Goldman Sachs BDC Inc (GSBD) 2016 Q2 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 second-quarter 2016 earnings conference call.

(Operator Instructions)

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

Thanks, Dennis. Good morning, everyone.

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 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 call is being recorded today August 5, 2016 for replay purposes. With that I'll turn the call over to Brendan McGovern, Chief Executive Officer of Goldman Sachs BDC.

Thank you, Katherine. Good morning, everyone, and thank you for joining us for our Q2 earnings conference call. I will start by providing an overview of our highlights for the second quarter, I will then turn the call over to Jon Yoder, our COO to discuss our investment activity and portfolio metrics. Jonathan Lamm, our CFO, will take you through a detailed discussion of our financial results. Finally, I will conclude with some closing remarks before opening the line for Q&A.

We are pleased to report Q2 net investment income of $0.50 per share, as compared to $0.44 per share for Q2 2015. The year-over-year increase in NII is primarily due to an increase in earning assets, as we grew our investment portfolio by over 10% from Q2 2015.

As we announced after the close yesterday, our Board declared a $0.45 per share dividend payable to shareholders of record as of September 30. We are pleased that our net investment income is contributed -- has continued to exceed our dividend meaningfully, reflecting attractive underlying yields on our assets and a carefully considered expense structure. This quarter our NII exceeded our dividend by 11%. Year to date, our NII has exceed our dividend by over 20%.

Moving on to investment activity. Gross and net originations were for $42 million and $37 million respectively, representing a modest increase in our total investment portfolio or approximately 3% sequentially. We ended the quarter at a debt-to-equity ratio of 0.7 times, which continues to be within our target leverage range of 0.5 to 0.75 times.

Turning to the underlying performance of our portfolio companies, we continue to believe that the current economic environment of steady growth in the US provides an attractive backdrop for our portfolio companies. On a weighted-average basis, our portfolio companies continue to grow EBITDA on both a year-over-year and year-to-date basis, including the companies in our portfolio that are currently marked at meaningful discounts to PAR.

That said, we placed out first-lien investment in NTS Communications on a nonaccrual status as of quarter end. This was a result of the company and its PE sponsors decision not to pay the amounts owed under our loan facility while we negotiated an amendment to the terms of our investment. Subsequent to quarter end, we reached an agreement on the amendment and received a cash payment from NTS in the amount of the past due interest, which was applied to principal.

To provide some background, NTS is a telecom company that operates a fiber-optic network with services to the premises for both commercial and residential customers. Our underwriting thesis was premised on the growing demand for data speed and bandwidth and the superiority of fiber in meeting this demand relative to other technologies. While the company has solid penetration rates in many of its most important markets, relative to our initial underwrite the company has not grown its subscriber base inline with expectations.

We believe this performance dynamic stems in part from NTS's inability to pursue certain growth CapEx programs given its debt service requirements. In light of this, we are pleased that the agreement we reached with the company and its sponsor after quarter end will provide the company with the financing and flexibility it needs to facilitate these programs, which we believe improves our file position and puts the company on improved trajectory. I would note this is first-lien investment was initiated at an attractive loan to value with approximately $100 million of equity cushion beneath our loan.

The other investment we had on non-accrual status at quarter end was alone to Hunter Defense. As you may recall from our Q1 earnings call, Hunter Defense was placed on nonaccrual status as a result of the company's deteriorating financial performance. During the second quarter, in an effort to rightsize Hunter's balance sheet of provide the company with adequate liquidity to execute its turn around plan, we engaged in insensitive negotiations with the company and their stakeholders, including the first-lien lenders, the other secondary lenders and the company's private equity sponsor.

We are pleased to report that shortly after quarter end, we closed on restructuring of the company that we believe derisks the capital structure, infuses capital to bridge the normalized operating environment, and provides potential for us to recoup our investment capital. Specifically, we converted our existing $28 million second-lien loan into non-interest-bearing preferred and common equity.

In addition, we were able to purchase approximately $8.7 million of first-lien loans from an investing holder at a discount to PAR and exchange it for additional preferred stock. As a result of these transactions, the total cost basis of our investment in Hunter is now $212.6 million, representing approximately 1.1% of our total investment portfolio at cost. And we have removed the investment from nonaccrual status effective July 1, 2016.

With that let me turn it over to Jon Yoder.

Thanks, Brendan.

During the second quarter we saw transaction activity pick up from first-quarter levels and build momentum modestly through the end of the quarter. This trend has continued thus far into the third quarter as well. At the same time, we are starting to see a little bit of consolidation and in some cases outright contraction in the number of competing lenders with meaningful amounts of capital to deploy, which we believe is indicative of an industry that is slowly maturing. While these trends haven't yet manifested in a significantly altered investment landscape, we are taking note that the direction is positive for investors and the private credit asset as more broadly.

As Brendan mentioned we are pleased with our investment activity during the second quarter, particularly our ability to grow the portfolio and continue to stay well within our target leverage range of 0.5 to 0.75 times debt-to-equity. We were also pleased with the continued growth of the senior credit fund, where we earned a 13% return on our investment capital over the past year.

During the quarter we were able to grow the senior credit fund by 4% and by 38% year-over-year. Our investment in the senior credit fund now represents approximately 6% of the Company's total investment portfolio. The continued strong performance of the senior credit fund and its continued growth as a percentage of our overall assets remains a priority in the coming quarters.

To quantify our investment activity this quarter, we made new investment commitments of $42 million, including an additional $9 million investment in the senior credit fund. The new investment commitments were comprised of 70% in first-lien debt, 7% in first-lien/last-out unitranche debt, 2% in second-lien debt, and 21% in the senior credit fund.

Sales and repayment activity was muted during the quarter totalling just $5 million and was driven by partial paydowns in scheduled amortization payments. While predicting the timing of future repayments is difficult, there are certain investments in our portfolio that we believe could be repaid in the relatively near future. So we do not expect this quarter's light repayment volumes to continue.

As of June 30, 2016, total investments and commitments in our investment portfolio were $1.116 billion at fair value. This is comprised of 92% senior secured loans, which includes 39% in first lien, 28% in first-lien/last-out unitranche, and 26% in second lien, as well as 2% in preferred stock and 6% in the senior credit fund. We had less than $1 million of unfunded commitments at the end of the quarter.

The portfolio continue to be well diversified across investments in 40 portfolio companies operating in 28 different industries with no significant industry concentration. The weighted average net debt to EBITDA of the companies in our investment portfolio decreased slightly to 4.4 times from 4.5 times as of March 31, 2016, which reflects the generally steady economic performance of our portfolio companies that Brendan described.

Turning to the senior credit fund, we originated $58 million investment in three new companies and three existing portfolio companies, bringing the total size of the investment portfolio to $354 million. All of these new investments were in first-lien senior secured, floating-rate loans with interest rate floors. The senior credit fund had sales and repayments of $47 million driven primarily by the repayment or refinancing of loans to three portfolio companies.

Total activity in the senior credit fund resulted in net portfolio growth of $11 million during the quarter and an increase in the weighted-average yield on the asset of approximately 30 basis points at cost and 20 basis points at fair value, as new originations had higher yields than repayments. The senior credit fund portfolio also remains well diversified across investments in 28 portfolio companies operating in 20 different industries, again with no significant industry concentrations. There were no investments in the senior credit fund nonaccrual status.

I will now turn the call over to Jonathan to walk through our financial results.

Thanks, Jon. We ended the second quarter of 2016 with total portfolio investments at the value of $1.115 billion, outstanding debt of $469 million and net assets of $668 million. Our net investment income was $0.50 per share as compared to $0.58 per share in the prior quarter and $0.44 per share in the quarter ended June 30, 2015.

As Brendan mentioned earlier our Board of Directors declared a third-quarter dividend of $0.45 per share payable to shareholders of record as of September 30. For the trailing four quarters we have consistently out earned our dividend on a net investment income basis. We believe that this is a testament to the strong earnings power of our portfolio, as well as to our incentive fee structure.

During the quarter our average debt-to-equity ratio was 0.68 times as compared to 0.62 times during the previous quarter. We ended the second quarter with a debt-to-equity ratio 0.7 times as compared to 0.63 times at March 31. The increase in ending leverage was primarily attributed to our net portfolio growth in the quarter.

Turning to the income statement, our total investment income for the second quarter was $29.3 million, down from $31.3 million last quarter. Primarily driven by the classification of NTS on nonaccrual and thus resulting in the reversal of accrued interest income. Notwithstanding this nonaccrual, we believe that our dividend continues to be well supported by high-quality income earning assets in our portfolio.

Total expenses before taxes were $10.9 million for the second quarter, as compared to $9.9 million in the prior quarter. Expenses were up quarter over quarter primarily driven by an increase in incentive fees and an increase in interest and credit facility expenses. The higher incentive fees are attributed to higher pre-incentive fee earnings in the quarter, as net unrealized depreciation was lower than in the prior quarter.

As a reminder, our incentive fee calculation takes into account net realized and unrealized losses and therefore can display volatility from one quarter to the next. We believe this feature provides the proper shareholder alignment as the fee is based on total return. We ended the quarter with net asset value per share at $18.47 down modestly from the prior quarter, driven by unrealized depreciation and partially offset by net investment income that exceeded the dividend. Our supplemental earnings presentation provides an NAV bridge to walk you through these changes.

Finally, as mentioned during the last quarter's conference call, we put in place a 10b5-1 program to repurchase up to $25 million of our shares on a programmatic basis when the market price is below our most recently announced net asset value per share. There were no share repurchases triggered under this program in the second quarter, as our stock price traded above NAV throughout the quarter. We believe this program is indicative of the confidence we have in the value of our investment portfolio.

With that, I will turn it back to Brendan.

Thanks, Jonathan. Overall we are pleased with the strong net investment income that we were able to produce this quarter. In particular, we are pleased with our continued ability to produce net investment income as meaningfully higher than our dividend.

Furthermore, as we described on past earnings calls, our investment income continues to be comprised predominately a contractual cash interest payments received from our portfolio companies, as compared to one-time nonrecurring items such as origination or syndication fee income. We continue to maintain a close eye on managing expenses and are pleased to have among the lowest management fees and cost of debt capital in the industry. Our incentive fees structure is designed to incentivized prudent risk management and align GSAMs interest with the interest of our shareholders. Taken together these items have let us utilize equity capital very efficiently consistently producing net investment income that is one of the highest in the industry as a percentage of gross investment income.

Finally, we continue to like the economic backdrop in the US of relatively steady consistent GDP growth and are generally pleased with the credit metrics and performance of our portfolio companies. While we are disappointed to have had two investments at nonaccrual status at the end of the quarter, we want our shareholders to know we brought tremendous focus and highly skilled resources to both of these situations. As we described, shortly after quarter end this dedication was rewarded by renewed capital partnerships and reinvigorated business plans with respect to both situations that we believe puts these companies on a path towards growth.

So with that and on behalf of the team we thank you for your time and continued support. And now, Dennis, we would like to open up the line for questions.

(Operator Instructions)

Your first question is on the line of Jonathan Bock with Wells Fargo. Please go ahead.

Hey guys, good morning, Fin O'Shea in for Jonathan Bock this morning.

Hi, Fin how are you?

Good thank you. Just a couple of housekeeping things. I missed the fair value for Hunter post restructuring.

I think we gave a pretty good accounting of that transaction. I think a few things to note, Fin, is it is all in our subsequent events section of our 10-Q. So as of quarter end we have this reflected as the pre-restructuring transaction. Which effectively was the pre-existing second lien note as of quarter end.

So I think the important thing to highlight here, and again, we go through this in detail in our subsequent event transaction is basically we took that $28 million of face amount of Hunter. We equitized that into preferred accounting. We also were able to purchase as part of that restructuring some first lien debt and contribute that back to the Company. And the overall effect of this transaction is the fair value as of that subsequent event is about $13.4 million. I think the way for you to think about it, Fin is again, I think when you go through the subsequent event you will see the effect of that transaction which really closed on July 1, which might be [part of it] from there.

Very well. Thank you. And then on the incentive (multiple speakers) -- sorry? On the incentive fee, are there any kinks there this quarter in that calculation? It appeared on our end to have come a little higher than what we calculated the cap would have been.

It was $2 million versus $1.4 million in the prior quarter so the cap did kick in. If you take a look at the unrealized depreciation in the quarter the $11 million you can back into what a fully baked incentive fee would look at 20% of that $11 million.

So that 2.085 was the cap?

2.08 was reflective of the cap. Correct.

Okay. And one more on the NTS. Just sort of a mixed read it seems. It seems like things are going well there were positive comments of the enterprise value and such. But on the other hand, the sponsor chose not to pay and you [lose in on pick], so some color on maybe what we can expect from a valuation perspective post-quarter?

Let's try Fin, to give you a little more context. I'm sure Jon Yoder might have some thoughts as well. We went to a fair bit of this in the remarks but basically we have a first lien loan to NTS. We put the loan in place about two years ago. This is a company that provides telecom services to both business and residential customers.

When you think about this business it is effectively providing the last mile of service to these customers. So there's an element here of a requirement of capital, so a capital intensive business that we characterize as success-based. As we look through the performance of the company over the few years while we have had this loan is kind of chugging along, it hasn't grown to the degree certainly the sponsor would have hoped.

Specifically with respect to its subscribers on that advanced network. And so the tension here has been as between success-based CapEx and the cash debt service obligations of the company. The sponsor wanting to pursue those growth initiatives and ultimately a company that has a debt burden attached to it. So we started to discuss and negotiate a dynamic, which would have us providing some relief to this dynamic. Whereby some incremental capital could come into the business to reinvigorate that growth.

That success-based capital expenditure that is described and in the course of those negotiations, the company did not pay the cash interest that was due. In about mid-July we did come to an overall arrangement with the sponsor whereby new capital came into the business from both we and the sponsor. We agreed to pick the investment for a period going forward. We were paid the amounts that were owed under interest previously that had not been paid as of June 30.

I think we took a pretty conservative approach and applied that to the principal of the loan. And so among other things we were also granted warrants, equity effectively to participate in what would be the upside growth as those capital initiatives take hold.

So on balance here, when you think about this investment it's a first lien loan, first dollar cash end point in this company's capital structure, and a dynamic whereby we deemed it prudent to provide that flexibility to the company. And are participating in the value we think that will unearth the company by virtue of the grant of the equity position.

Okay guys thank you very much, that's it for me.

Thank you.

We will take a moment to compile the Q&A roster.

Your next question is from the line of Doug Mewhirter with SunTrust. Please go ahead.

Hi, good morning this is actually Matya Rothenberg on for Doug. Thank you for taking my questions.

How are you?

Good, how are you. Can you comment on what you're seeing in the market in terms of pricing and activity levels?

Sure, so it's Jon Yoder. I would say that the first couple quarters of the year especially the first quarter there was not a lot of activity on the sponsor side. I guess the way we will look at the market is we kind of bifurcate the world between the sponsor market and the nonsponsor market.

And so in the sponsor market as I said first quarter very low activity levels. As I said my opening remarks there are certainly accelerated activity levels or activity levels that picked up in the second quarter. But still if you look at the trajectory over on a year-to-date basis it is still relatively muted. So as a result I would say there continues to be pricing pressure in the sponsored market. There continues to be significant levels of competition there.

But on the nonsponsored side where we are also very active, we really haven't seen that same dynamic. We have seen activity levels and competition levels that are really unchanged from what we have seen in prior quarters. And so we're certainly spending a fair bit of time on the nonsponsored space as well. So I think it is kind of a tale of the two different markets.

Okay. Thank you and then can you also give us an update on your [grade three or four] investments and how you're thinking about those credits?

Yes. I think when you look at the overall composition that we disclosed there has really not been a lot of movement as between the overall composition between the twos, threes, and fours. I think we have spoken pretty much at length around NTS and Hunter which are the two nonaccruals that were on the books as of June 30.

Hunter as we just discussed and give a lot of detail on both these investments and the subsequent events. Hunter has been taken off of nonaccrual as of quarter end. And we are actually feeling good about the recapitalization of that company, the trajectory of that business. I think we just gave a pretty good accounting of NTS.

So overall when we peel back the onion on the portfolio metrics across the board, we see good solid stable performance across the portfolio. And not a lot of overall changes in those risk rankings.

Okay. Thank you. That's all I have for now.

Thank you.

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

Great thanks, Dennis. Thank you all for joining us today for the call. We appreciate your time and the questions. If you have any follow-ups, please feel free to reach out directly to the team. Have a great weekend.

Ladies and gentlemen this does conclude the Goldman Sachs BDC, Inc second quarter 2016 earnings conference call. Thank you for your participation. You may now disconnect.