be a very big headwind for Golub Capital. I agree with you, David, that it may be a bigger issue for some other lenders.

Okay. It's one of the ways that I -- it just seemingly is an industry phenomenon for certain managers that they're just effectively taking some interest rate bets. And of course, what I think most investors are interested in is your ability to underwrite. So it always seemed to be kind of a misplaced phenomenon in the LIBOR floor.

But moving on from that, I wanted to also follow up on #3 and #4 of your tailwind with regard to private equity and its growth. A lot of your peers in the industry, especially some of the larger ones, have really sizable and meaningful private equity verticals themselves. And from discussing the potential conflicts and having different advocates on Boards for different parties on the debt side versus the equity side, there's always been some explanations that seem to be reasonable, but it appears to me that in some of those conflicts, I don't know that you can ever really get away from. And so can you talk a little bit about how you perceive your interaction with the private equity world as a lender versus others who have a little bit more of a conflict? And is this -- does this actually put your company, your Golub Capital in a position to benefit more from tailwinds #3 and #4?

I hope so, David. Look, I think that there's a purity about our business model that's a positive. It's a positive from the standpoint internally of giving us a singular focus. It's also a positive from an external perspective. I mean put yourself in the shoes of a major private equity firm that's looking at gaining financing for some company x. Do you really want to share all your thoughts about industry dynamics, all of the ways in which you do your due diligence, all of your industry research with a firm that may be competing with you on the next deal? It's awkward. So I mean, I think you're correct that we have not just one, but a number of competitors who are successfully using this business model of being in the private equity business and being in the private debt business, serving other sponsors at the same time. But I think there are some challenges with that model, and it's one of the things I like about our singular focus.

There are no further questions at this time. I will now turn the call back over to David Golub for closing remarks.

Great. Thank you very much, operator. I want to just reiterate something I said during the opening remarks, which is I want to thank all of you. This has been a challenging period through COVID with a lot of surprises and need for attention to things that historically didn't require so much attention. So we very much appreciate your support through this period and your confidence in us, and look forward to continuing to report on our progress and success over coming quarters. Have a great holiday season.

This concludes today's conference call. Thank you for participating. You may now disconnect.