Goldman Sachs BDC Inc (GSBD) 2015 Q2 法說會逐字稿

Good morning. My name is Brent and I will be your conference facilitator today. I'd like to welcome everyone to the Goldman Sachs BDC Inc. second-quarter 2015 earnings conference call. Please note that all participants will be in listen-only mode until the end of the call, when we will open up the line for questions.

I will now turn the call over to Ms. Katherine Schneider, Head of Investor Relations at Goldman Sachs BDC, Inc. Katherine, you may begin your conference.

Thanks, Brent; good morning, all.

Before we begin today's call, I would like to remind our listeners that today's remarks may include forward-looking statements. These statements represent the Company's beliefs regarding future events that, by their nature, are uncertain and outside of the Company's control. The Company's actual results and financial condition may differ possibly materially, from what is included in the forward-looking statements as a result of a number of factors, including those described from time to time in the Company's SEC filings.

Yesterday after the market closed the Company issued an earnings press release and posted a supplemental earnings presentation, both of which can be found on the homepage of our website at www.goldmansachsbdc.com under the investor resources section. These documents should be reviewed in conjunction with the Company's Form 10-Q filed yesterday with the SEC. This conference is being recorded today, August 7, 2015, for replay purposes.

With that, I'll turn over the call to Brendan McGovern, our Chief Executive Officer.

Thank you, Katherine. Good morning, everyone, and thank you for joining us for our Q2 earnings conference call.

To outline the call, I'll start by providing an overview of our highlights for the second quarter. I'll then turn the call over to Jon Yoder, our COO, to discuss our investment activity and performance metrics. Jonathan Lamm, our CFO, will discuss our financial results in greater detail. And finally, I'll provide some closing remarks before we open the line for Q&A.

Jumping right in, we are pleased to report strong operating results for Q2. On a per-share basis, net income and net investment income was $0.50 and $0.44 respectively. Furthermore, net asset value per share increased by $0.05 and ended the quarter at $19.46.

Subsequent to quarter end, our Board declared a $0.45 per share regular dividend for shareholders of record on September 30. In addition, we are very pleased to report that the Company received an investment grade rating from Standard & Poor's this week, putting us in a position to diversify and further optimize our financing structure for the benefit of our shareholders.

Moving on to investment activity, the Company's investment portfolio grew 10% sequentially, reflecting strong origination activity during the quarter. Gross and net originations were $126 million and $117 million respectively. Included in the $126 million origination figure is $28 million of unfunded commitments, $22 million of which has already been funded thus far in Q3.

As Jon Yoder will discuss in detail, our originations this quarter skewed heavily towards first-lien debt to privately held family- and founder-owned companies, which reflects positively on our ability to source attractive risk through our proprietary channels.

Turning to the balance sheet, recall that following our IPO in late March, we exited Q1 with a debt-to-equity ratio of 0.33 times compared to our target leverage ratio of 0.5 to 0.75 times. While we were successful in Q2 in deploying a significant portion of the IPO proceeds into very attractive assets, the bulk of our originations were funded near the end of the quarter, and as a result our average debt-to-equity ratio for the quarter was 0.35 times. While this leverage ratio was well below our target, the portfolio is still producing ample, high-quality, recurring NII that roughly matches our quarterly dividend.

Furthermore, based on our closing quarter-end leverage ratio of 0.43 times, we estimate that on a static basis, assuming no new originations and no prepayment fees or other -- prepayment or other fees, our ending Q2 portfolio produces approximately $0.47 per share of quarterly run rate NII, compared to our stated quarterly dividend of $0.45 per share. In addition, we have continued to produce solid portfolio growth thus far in Q3, which has allowed us to move leverage up into our target range. We expect this will result in growth in actual and run rate NII per share for Q3, assuming stable credit trends.

Turning to the underlying performance of our portfolio companies. We are pleased to report that credit quality in our portfolio remains strong. There continues to be no investments in our portfolio on nonaccrual status and we believe that the steady, if unspectacular, growth of the US economy provides a solid backdrop for credit performance.

The weighted average net debt to EBITDA and interest coverage ratios for our portfolio companies were unchanged quarter over quarter at 4.2 times and 3.0 times respectively. Importantly our energy exposure remains modest at just 4.6% of the total portfolio.

With that, I would like to turn the call over to Jon Yoder.

Thanks, Brendan.

We saw increased activity levels this quarter, both in terms of the number of new opportunities that we reviewed and the number of new transactions that we closed. While the market to provide capital to sponsor-backed transactions remains competitive, we believe our firms relationship set within the sponsor community is as strong as ever and continues to benefit from Goldman's years of providing a large suite of services to private equity firms, as well as a large alumni network within their ranks.

The market for providing capital to family- and founder-owned companies continues to be much less competitive, which we believe is due to the difficulty in sourcing these transactions, though here we benefit from Goldman's tremendous network within this community, often stemming from our colleagues in private wealth management.

During the quarter we made new investment commitments of $126 million, including $10 million to the Senior Credit Fund. As Brendan mentioned, many of the most attractive opportunities that we reviewed were originated through our proprietary relationships in the family- and founder-owned community. As a result, approximately 70% of new originations during the quarter were made to family- and founder-owned companies.

As an example, our largest commitment was to a privately held company called Perfect Commerce, which is a SaaS-based procurement company with a very attractive recurring revenue business model. This transaction was sourced through our PWM network and we were able to structure a first-lien loan that we believe has attractive characteristics, including a comparatively modest debt-to-EBITDA ratio, a robust covenant package and attractive call protection.

We believe that our ability to source proprietary transactions such as this one through our firm's preexisting relationships in the nonsponsored community is an important mitigant to the relatively competitive lending environment that we are currently seeing in the sponsor community. Our new originations were comprised of 92% in senior secured loans with the remaining 8% as a contribution to our Senior Credit Fund.

Of the new senior secured loans, 80% were first lien and 20% second lien, and all new loans for a floating rate of interest. These originations were distributed across seven portfolio companies, including five new portfolio companies and two existing portfolio companies.

During the quarter, we received relatively modest repayments of only $9 million, resulting in net origination activity of $117 million. Total investments at the end of the quarter totaled $1.5 billion at fair value, up from $910 million as of the end of the first quarter. This represents a 10.4% quarter-over-quarter increase in our portfolio. The weighted average gross yield of our investment portfolio at amortized cost and fair value remained unchanged at 11% and 11.3% respectively.

The investment portfolio remains focused on senior secured loans, with 94% of investments by fair value in senior secured assets, including 30% in first lien; 27% in first lien, last-out unitranche; 36% in second lien; 3% in preferred stock; and 4% in the Senior Credit Fund which, as we've discussed, has a portfolio exclusively comprised of senior secured loans. We also had $56 million of unfunded commitments, bringing total investments and commitments to $1.61 billion as of quarter end.

The portfolio also continues to be focused on floating rate investments. 86% of our income-producing assets have a floating interest rate, predominantly subject to interest-rate floors. The portfolio remains well diversified across 38 portfolio companies and 27 industries, with no significant industry concentration risk.

As Brendan mentioned, our energy sector exposure remains quite light at under 5% of our assets. Within the Senior Credit Fund, new originations totaled $81 million, bringing the total size of the investment portfolio to $256 million, which is a 41% quarter-over-quarter increase. These new originations were in eight portfolio companies, including seven new portfolio companies and one existing portfolio company. All of the Senior Credit Fund's new originations were first lien, senior secured loans with floating rates of interest subject to interest-rate floors.

The annualized return at cost from the Senior Credit Fund during the six months ended June 30 was 12.2%, up from 8.7% during the first quarter. The Senior Credit Fund's portfolio is also well-diversified across 20 portfolio companies and 16 industries.

I'll now turn the call over to Jonathan Lamm to walk through our financial results.

Thanks, Jon.

We ended the second quarter of 2015 with total portfolio investments at fair value of $1,005 million, outstanding debt of $301 million, and net assets of $706 million. As Brendan mentioned, our average debt-to-equity ratio was 0.35 times during the second quarter, as compared to 0.56 times during Q1 2015.

We ended the second quarter with a debt-to-equity ratio of 0.43 times as compared to 0.33 times at March 31. The increase in ending leverage was attributed to net portfolio growth as we have deployed capital into new income-earning assets. As a reminder, our target debt-to-equity ratio is 0.5 to 0.75 times.

As Brendan mentioned, we have made originations so far in Q3 that have brought us within our target debt-to-equity ratio. However, we believe we still have ample capacity to grow the investment portfolio.

Turning to the income statement, total investment income for the second quarter was $27.3 million. This is up approximately $1 million from the previous quarter, or 3%. Income growth during the second quarter was primarily driven by higher income earned from the Senior Credit Fund. The quality of our investment income continues to be very strong, with non-cash PIK income accounting for less than 0.5% of our total investment income in Q2.

Turning to expenses, total expenses before taxes were $11.4 million for the second quarter, as compared to $10.6 million for the first quarter. Quarter-over-quarter expenses were up, primarily driven by higher incentive fees.

As a reminder, in April our underwriters exercised their full overallotment option related to our IPO. Consistent with our approach at the IPO, Goldman Sachs paid approximately 50% of the total offering expenses associated with the overallotment exercise. Overall NAV, as adjusted for the overallotment exercise increased by $0.05 per share, driven by net unrealized gains during the quarter. Our supplemental materials for this call provide a full quarter-over-quarter NAV bridge on slide 12 to walk you through these changes.

Finally, as Brendan mentioned earlier, the Company received an investment grade credit rating from Standard & Poor's earlier this week. As we have discussed in the past, our financing strategy for the Company takes into account a number of factors, including the cost of our debt and its impact to shareholder returns; the term structure of our debt relative to the duration of our assets; the secured versus unsecured debt mix and its impact on our financial flexibility; the fixed versus floating-rate debt mix; and the diversity of our lending counterparties.

Receiving the investment grade rating is an important milestone for the Company and provides us with greater flexibility to diversify and optimize our capital structure over time, consistent with our financing strategy.

With that, I will turn it back to Brendan.

Great. Thanks, Jonathan.

Overall we are very pleased with the quarter. Notwithstanding the competitive financing environment, we successfully deployed a significant portion of the proceeds from our IPO into attractive senior-secured, income-producing assets over the course of Q2, demonstrating our ability to execute and deliver to our shareholders the benefits of the Goldman Sachs platform.

The results of this execution is a portfolio of high-quality performing assets that, based on the Q2 closing balance sheet, generates run rate quarterly NII per share of approximately $0.47, which is in excess of our stated quarterly dividend of $0.45 per share. Furthermore, we are very pleased that this positive origination trend has continued into Q3, which has enabled us to move within our leverage target ratio of 0.5 to 0.75 times, and as a result, we anticipate positive NII per-share trends in Q3, assuming continued stable credit trends.

We thank you for your support, and look forward to continuing to execute on our business model and delivering attractive returns to our shareholders. With that, on behalf of the team, we thank you for your time. And now, operator, let's go to Q&A.

Ladies and gentlemen, we will now take a moment to compile the Q&A roster.

(Operator Instructions)

Douglas Harter with Credit Suisse.

Hi, this is Sam Chao filling in for Douglas Harter. I was just wondering about environment post 2Q, what you have been seeing in terms of the investment opportunities? And I guess, given that leverage is below your target, how we should be thinking about that, given that the range is like 0.5 to 0.75 do you see yourself being in the midpoint by the end of the year?

Hey, Sam, how are you? Thanks for the question. We made some reference to this in the prepared remarks. I would say thus far in Q3, the trends that we described in Q2 have continued relatively competitive sponsor space, but we have had good success thus far during the quarter continuing to grow the portfolio and I think benefiting from some of our proprietary channels.

So we are not going to get into the habit of giving specifics around quarterly activity, but safe to say we do feel positive about these portfolio growth trends. As I referenced in our remarks, we are today within the target leverage ratio for the Company. And so, again, I think that really bodes well, so when we have stable positive credit trends going forward, as we have had, just the benefit of being able to put on more income-producing assets with debt capital does have very powerful effects on our income-producing capabilities. That's where we sit today.

Okay. A second question. As operating metrics improve, how are you thinking about the dividend? Are you thinking about it staying the same relatively for the remainder of the year, or just your thoughts on that, please.

Look, as we think about our dividend, we believe our shareholders really value the cash-flow capability of the Company, they value the stability and certainty of the dividend and that's what we really endeavor to do as we have built this business model. I think as we have discussed pretty extensively, we try to be conservative. We try to make sure we have earnings power in the Company that can well exceed our stated dividend range under a variety of different circumstances.

And we like that flexibility; we like that cushion that our business model provides where we are really not forced to, for example, reach for yield in lower-quality assets as a means to drive income. But rather we do enjoy having a model here which allows us to be selective and prudent with respect to capital deployment and still being in a position to over-earn the dividend.

And so our hope is that, over time, we will be successful in over-earning that dividend and if that's the case, we will be in a position to think about providing special dividends to our shareholders. And philosophically, that's really how the Management team thinks about that.

Got it, thank you.

Leslie Vandergrift with Raymond James.

Thank you; good morning. I had a quick question. I appreciate the color you gave right at the beginning of the call on the unfunded commitments and what you have funded so far out of that in the third quarter, but I had a question.

I know that you guys are sitting at a good asset coverage, even when you include all of your unfunded commitments. But have you heard any color on the SEC and their new thoughts on changing how they include unfunded commitments into that test? Or have you had any discussions with them about how you will have to proceed with that going forward?

Hey, Leslie, thanks for the question. I will start and I will hand it over to Jonathan Lamm to discuss more specifically. As a starting point, from a Management perspective, unfunded commitments are pretty inefficient use of our capital. From a risk perspective, we think about setting aside that capital based on the possibility of getting hit on that commitment and it is obviously -- while it is not funded, not earning income for the benefit of our shareholders.

So historically we've tried to be very prudent and, frankly, very strategic about our use of those unfunded commitments, being thoughtful about the duration of those commitments. We did, for example, this quarter with Perfect Commerce provide an unfunded commitment to help facilitate a very important transaction for that Company. And as discussed, we have subsequently funded that.

And so I wouldn't expect it to be a big, significant portion of our capital going forward. That being said, we do understand that industry wide it is a big focus. And maybe I will turn it over to Jonathan Lamm to give more color on what we hear.

Yes, we've been staying close to the situation. We have not had any direct contact with respect to how it works. Our view is that including unfunded commitments in your analysis, as you're thinking about your asset-coverage ratio coverage, makes sense. We don't necessarily think the corresponding assets, were you to fund that unfunded commitment, should not go into the numerator of that calculation.

But nonetheless, we monitor it both on a debt-to-equity and asset-coverage ratio, assuming those unfunded commitments are in the calculation and we're looking at it along the lines of the way that the SEC is currently interpreting it, as well as the way that we think it should be thought about.

Okay, perfect, thank you. And then I had just one more follow-up question on your discussing the end of the quarter being heavy for originations last quarter and then talked about your leverage levels increasing already this quarter. Have you seen third quarter looking like it's going to be early, heavy, with originations or do you see your trend of being back-end weighted continuing?

This is Jon Yoder here. This quarter, as Brendan mentioned, we have had continuously very good trends in terms of new origination. As Brendan mentioned, we closed the quarter at 0.43 times levered and subsequent to quarter end, i.e., in the last 40 days or so, we have moved into our target leverage ratio of 0.5 to 0.75. So clearly, again, as Brendan said, we are not in the habit of disclosing the exact amount of originations quarter to date, but you can tell from those numbers are clearly we have had nice funding already this quarter.

Okay, perfect, thank you.

Jonathan Bock with Wells Fargo Securities.

Good morning, guys. And thank you for taking my questions. So we will start first with I'd imagine the item that sits in all investors' heads and that is growth and accretive growth at that. So you are continuing your deployment pace, but you are also at a luxury where nobody -- I would say no other BDC is, which is sitting at a significant premium valuation based on your strong results and strong platform.

So the question is, you can capitalize on that by raising capital today and making it accretive, but you could also choose to wait, deploy capital lever -- deploy your existing capital and leverage, and make a potential equity offering more accretive in the future given higher leverage utilization. What is your view on equity capital and which side of the fence do you feel is more appropriate, capitalize on brand-name while you can, or focus on delivering additional leverage until some later point in the future?

Hey, Jon, thank you for the question. I think it is an important one. Philosophically, again, we think a big role that we have in Management here is to drive returns to shareholders. I think the easiest way to do that is to help grow the net investment income per share for the Company.

That has a whole list of benefits which hopefully create a very virtuous cycle that you have described. Whether or not we take on new equity capital, and we've talked about this in the past, is dependent on a few different factors and these are really "and" tests. Do we need the capital? Meaning do we have access to leverage facilities currently available to us or are we at the peak leverage of the portfolio? That is one. Do we have other sources that might be more accretive to NII per share as opposed to equity capital. That is one.

Two is are there good opportunities to deploy those proceeds into very attractive income-producing assets, the likes of which we have been investing in over the course of the life of this Company? And three, can we do that in a manner that is accretive to the NAV of the Company? Again, those are really "and" tests and I think, ultimately, what that would indicate, Jon, is we think it is prudent to continue to get the benefit of drawing on leverage to fund new investments and as we continue to see new opportunities, we will determine whether or not an equity raise is appropriate.

Okay. Appreciate that. And agree with it entirely. And then now perhaps moving to a question on one individual investment, Orchard Brands. This will then lead us into another question on the back-end leverage environment.

So I believe Orchard Brand's still on your balance sheet at about 11.5% rate. I think this was a second lien, roughly $40 million, but then it was also bought. One, I'm curious is that correct? Is that taken out?

And then two, what is the belief, given that you did, I believe, a 9.9% investment rate relative to the 11.5% we are seeing here. The potential of earnings compression as some of your clear winners, be they second lien or other, are getting taken out in an environment where there's just so much liquidity in the system?

I will start with just -- given the facts that you have alluded to, I think this is all in the public domain as well. Orchard Brands, [a catalog company that was purchased by Capmark] (corrected by company after the call), that transaction closed in the current quarter in Q3. So that investment is as of the Q2 numbers you are looking at on our schedule of investments, it will not be in Q3.

A few things to point out. That was a very successful investment for us, very well-structured investment in a nicely performing company. Ultimately our exit with the benefit of, A, buying it at a discount with some OID; and B, getting very nice call protection resulted in a very attractive call at midteens-plus type of IRR. So in the very short term, quite the opposite. You won't see an earnings hit from that. In fact, you'll see some of those earnings that we would have otherwise earned over the course of a longer investment get pulled forward by virtue of that attractive call protection.

And so the next question becomes, so what do you do now? How do you deploy that? As we've discussed, Jon made some comments as well, we continue to be very excited about the opportunities we are seeing in mostly our proprietary channels.

And so what that has led for us is continued growth in our portfolio, which, with the benefit of the leverage dynamic that we just talked about at length, really will cause NII -- assuming again continuous stable operating trends at our portfolio companies and continuous stable credit trends that we have had, that should result in positive growth for our net investment income per share.

Just a follow-on on that, one thing that is really important to understand is that because of the way we have set up this model, and the earnings power the Company has, we don't really have to reach -- the ability to drive NII forward isn't by virtue of increasing the yield on our assets, it is by increasing our leverage ratio. And so we don't need to replace an 11.5% yielding asset with another 11.5% yielding asset to drive our NII, we just simply need to grow the portfolio. And so that's a really important factor to keep in mind.

That is a very important distinction. I appreciate that, Jon. And then lastly, the environment for back-end leverage. There is a number of questions surrounding its use, be it leverage guidance, et cetera, and every bank has a different model and has a different view.

But the idea is, looking at second lien versus proprietary -- let's say this. Looking at second lien versus back-end leverage, what is your view in the pipeline of the attractiveness of one versus the other? And whether or not the terms for back-end leverage are still favorable, and allowing you to earn superlative rates of return relative to maybe elsewhere in a capital stack that is a first/second?

Jon, I will take a crack at that and I will let Jon Yoder chime in if he's got other comments as well. I think we have talked about this pretty extensively in the past with folks. A few things to note. We do give a lot of disclosure and clarity around the true structure of our investments. So as we have indicated, you can see this on our website and on our investor presentation, first lien-last out, is about 27% of the book today. That compares to about, I'll call, 36%, 37% of second lien in the book today.

And I would tell you that if you looked at those two buckets of investments, the underlying attachment points, the underlying yields, are really not very different. There is not a tremendous difference between what we are doing in those spaces. Our second liens don't look like mezz type investments which are the 4 to 6 times attachment point, but rather they are in fact slightly below today our corporate average.

And so we tend not to think about the question we are asking monolithically as an asset class, but rather we look at facts and circumstances of every specific investment that is put in front of us and how can we best structure it, one, in the context of what might be a competitive situation with other folks looking for that investment; and, two, what does that mean for returns to our shareholders? So ultimately whether we end up in a second-lien loan or a first lien last-out is going to take into account a whole host of factors that drive that ultimate execution.

And in each case what we endeavor to do is make sure we got an investment for the benefit of our shareholders that produces an attractive risk-adjusted return. Probably not exactly the answer you're looking for more broadly, but that is truly how we think about the two different asset classes.

I appreciate it. Thanks for taking my questions.

David Chiaverini with Cantor Fitzgerald.

Hi, thanks. Question for you. So you mentioned 70% of originations were from family- and founder-owned businesses sourced through the Goldman Sachs private wealth management channel, which is attractive, but my question is, is there enough deal flow from this channel to support growth or will you have to look to the sponsor-backed market to drive growth, particularly if you look to raise equity capital?

Hey, David, thanks for your question. I would say we don't think of it in terms of this quarter we are going to do more here and next quarter we are going to do more there. Our job is to go out there and boil the ocean and try to turn over every rock and look at every single opportunity we can possibly find and distill it down to the most attractive ones.

As I mentioned in my prepared remarks, recently there has been light volumes in the sponsor market, which means that the things that we are seeing in the non-sponsored market, much of which does come through our private wealth channel, are comparatively attractive and so we are doing more deals there. In terms of the volume of deals, it's, for sure, like anything, can be lumpy at times, but I would say that it is a very good pipeline for us. And it is one where we think we can continue to grow as a percentage of our overall assets.

So I think we feel pretty comfortable that we can continue to prosecute opportunities there, but I wouldn't necessarily say that, again, the sponsor market and the market dynamics can change. The sponsor market could change if volumes there increase. Very well could start doing more there as well. We are still prosecuting opportunities on all fronts is what I would leave you with.

Thanks very much.

Doug Mewhirter with SunTrust.

Hi, good morning. Most of my questions have been answered. I just had two. One specific question and one more general question. First the specific question, not to dwell on the negative and it's not really a negative, it's more of a curiosity. I just wonder if you could give any more detail around your category -- your risk rating three investments which you seem to have ticked up a little bit and I realize a lot of it is the natural evolution of the portfolio and everything is on a bell curve.

Is there a concentration of industries? Is it all idiosyncratic why these are companies that may be underperforming? Do you feel that you have them under control?

Thanks, Doug. A few things. If you look at just quarter over quarter the changes in that schedule we provide around the risk categories, we had one investment move up into a one; we had one investment move down from a two into a three. And so I think when you look at our threes, when you compare us to the industry, I think we competitively still look very good there.

With respect to industry trends or anything idiosyncratic, it is much more idiosyncratic. There is no broad trends that I would guide you to with respect to what is populating our threes. But in each of those cases, those were investments that we continue to have high confidence that those will be staying on, on a performing basis.

Many of those companies are just below our initial expectations at underwrite but obviously, as a credit investor, we focus on structuring those investments at the outset with a margin of safety such that even if the company doesn't perform relative to its budget or relative to what might be a more aggressive sponsor or owner case, that we, as lenders, are in good shape.

So that's really the dynamic with respect to those names. And of course, again, we continue to have no names in the portfolio as either a four or a five, so there's nothing on nonaccrual status and nothing sitting here today that we think is moving in that direction.

Thanks for that. That is very helpful. And like I said, all portfolios have a natural evolution to them and it sounds like you have some -- pretty healthy portfolio. The second question may be a more general question, is there any kind of industries -- more of a two-part. Any kind of industries that you are maybe paying a little more attention to in terms of where you see the current economy or where you see opportunities? Or is it more because, again, you have this family business network that you are taking opportunities as they come?

And the second part of that question is maybe are you becoming a little bit more attuned to industries with a higher risk profile now, energy being the most obvious one, given that there is a lot of wreckage in there right now and there might be some overlooked opportunities? That's my last question, thank you.

I will start and answer the first part of your question and then maybe I'll turn it to Brendan to talk about the energy question. In terms of our focus, we are generalists. The middle market is full of idiosyncratic companies, and we are also blessed with the fact that we have the broader resources of Goldman Sachs that help bring -- give us the knowledge and expertise we need to underwrite in pretty much any industry.

We feel pretty confident operating across industries. So there's nothing in particular that we are targeting. I would say certainly energy is the one that a lot of people are focused on. As you know from our numbers, we have not done a lot there. I think it's a space that, while we have a lot of expertise in, we have still significant concerns about. And I don't know, Brendan, if you want to talk about that a little bit?

Yes. I think specifically for sure there is pretty significant carnage in that space. I think even relative to Q2, what we have seen is the commodity price environment taking another leg down and a relatively significant one. So as I'm thinking about opportunities in that space, for this mandate, for the BDC -- and, again, I think this is important, our goal here is to have stable producing companies that generate a very nice income flow that we can then distribute back to our investors.

And as I look at the energy sector today, as an asset class doesn't really fit with that ultimate goal and mandate -- not to say it won't going forward, not to say there won't be specific opportunities where we can be, for example, more senior in the capital structure and get those sorts of metrics.

But by and large, by virtue of what is still a very realtime capital markets reaction to what is going on in that commodity space, the notion of wading into the entrepreneured portions of those companies' capital structures, trading up big discounts or, frankly, even second-lien deals, many of which got done just a few weeks or months ago and are down 5, 10, 15 points, that does not seem like a good place for us to be to be investing our shareholders' capital at this point given our mandate and given our focus on really providing stable returns. We think ultimately that's what our shareholders are going to value.

Thanks for that. I appreciate the answer.

Derek Hewett with Bank of America Merrill Lynch.

Good morning, everyone. My question is how quickly can you guys ramp the Senior Credit Fund? And is the -- really the growth rate during the first half of this year representative of a sustainable pace going forward? Or do you think it could be ramped even quicker?

Yes, I think the Senior Credit Fund -- it's important to understand that the Senior Credit Fund is something where we are still being very selective about the opportunities we are pursuing. And just like what we are doing on the balance sheet, that means it is going to be lumpy in terms of originations. We have been growing it pretty significantly, and I think that our plan [is] (corrected by company after the call) to grow it and to grow it in size.

But that said, any quarter definitely you could see less origination activity than the prior quarter. And again that is a function of we're not just buying the market, we are not just buying paper, we are out there looking for what we think are the best opportunities and in some quarters you don't see a lot and in other quarters you see more. I would certainly tell you the trendline, if you look over two, three, four quarters is definitely going to be up and probably significantly up. The trend one quarter over another quarter could go either direction.

I think to expand on that, when you look at the underlying attributes of the investments in our Senior Credit Fund and compare them to, for example, just the broadly syndicated credit market, we've got a portfolio of assets there that are yielding about 6.7%, which is quite high for senior secured loans. The last dollar attachment point on a debt-to-EBITDA basis is just 3.3 times. We have gotten close to four times in interest coverage, so high-quality portfolio, but still generating a very nice income stream. And so to the extent the market is, for example, tightening dramatically and we can't get the same risk reward, we will step back and we will be opportunistic and we will be thoughtful about investing that capital.

Exactly what Jon just described, which is, looking at origination trends over time, I think what we end up doing on any quarter will be a function of the opportunities we see in that quarter.

Okay, great, thank you. Also, really quickly, on the yield, I believe you guys disclosed that the year-to-date yield was I think 12.2%? And I think maybe the first quarter was 8% -- the mid 8% range. Do you have the second quarter yield? And then was there anything unusual in the second quarter that would have bumped that up?

Yes. It is Jonathan. So you are correct, the first quarter yield was 8.7%. The second quarter yield was north of 14%, if you were to look at it on a standalone basis.

And the reason for that is that our structure in the Senior Credit Fund is such that originations that are found by the BDC relative to originations found by our partner are the OID or fee income associated with that will inure to us or to the BDC relative to our partner. If our partner were to originate, they get that income.

That income is subject to an initial threshold of first covering the operating expenses of the vehicle, which, when you take into account originations year to date, we've already covered the operating expenses for the vehicle on an annualized basis and, therefore, whatever originations you have from here to date would either go to us or our partner, depending on who finds it.

I think we would encourage you to think about this on a long-term basis. There will be quarter-to-quarter volatility based on how those fees are allocated. Here to date our team has been originating the vast majority of the investments in the BDC, but we expect that over time -- call it a low teens type of return, is what we expect in that portfolio.

And what I would tell you is that the 8.7% yield that you saw in the first quarter was as a function of the fact that the portfolio was not yet levered to its 2:1 target debt-to-equity ratio. It only got to that point by the end of the quarter. The portfolio is now running at that target 2:1 debt-to-equity ratio. So I think the yield that you are looking at is much more representative yield of what you'd think about on a run-rate basis and the originations can potentially add incremental to that.

Great, thank you very much.

Jim Young with West Family Investments.

You had mentioned that your NII run rate for the third quarter is $0.47 a share and the question is what is the average debt-to-equity leverage ratio that you are assuming to get to your $0.47?

Jim, just to clarify, that $0.47 NII per share run rate that we are referencing, that's a function of the ending portfolio as of June 30. What we're attempting to do with the metric to give you a sense of is if we did nothing, if you just literally took the current portfolio, which has a debt-to-equity ratio of 0.43 times and had no new originations, did not earn any prepayment fees and the like, just the true cash flow generating capability of the portfolio would deliver that $0.47 per share.

As we also alluded to, we have had success thus far in Q3 further growing that portfolio, which obviously helps to -- assuming stable credit trends helps to augment that $0.47 per share run-rate number.

Okay. Thank you. And can you just give us a sense as to what the earnings sensitivity is for every tenth of an increase in the leverage ratio, is it worth like $0.01 a share, $0.05 a share, can you give us some sense as to what that is?

I think we could probably take that off-line with you. There are a host of different variables that would go into that calculation that come to mind just with respect to originations -- excuse me, with respect to coupon on the portfolio, other expenses. So I think just given the multi variable analysis there, we would be happy to give you some thoughts and some color, but probably best taken off-line.

Thank you.

At this time there are no further questions. Please continue with any closing remarks.

Thank you, everybody, again for your time. We really do appreciate your questions especially on a summer Friday. To the extent you do have more questions, please reach out directly to the team or to Katherine Schneider. In the meantime, have a great weekend.

Ladies and gentlemen, this does conclude the Goldman Sachs BDC Inc. second quarter 2015 earnings conference call. Thank you for your participation.