Goldman Sachs BDC Inc (GSBD) 2015 Q4 法說會逐字稿

Good morning. My name is Dennis, and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs BDC Inc. fourth-quarter 2015 earnings conference call.

(Operator Instructions)

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

Thanks, Dennis. Good morning. 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 home page of our website www.GoldmanSachsBDC.com under the Investor Resources section. These documents should be reviewed in conjunction with the Company's Form 10-K filed yesterday with the SEC.

This conference call is being recorded today March 3, 2016 for replay purposes. With that, I will turn the call over to Brendan McGovern, our Chief Executive Officer.

Great, thanks, Katherine. And thank you all for joining us this morning. Let me start by laying out the agenda for the call. After some opening remarks on key highlights for the quarter, I will turn it over Jon Yoder to take you through our investment activity. Jon Lamm will then walk you through a detailed discussion of our financial results, and I will wrap it up with some perspective on our first year as a public BDC before we take questions.

So with that, we are pleased to report net investment income of $0.62 per share in the quarter as compared to $0.57 per share for Q3. Furthermore, our board declared a $0.45 per share dividend payable to shareholders of record as of March 31. Clearly this quarter, we demonstrated the Company's ability to deliver very strong net investment income and will discuss this in more detail later on in the call. Note that our net investment income exceeded the dividend by almost 40% in Q4.

Our net asset value declined 2% quarter over quarter from $19.38 per share to $18.97 per share, reflecting net unrealized mark to market writedowns of our loan portfolio. Much of the writedown was concentrated on our investments in GTL and Securus, two investments we discussed on our last earnings call. During the quarter, we marked GTL from 94% of par to 60% of par and Securus from 94% of par to 54% of par. These two companies are regulated telecom service providers, and the markdowns were in response to an [FCCC] order which if enacted would cap rates and likely result in lower revenues for both companies.

While the risk of these investments has clearly gone up, at this time we remain constructive on the overall situation and currently do not anticipate that these investments will go on non-accrual status. Rather, we believe that both companies will be successful in offsetting the impact of the rate cap with a corresponding decrease in their cost structure. Should this come to pass, we believe operating results with be materially better than the market anticipates and fair market values for these investments may increase. Apart from GTL and Securus and excluding certain company-specific gains during the quarter, the bulk of the remainder of our unrealized losses resulted from overall volatile credit market conditions.

I would like to pause here to provide some context for our results. While we are not satisfied with the 2% decrease in NAV we reported, it is important to highlight one of the very important differentiating factors of our BDC, which is the alignment of interest that we've created with our shareholders through our incentive fee structure. You will note this quarter that our net investment income benefited from a substantial reduction in incentive fees paid to GSAM, so let's talk about that for a moment.

As a reminder, we net our capital losses whether realized or unrealized against an investment income for the purpose of calculating incentive fees. And as a result of this netting, in periods such as Q4 when investments are being marked down, there is a reduction in GSAM's incentive fees. We think this is a differentiating fee structure is a major and highly tangible advantage of our company relative to others.

Furthermore, despite the volatility in the credit market conditions, we feel good about the overall credit quality of the portfolio. Here are a few data points to support our view. On a weighted average basis, our portfolio companies grew revenue and EBITDA year over year by 4% and 7%, respectively. Furthermore, [Agnee] credit metrics showed modest improvement trends. Weighted average net debt to EBITDA and interest coverage of our portfolio companies at year end was 4.3 times and 3.1 times respectively. This compares to weighted average net debt to EBITDA and interest coverage for the Q3 portfolio companies of 4.4 times and 2.9 times, respectively.

In addition, the mix of our assets became more senior during the quarter as we decreased our [secondary] exposure and monetized our DDDS equity investment. Notwithstanding the fact that we moved up in seniority during the quarter, yield at cost increased to 10.9%, in part as we continue to grow our high yielding investment in the senior credit fund joint venture. And most importantly, no investments in our portfolio are on non-accrual status.

A few other things to highlight, Jon Yoder is going to talk in detail about our investment activity and overall market conditions, but you will see that our investment activity was modest during the quarter. While our pipeline of new investments was robust, we actually saw over 240 new deals during the quarter. Our general observation was that pricing and structure in private deals did not reflect the volatility we witnessed in the broader credit markets. And as a result, we felt it prudent to be patient and hold our capital to invest in better deals that we anticipate materializing in coming periods.

Suffice it to say, in light of the fact that our assets continue to perform and our net investment income has been materially in excess of our dividend, we feel like we have the ability to be on offense relative to peers who are capital constrained. We ended the quarter at just 0.61 times debt to equity, which was toward the lower end of our 0.5 to 0.75 times target. And as a result, we have dry powder to pursue new investments.

A few other company updates to note. Recall that at our IPO, we put in place a 10b5-1 plan under which Goldman Sachs was required to purchase shares of GSBDC subject to limitations if traded below NAV. During the fourth quarter and through February 26, Goldman Sachs & Company purchased approximately 576,000 shares of GSBDC common stock, providing a powerful reminder of Goldman's strong sponsorship of the Company. Pro forma for the purchases, Goldman owns 17.8% of the shares outstanding, making it far and away the biggest owner of Goldman Sachs BDC.

We are pleased to announce that our Board of Directors has approved a 10b5-1 plan for GSBDC to purchase up to $25 million of its common stock if the stock price is below NAV commencing in March when the current plan expires. We believe the new plan provides shareholders with the benefit of NAV accretion in the event the Company buys back shares below NAV. With that, let me turn it over to Jon Yoder.

Thanks, Brendan. The fourth quarter was marked by escalating volatility in the public credit markets, a theme that continued into early 2016. As has been observed many times in the past, private credit markets tend to lag public credit markets. We expect that this time is no different. In light of this, we significantly reduced the pace of new funding activity to only $7.4 million during the quarter in expectation of more attractive capital deployment opportunities in the months and quarters to come.

As Brendan described, we have the luxury of waiting because our current portfolio produced significantly more income than our dividend in both Q4 and the full year 2015. And since we amortize origination fees over the life of our loans rather than take all of the income up front, we are not dependent on new origination fees every quarter to maintain consistent levels of income. The fact that we put ourselves in the enviable position of being able to sit out certain periods of time while waiting for better origination opportunities is the product of concerted effort and deliberate planning and is a major differentiator that we expect will benefit us, particularly in periods when credit markets are changing as we are experiencing now.

All of the $7.4 million of new fundings during the quarter were in existing portfolio companies, including an additional $2.5 million investment in the senior credit funds. We also had sales and repayments of $52.1 million, predominantly in second lien debt investments.

Most notably, we monetized our $10 million common equity investment in Data Driven Delivery Systems in connection with the sale of the Company to an investment-grade strategic acquirer. As part of this sale, we have fully exited our equity position after just a five-month hold period while maintaining our first lien loan position. The sale of this company was a very successful transaction for us and resulted in a $1 million economic gain.

Recall that this investment was originated through our private wealth channel in the third quarter. Data Driven Delivery Systems is a great example of our ability to source proprietary transactions from family and founder-owned businesses utilizing our firm's large network of relationships in this community. In this case, our equity investment provided the owner of the business with the benefit of a valuation marker from our firm shortly before a sale transaction to a strategic acquirer, while our investors received the benefit of an attractive rate of return on the investment.

While we waited for better origination opportunities in private credit markets, we were able to take advantage of the change in public credit markets during the quarter by adding some names that we like in our senior credit fund that either sold off or experienced spread widening at new issue. In sum, the senior credit fund added $54.2 million of exposure across four new portfolio companies and one existing portfolio company. These new investments consisted exclusively of first lien senior secured floating rate loans containing interest rate floors.

The senior credit fund also had sales and repayments of $25.5 million during the quarter, resulting in net portfolio growth of $28.7 million. And this brought the senior credit fund's total assets to $285.6 million, which represents an increase of 10.5% quarter over quarter. The senior credit fund is a very balance sheet efficient way to grow the Company's earnings. As of December 31, our trailing 12-month yield from our investment in the senior credit fund is 13%.

We ended 2015 with an investment portfolio at fair value of $1.081 billion. As of December 31, our investment portfolio at fair value was comprised of 94% senior secured loans, including 39% first lien, 28% first-lien/last-out unitranche, 26% second lien, 2% in preferred stock and 4% in the senior credit fund. We also had $6 million of unfunded commitments, bringing total investments and commitments to $1.087 billion.

The portfolio continues be focused on floating rate instruments with 87% of debt investments bearing a floating rate of interest subject in most cases to interest rate floors. The gross yield at cost and fair value of our total investment portfolio as of the end of the year was 10.9% and 11.7%, respectively, as compared to 10.7% and 11.1% as of September 30, 2015.

The increase in yield at cost during the quarter was driven primarily from the monetization of our common equity investment in Data Driven Delivery Systems which was not a yield bearing instrument and also by an increase contribution and yield from the Company's investment in the senior credit funds. The increase in the yield at fair value resulted primarily from a decrease in the fair value of certain investments.

Looking back on 2015, we are very pleased with the way the portfolio developed and performed over the course of the year. The results show that we focused our origination efforts on first lien and first-lien/last-out unitranche investments, which increased this exposure from 55% to 67% of total assets at fair value and simultaneously reduced our second lien exposure from 38% to 26%.

Once again, and as Brendan mentioned, we had no realized capital losses and no investments go on non-accrual during 2015. And we were able to utilize our unique and powerful sourcing engine to deploy capital at times we think are right and in transactions we think are attractive.

As we look forward to 2016, we are very pleased with our capital position and our available dry powder. And we intend to be open-minded about where the changing credit markets could create opportunities. Our experience has taught us that when markets change, opportunities arise. I will now turn the call over to Jonathan to walk through our financial results.

Thanks, Jon. We ended the fourth quarter of 2015 with total portfolio investments at fair value of $1.081 billion, outstanding debt of $419 million, and net assets of $689 million.

As Brendan mentioned earlier in the call, the Company had very strong net investment income in Q4. Our average debt to equity ratio was 0.63 times during the fourth quarter, which was up from 0.58 times during the previous quarter. We ended the fourth quarter with a debt to equity ratio of 0.61 times as compared to 0.64 times at September 30. The decrease in ending leverage was primarily attributed to modest repayment activity during the quarter.

Turning to earnings, our net investment income for the fourth quarter and full year of 2015 was $0.62 and $2.14 versus $0.59 and $1.77 for the comparable 2014 periods. For the full year, this represents growth of 21%, primarily driven by greater income-producing assets as we moved into our target leverage range and reflecting the continued performance of our income-earning assets.

The quality of our investment income continued to be very strong in Q4 as our net investment income was not reliant on fee income in order to cover the dividend. For 2015, interest income and dividend income from investments was $116.2 million or 98% of total investment income. Other income was just $2.3 million or 2% of total investment income. We over earned the dividend on a full-year basis net of excise tax by $9.7 million or $0.34 per share.

Turning to expenses, total expenses before taxes were $9.2 million for the fourth quarter as compared to $12.1 million for the third quarter. Quarter-over-quarter expenses were down driven by a reduction in total investment advisory fee expenses. The impact of netting the net unrealized losses we experienced this quarter against investment income resulted in a 90% reduction in incentive fees. This provision of our fee structure reduced expenses by $0.12 per share this quarter. As Brendan mentioned, this is a significant differentiator that delivers tangible, quantifiable benefits to shareholders.

Our net unrealized losses during the quarter were primarily attributed to our investments in GTL and Securus, and otherwise to the volatility in the credit markets that we experienced in the fourth quarter. Our supplemental earnings presentation provides a NAV bridge to walk you through the changes to our net asset value quarter over quarter.

As we announced back in November, the Company favorably amended the terms of its senior secured revolving credit facility which reduced the stated interest rate from LIBOR plus 2.25% to LIBOR plus 2% or 1.75% subject to certain borrowing base conditions. We also extended the maturity date in November 2020. The lower rate should positively impact our net interest margin, and the maturity extension further enhances our overall long-term capitalization. We feel very good about our capital position right now given the extension of our credit facility and our relationship with our lenders coupled with our available borrowing capacity.

We also made favorable changes to the senior credit funds debt facilities. During the quarter, we entered into a term loan facility to provide the SCF with an incremental $65 million facility. More recently, in February, we were successful in increasing the total size of our SCF debt facility to $350 million, up from $315 million at the end of the fourth quarter. This provides the Company with incremental dry powder to continue to grow our SCF portfolio. With that, I will turn it back to Brendan.

Thanks Jonathan. As we approach our one year anniversary as a public company, I would like to take a moment to look back on our performance.

When we met with prospective investors on our IPO road show early last year, we discussed what we believe to be our key differentiators, including our alignment of interest with shareholders, our unique and proprietary sourcing channels through our private wealth network and our strong credit underwriting culture and capabilities. As we look back, I believe we've demonstrated solid performance in all of these areas. As this quarter demonstrated, we have an industry-leading fee structure. By taking into account unrealized capital losses and [calculating] our incentive fees, there's more income left over for shareholders to support distributions.

Also, we put our money where our mouth is. Goldman started the year as by far the larger shareholder of the Company and added to its ownership stake over the course of the year. We demonstrated the power of our origination platform as we leveraged our unique network of relationships with both middle market sponsors and family founder and entrepreneur owned businesses to originate assets with risk reward characteristics that we believe are excellent.

And finally, we have been a good steward of capital, as evidenced by the fact that we had no realized credit losses and no non-accruals during the entire year. As a result, the Company delivered very strong financial performance. Our ROE based on net investment income was over 11% for the year, and net investment income outstripped our dividend by nearly 20% over the course of 2015. Furthermore, we achieved these results despite operating at an average of just 0.5 times debt to equity over the course of 2015. As a result, we find ourselves poised and well positioned to tackle the opportunities that will undoubtedly arise this year.

We thank you for your support, and to our shareholders, we thank you for the privilege of managing your capital over the past year. With that, let's take some questions.

(Operator Instructions)

Derek Hewett, Bank of America Merrill Lynch.

Good morning and thank you for taking my question. So I guess given the lag in private markets in terms of pricing and structure that you have been seeing, over the last quarter or two, should we expect accelerating growth in the senior credit fund relative to say the last couple quarters?

Thanks for the question. I will take a stab and I'm sure Jon Yoder has some thoughts as well.

I think this quarter as we described, what we observed in the marketplace is that by virtue of that lag, the opportunities that we saw through traditional direct revision channels were not reflective of what we thought the broader credit markets were implying in terms of volatility and therefore the price and the structures that we should be able to command. So we took the opportunity to turn our focus on the SCF, which is by and large a more syndicated strategy where there is a much quicker realization of market activities. It's a very efficient way for us to deploy capital.

As we look forward, we continue to be very open-minded. We would say that the opportunities are getting better, and I think as borrowers survey the landscape of places they can go for capital, they are finding fewer places to go. And as a consequence, we do believe that structures and pricing will be better as we do roll the clock forward.

So whether or not we continue to grow the SCF versus the balance sheet investment, that's going to be a function of the bottom-up microanalysis of the deals that we see coming through our organization on a day-to-day basis. So we're certainly not making any asset class based determination about where to spend time and resources.

We have confidence that we're going to find deals this quarter as well as into subsequent quarters that are through our traditional direct or adjacent channels, both private wealth as well as through middle market sponsors that are going to fit the bill that we think is consistent with our underwriting standards and consistent with the economic return the we're trying to deliver for our shareholders. So Jon, I don't know if you have more thoughts.

The only thing I would add to that is, and Jonathan referenced in his prepared remarks, but we've obviously put quite a bit of time and effort during the quarter to also expanding the credit facility for the senior credit fund which gives us more capacity there. So we definitely think that there is room there to continue to grow that.

And given the opportunities that we've seen in the public credit markets, we absolutely have been spending a lot of time there. But as Brendan said, that doesn't mean it's necessarily to the exclusion of opportunities in the private credit markets where we are also seeing as we would expect better opportunities than what we did in the fourth quarter.

Okay and then, I know the credit markets are somewhat volatile right now, but any thoughts in terms of diversifying more your funding mix by issuing some unsecured debt?

We continue to think about certainly issuing unsecured debt and certainly creating greater financial flexibility. With the volatility currently in the credit markets, we think it's not the right time from an opportunistic perspective to tap those markets.

But to the extent as things improve and the opportunities are there, we certainly would plan to avail ourselves of that opportunity. That being said, we feel very, very good with our existing lender base and our revolving credit facility and the term on it, so we feel comfortable now, but obviously we will look to diversify when the opportunity set is there at more attractive levels.

I would just also add to that, obviously the cost of duration is not cheap. And obviously depends on where the market is at any given point in time, but suffice to say it's generally not going to be cheap.

I think one of the things we would point to and gives us a lot of comfort and confidence about where we are is, we were one of the only BDCs that was able to actually extend out their credit facility -- bank credit facility last year. And so we did do that near the end of last year, and were able to send it out to a five-year term. So we think we've got pretty good duration on our bank credit facility and whether we need to add additional duration on our liabilities, we will make that decision later, but with the understanding that there is a cost to doing that.

Okay great, that's all for me, thank you.

Leslie Vandegrift, Raymond James.

Hello everybody, I changed my name for the event because I thought I'd get a question quicker. So first, a little bit of an obscure question if I can. On the dividend strategy, because as you say excellent management fee structure that really benefits shareholders.

So the question though is of course, it generated an extra $0.12 of NII effectively in the quarter that flows to NAV and offsets the NAV hit from the unrealized losses. But at the same time, it also generates that $0.12 goes to spillovers.

So what's the strategy on distributing that extra $0.12, because obviously if you do distribute it, the NAV hit is there as well. So it's a strong benefit, but it moves things around a little bit. And the rules obviously require you in principle to distribute that, so what's the policy going to be there?

Thanks for the question. First off, we like being in the position where we do have optionality, and I think by virtue of how we manage the balance sheet and the income, we do have a lot of choices that we can think through. We obviously work closely with our board to set dividend policy, we think through what will be in our estimation the most value enhancing outcome for shareholders.

I think right now in an environment where our BDC and many other BDCs are not trading well, I think folks have questions about the credit markets in the volatility that we're seeing. We think right now that are to retain that into NAV as opposed to distribute it back to shareholders.

We're not sure that shareholders will value that one-time special dividend in this environment. And we while constantly reevaluate that over the course of the year and over the course of time, but right now we do think the better strategy is to retain that spillover into NAV.

I agree with you for what it's worth.

If I could just add to that, the amount of spillover that we have which is $0.34 of spillover generated from the current year, that does not have to be distributed or does have to be distributed in the current year, but the way that the tax rules work, we are able to essentially retain that $0.34 on a perpetual basis or until we decide to distribute it out.

I realize, thank you. On the SCF, we originated some in the quarter, the volatility in the fourth quarter was up, obviously continued to get worse in the beginning of the year. I mean, was your expectation, if I can put it this way, the decision to deploy in the SCF obviously on a credit by credit basis, was that colored by an expectation that you maybe thought things were going to stabilize or in hindsight perhaps waiting a bit longer would've gotten even better structures which is what you're doing on the non-SCF side?

So can you give us a little bit of color on where you think the volatility is in the different end markets and timing. It hasn't made it really to the private markets yet. How do you long to think that's going to take, and is the SCF even more attractive today than it was in the fourth quarter?

So let's try to bring you into the fold just on the capital allocation decision, the conversations that we have here over the course of time. As we described, with Derek's question, what we don't do is think through buckets, bucket being the SCF, were you in the first lien versus the second line, and say we're only going to focus our efforts on this category of originations. We respond to what we see as opportunities that we think are going to generate the best return for our capital, which of course is quite dear.

So from a process perspective, we continue to look in, evaluate transactions both in the public markets, be it primary in the public markets as well as secondary. We do the secondary market transaction on a new name within the SCF in this quarter as well as a few add-ons with existing physicians, so being reactive to opportunities.

But each of those decisions is made on our team's assessment of whether or not that price is compensating us appropriately for the risks that we are taking in each of those investments. For sure, within the public market, you are taking a different risk which is liquidity and what's going to happen on a mark to market basis.

When you look through our SCF, you will see that we did mark it down over the course of the quarter, which of course is reflective of what's going on in the broader market. We did in many of those instances take a look at those opportunities and think they were really attractive from a yields perspective, especially in the context of our senior credit fund where we've guided termed out credit facility to finance longer-term equity investments that our BDC and our partners made. So we have a duration of capital in both places that really gives us the luxury and the ability to be thoughtful about when and how to add risk in those areas.

And I would say again, on a go forward basis, we think both of those opportunities will continue to be there. Neither are mutually exclusive, and we really feel good about the fact that we put ourselves in a position from a balance sheet perspective to be able to go on offense on those opportunities as they come forward.

And as we survey our peer set, we see lots of folks who are through their own internal leverage targets or toward the higher end of even the statutory leverage limits. And we put ourselves in a very different position, and I think that really works to the benefit of our shareholders.

Thank you, very helpful and congratulations on the quarter, the management fee, and I think shareholder should be pretty happy. So thanks.

Doug Mewhirter, SunTrust.

Good morning. First, a question on the portfolio if you are able. Is there any update on [Iracor]? I know they are not exactly in the best market right now, but they are still listed as a performing loan.

So it sounds like they seem to be hanging on. Is there any developments there either macro or micro with that company?

I would say macro, the E&P space I think as everybody is certainly well aware continues to be under pressure, not a whole lot of change across our portfolio investments in that space. I think for everybody's benefit, E&P is just about 4% of our assets, so not a very big allocation of our capital.

Iracor is a first lien position that we have in place more on the services side. We've marked it down substantially, I think we were marked at $0.65 at the end of the first quarter for that first lien investment.

The Company does have liquidity. They were relatively recently able to raise incremental capital. They have liquidity, they have runway, they have a relatively flexible cost structure within the Company. And so we don't foresee in the short term any change to that company status as being a performing credit.

Great, thanks for that. My second question, have you with the new, more favorable regulations, have you considered starting the process on applying for an SBIC license?

So on the questions, we have not been pursued that. We have conversations, it's something that we evaluate.

If you look at our senior credit fund and strategy that we have in place with our senior credit fund, we feel like we're getting really the -- a very similar economic benefit, which is effectively the off balance sheet leverage treatment. We're doing it in a strategy where there are fewer constraints with respect to the nature and the types of the assets that we can consider.

As we discussed, we view that portfolio over the course of this quarter. We put in place more financing to be able to continue to grow that strategy.

And so, as between our SCF and an SBIC, I think we get a very similar overall economic benefit to the shareholders in our BDC. As we discussed, that equity investment this quarter delivered a 13% yield on a cash on cash basis. So very attractive, one that we do anticipate growing, and ultimately seeing benefits as the aspect of fewer of the constraints.

Great, my last question is just a clarification. Something I should have picked up in the opening remarks, but I didn't quite get it sorted out in my head.

So just to clarify on the buyback or the 10b5, the Goldman Sachs plan is done and the only plan that is left now as of March 18 or whatever is going to be a buyback plan on some formulaic basis. Is that correct?

Yes, that's correct. So at our IPO, we had in place the Goldman 10b5-1 program, and we had a discretionary plan for the Company.

Over the course of 2015, basically we determined along with our counsel that it was better not to try to coordinate purchases between the BDC and that plan. And so the 10b5-1 plan for Goldman did purchase a substantial amount of shares over the course of 2015. That plan is set to expire on March 18, which is one year post for our IPO.

At that point in time, our new 10b5-1 plan will kick in, but that is the Company's plan. So to the extent that pool of capital which is $25 million does buy back shares in the open market at a discount to NAV, the accretion to NAV will result because it will be in the Company's capital that is making those purchases.

Great thanks, that's all my questions.

Thank you.

Jonathan Bock, Wells Fargo Securities.

Congratulations and also thank you for taking my questions. Just as a follow up to Leslie's question at Raymond James, related to the SCF, would you be able to shed just a little bit more light on the leverage ability of the collateral?

So you obviously increased leverage. My guess is you can do so again, and the quality of that collateral continues to improve as well as perhaps even the prices of that collateral continue to improve as evidenced through your increasing return on the SCF equity. I am curious if you would feel it's more prudent to continue upping leverage beyond what you have already increased in the SCF today?

Just to clarify, we put in place incremental capacity to pursue investments via an upsizing of our credit facility. We are not changing the capitalization strategy of that vehicle.

So we're not going to take the same assets and apply more leverage. We just have more capacity by virtue of having more debt available to us to draw down alongside the equity that we and our partner have committed to grow the strategy. So that's two to one, and we think that's an appropriate amount of leverage as we look at sale equity and other much more levered structures where that leverage might be 10% of the equity contributing to those vehicles.

We don't think that's appropriate for this strategy. We think the volatility that results frankly is inconsistent with what we're trying to achieve for our investors. And so, we're not changing capitalization strategy of that vehicle at all.

Okay, that's a fair question and great response. So next, extraction oil and gas, just when we look at the second lien, I believe other BDCs also have this market par. And so I am curious just in light of the bids of oil and gas cos across the market on where you see this Company right now today and its forward prospects.

So again, this is oil and gas, and this is the second investment that we have in the portfolio marked at around par I believe is relatively unchanged from the prior quarter. In this particular instance, we have a number of things working to our benefit as lenders to this Company relative to other situations in the broader E&P markets.

First and foremost, we have an equity sponsor here which is Yorktown who has been very supportive with their capital. Since the oil market has become much more volatile, the sponsor here has infused hundreds of millions of dollars of junior capital beneath us to support the business, to support its prospects and support its growth. They are doing so I would say in large part because they know they have a very strong asset that in many different price environments for oil can be quite profitable.

So even here, at the current price deck, they continue to drill, albeit less than they were doing at much more robust prices. That in and of itself is unique. They are doing so because they are still able to earn very attractive returns on those drilling investments.

So when we look at our position in this capital structure, we feel like we're about two times covered by PDP of the assets. And again, that doesn't even take into consideration the junior capital that continues to come into the Company.

Okay great, thank you. And then also, in terms of the equity sale as it relates to data driven, as well as the corresponding markup, can you give us a view of anticipation of prepayment in terms of timing and how you would look at that investment going forward because it is -- there are some favorable news items that you have outlined.

Go ahead.

I would just say we are not in the business of predicting repayments. And you will see that we have learned over time that that can be a fool's errand. And you might think you're taking out or something and then there is a change in the credit markets or there's a change in a transaction that results in you not being taken out.

So certainly, as we mentioned in the prepared remarks, the acquirer of the business was investment grade rated, is investment grade rated. So it's very possible that they will find a more lower cost of capital to take us out, but we don't really want to predict the exact timing of that.

Okay. All right guys, thank you, congratulations.

Thanks.

Christopher Testa, National Securities.

Hi good morning, thanks for taking my questions. Just with your opening remarks with holding back originations being that they were not reflective of broader markets from what you're seeing, can you provide more color on whether that was primarily in sponsor or non-sponsored transactions? And also, was it not indicative of the market in terms of yields or in terms of structures and covenants and whatnot being reflective of reality?

So I will make a few comments, and then Brendan may have others as well. So I think the private markets, very much as I said on the outset lagged the public markets, and I think that is a function of pricing to start with.

We have not seen or at least through the end of the fourth quarter did not see dramatic moves in spreads in the private markets the way we saw in public markets. That being said, the private markets have been fairly consistent in terms of the covenants and other terms of the deals that provide production to lenders.

And so, we haven't seen -- during the fourth quarter, I wouldn't say that we saw any significant change to that, but that's not surprising given that frankly the vast majority of the middle market has always been a covenanted market. We didn't really see any change in the last few years, and so the fourth quarter continued what was already a very favorable set of market terms for middle market loans. I think our comments, really our observations were more one of pricing that the spreads that were on offer both in sponsored and non-sponsored deals in the fourth quarter were just not as attractive relative to what we thought they should be given the spreads that occurred in the public market.

The only other thing I would add to that is, I think anytime you see a rapid and dramatic change in an overall environment, that tends to decrease activity. So I alluded to the fact we actually did see quite a number of different opportunities. We had more than 240 different opportunities come through the door over the course of 2014, excuse me, Q4 of 2015, both sponsored and non-sponsored.

And I think expectations on the part of borrowers were frankly yesterday's pricing. And so when confronted with the newer cost of capital, I think that tends to cause a chill on overall market activity.

Whether or not these deals got done at the terms that folks were looking for, some of them did with more aggressive competitors, some of them the transactions did not get done. But in any event, I think when you see the capital shifting, negotiating leverage shifting to lenders versus borrowers, I think that does bode well for subsequent uses of our capital.

Great, that's great color. And also, with the senior credit fund, what's the incremental yield pick up on an unlevered basis that you are seeing so far in the current quarter given that the volatility has persisted?

Look, I think if you look at that portfolio, I think historically we probably have been in the 6% asset yield range. I think opportunities are at least 50 basis points wider or in some cases 100 wider of what we have historically been able to achieve just from an asset level on those investments.

And so, I would say -- Jon commented about the private markets historically benefiting from protections within the SCF where it is a bit more of a syndicated opportunistic set. It's yield but it's also structure. So we are seeing changes in structure in those more syndicated deals that do make us a bit more favorable.

So there's a number of different categories and covenants I would say that would have been inserted to some of those transactions that do make them more attractive. And so within that part of the market, in addition to the price change, I think the structural benefits are improving.

Okay great. And would you be able to give us an idea on what the origination outside of the SCF just in your portfolio have been quarter to date and how much they have picked up?

Yes, I think we don't want to get into the habit of giving intra quarter numbers around originations. I think we've given a lot of color about our confidence that opportunity sets will pick up, and we feel very good about being positioned for those opportunity sets.

So I do think, Chris, that we will see an increase in activity in subsequent quarters. There are some transactions that may close in Q1 of this quarter and others that might trip into early part of Q2. We are definitely seeing a pickup in activity and opportunities that we do think are within our strength zone, and that's the good news.

Okay. That's fair. And just last one for me, the two telecom investments you mentioned were marked down given the potential of having the caps on the rates that they could charge.

Just one part question, how long do you think it would take them to cut the cost necessary? And two, are the current marks as of 12/31 reflecting them not being able to cut the costs, or are those assuming that they are going to be able to do the cost reductions?

So let me try to answer that a couple of different ways. I will tell you that our underwriting approach here is assuming that the rate caps go through as proposed. Both companies are trying to stay the orders. Whether or not they are successful we don't know, but we assume that the orders go through as proposed.

GTL we would say by virtue of its more concentrated customers, they tend to be in bigger prison system than Securus, which has a more distributed base of customers. We anticipate that they might be a bit quicker in terms of being able to renegotiate contract rates for commissions lower just by virtue of having fewer of those contracts to renegotiate. But either way, we think both companies will ultimately be successful in getting some relief if the rate caps do go through and revenues are impacted.

With respect to the marks, the marks are in this case public. I think one of our competitors alluded to the fact that some of the marks have gone up post 12/31. We're obviously sitting here about two thirds of the way through the quarter, so things can change.

I think what's most important is, as we do see the order go through, I think investors ultimately will be looking for whether or not the companies can be successful in again mitigating the rate cap issue with their ability to cut commissions. So I do think there will be a bit of a show me aspect to that.

But we have confidence that will take place. And if and when that does, we think we will see it in the financials, we think we will see stability. And given the prices that we've talked about, 60% and 54% for GTL and Securus respectively, we do think there is a very good chance to see market values improve if they can prove their ability to mitigate cost.

Great, thanks for taking my questions.

Bruce Roberts, FinTrust Brokerage Services.

Good morning, congratulations on your first year as a public company. I just had a follow up question on the two telecom companies.

You made a comment that you don't expect them to go on non-accrual status. Does not assume a change in their cost structure, or does that -- will that be the case even if they weren't able to garner a significant change in their cost structure right away?

So look, the way we go about doing this is we take a look at the fixed charges within the Company, we look at the cash flow generating capability. We will stress the revenues and try to understand the nature of the cost within the Company, what are variable and what are fixed.

And so I think we talked about this last quarter. I would say frankly before we had more confidence in their ability to mitigate some of these costs. So when we talk about our expectation that these companies won't go on non-accrual, I think we don't need to see all of the commission that they paid go down to zero to find themselves in a good position.

Both of these companies were relatively low delevered coming into this issue. Both these companies continue to generate today significant free cash flow. So there's fair bit of cushion in the financial model such that even if they are not able to recoup all of the revenue that might be at risk given the rate caps, we do think there is enough flexibility in the models such that they can stay current on their cash valuations.

Okay great, thank you. I just wanted some of the granularity on the portfolio overall. You mentioned that the weighted average revenue and EBITDA growth was 4% and 7% respectively.

And I was wondering, can you give us any color, any granularity on profitability for your typical portfolio company? Did EBITDA margins improve in 2015, did they stay stable, maybe what they are a little bit and maybe what range they do come in at, any help there as well?

Yes, I don't think we have that at our fingertips, but I think when you think about revenue up and EBITDA up more, that should imply margins were improving. But look, I think the most important thing is, clearly in this environment I think investors are focused on credit quality.

When you look at our portfolio and you look at how we manage this capital, I think we've done a very good job there. The underlying health of our portfolio companies feels good.

There's certainly going to be different pockets of volatility in different areas. If you look at our risk ratings that we provide for investors, the weighted average risk rating portfolio this quarter was essentially flat.

So we feel very good in an environment where folks are really concerned about what's going on in both the credit markets but also the underlying economy. I think we have gained some data that shows our portfolio companies are doing okay.

Great, that's very helpful. I appreciate the color, again congratulations.

Thank you.

Jim Young, West Family Investment.

A couple of questions, with respect to your write-downs -- the unrealized losses and the write-downs you had in the two telecom services, you mentioned the FCCC order. Was this the final order, and is there an appeals process going forward? Or can you help us understand going forward what we can potentially expect out of the FCC thank you?

Yes, both companies are appealing the order. There is a state process in place. We think within the next couple of weeks we will get some information with respect to the state.

I think most importantly though is we are not underwriting this with an expectation that the current order as contemplated won't go through. We are looking to the worst case scenario, looking to see what will happen to these companies and their ability to generate cash flow to service our obligations in the event that worst case happens. And so if they are successful obviously in either staying or getting an appeal to beat this back, that of course would be a tremendous positive, but we're trying not to bank on that as our underwriting case.

Thank you.

I think that looks like it's all the questions that we've got. So we do thank you for your time, so let me turn it back over to Dennis.

Ladies and gentlemen, this does conclude the Goldman Sachs BDC Inc. fourth-quarter 2015 earnings conference call. Thank you for your participation. You may now disconnect.