Goldman Sachs BDC Inc (GSBD) 2018 Q3 法說會逐字稿

Good morning. This is Ian, and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs BDC, Inc. Third Quarter 2018 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, Ian. 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 indicated in these forward-looking statements as a result of a number of factors, including those described from time to time in the company's SEC filings.

This audio cast is copyright material of Goldman Sachs BDC, Inc. and may not be duplicated, reproduced or rebroadcast without our consent. 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, November 2, for replay purposes. So with that, I'll turn the call over to Brendan McGovern, CEO of Goldman Sachs BDC.

Great, thank you, Katherine. Good morning, everyone, and thank you for joining us for our third quarter earnings conference call. In terms of the agenda for the call, I'll start by providing our Q3 results as well as an update on the progress we have made to position the company to benefit from the Small Business Credit Availability Act. From there, Jon Yoder and Jonathan Lamm will discuss our investment activity and financial results in greater detail.

So with that, we are pleased to report a strong quarter for our shareholders. Net investment income per share was $0.54 in Q3, up from $0.52 -- $0.50 in Q2.

The quarter-over-quarter increase in NII was driven primarily from elevated income from prepayments, coupled with decreased management fee expense. Net asset value per share at the end of Q3 was $18.13, an increase from $18.08 as of the end of Q2. In addition, our board declared a $0.45 dividend per share payable to shareholders of record as of December 31, 2018.

While we are very pleased to report such strong results, there are a few things worth noting. First, while prepayment fees were quite strong this quarter, we have observed a lower level of transaction activity thus far in the fourth quarter, underscoring the inherently unpredictable nature of prepayment income.

Second, you'll note that yields on new originations were lower than yields on repayments. This is a trend that may continue in the current environment, particularly as we are currently focused on better risk-adjusted returns in first lien assets.

Still, we view the strong results this quarter validate all the actions we have taken as a management team to position the company for success following the recent regulatory changes impacting the BDC industry.

As a reminder, at the end of the second quarter, shareholders approved the company's proposal to reduce the minimum asset coverage requirement to 150% and GSAM agreed to reduce its management fee from 1.5% to 1% on gross assets.

In Q3, we turn our attention to obtaining approval from lenders of the company's senior secured revolving credit facility to reduce the company's minimum asset coverage covenants to align with the same level approved by our shareholders. We appreciate the constructive response we received from our lenders, and we're able to execute the amendment we sought without incremental fees or any increase in borrowing costs. As a result, we believe the company is well positioned to enjoy increased operating and balance sheet flexibility.

As we have said before, we are not planning to utilize this additional flexibility to change our core investment strategy of direct lending to middle-market businesses. Our approach to investing will continue to be rooted in seeking the best risk-adjusted returns in a borrowers capital structure based on a fundamental bottom-up review.

The third quarter represented the first full quarter of operations following shareholder approval to operate with higher leverage, and we believe that the company's already benefiting from the increased flexibility. In particular, we are currently seeking -- seeing better risk-adjusted returns in first lien senior debt. And during the quarter, nearly 89% of new investments were in first lien loans. In general, these loans are carrying lower yields, but we believe that they also have lower risk.

We also modestly increased the size of our balance sheet during this quarter. Our ending debt-to-equity ratio was 0.79x, which was up from the prior quarter at 0.7x. We will expect our leverage ratio to continue to gradually increase if we continue to find attractive first lien senior loans. However, if this has not come to pass or our asset mix is otherwise unchanged, then our leverage profile is unlikely to significantly change. We expect that over time, the composition of our assets will be dynamic, reflecting the lending environment and where we are seeing the best risk-adjusted returns. Asset composition, in turn, will drive our leverage profile. This is a reflection of prudent risk management practices, which we believe are a core competency of Goldman Sachs. As we have in the past, we will endeavor to maintain a meaningful cushion to the statutory minimum asset cover requirement. With that, let me turn it over to Jon Yoder.

Great. Thanks, Brendan. During the third quarter, we saw very strong deal activity in the middle market, particularly by private equity sponsors and sponsor-backed companies. We believe the deal flow continues to be driven by significant fundraising activity in the private equity sector in recent years, combined with high levels of business confidence by U.S.-based companies. The fundamentals appear to justify this confidence as job creation and unemployment trends are favorable while growth in gross domestic product is near multiyear highs. These factors tend to resonate more strongly in the middle market segment of the U.S. economy where businesses are generally more focused on domestic customers.

Middle-market lenders like us benefit from these strong fundamentals through higher collateral values. But we are also benefiting from increased -- increasing interest rates, driving higher income on our existing portfolio of mostly floating-rate loans.

As we look forward, and notwithstanding some of the market volatility that we witnessed in October, the macro backdrop is not showing signs of material fundamental weakening. However, there have been some statements made by high-level policymakers expressing concern about the state of the leverage lending market.

If these come in slow or even reverse capital flows into the space, we would welcome this development as it would positively differentiate the company's structure with its stable capital base.

Turning to specific investment activity for the quarter. We have previously said that one of the key benefits of the coinvest order that we obtained more than a year ago was to provide for increased single name diversification through cross allocating investments with other GSAM funds. This quarter was another example of this benefit as 2 of our largest single name investments, our $57 million first lien/last-out loan to Associations and our $47 million second lien loan to MedPlast, were repaid. And we participated in the new financing in order -- in reliance on our coinvestment order. This allowed us to cross allocate the loans and reduce the single name exposure to $15 million and $8 million, respectively.

While both of these investments performed very well, we were pleased to be part of the lender group that refinanced these loans. We are also believed that a reduction in the size of these 2 investments is consistent with our goal to increase single name diversification.

Another single name we've discussed in the past is our investment in NTS Communications. As a reminder, NTS is a telecom operating both a CLEC and the fiber network, primarily in West Texas. Our long-term shareholders will recall that back in July of 2016, we amended the terms of our loan to allow for the payment of PIK interest instead of cash and provided additional capital to the company in an effort to support its growth initiatives. We've been pleased with how NTS has utilized our support to improve financial performance over the last few years, though it continues to underperform our initial underwriting as consolidated EBITDA is modestly below where it was at the time of the initial investment.

Given that our loan is set to mature in June of 2019, we have engaged in constructive dialogue with NTS and its private equity sponsor on a variety of options, including a potential path to monetize our investment for an amount at or near our current blended mark on our revolver and term loan, which is approximately $0.91 on the dollar. We look forward to updating shareholders further on this investment as we draw closer to maturity.

For the quarter, new investment commitments and fundings were $205.6 million and $190.1 million, respectively. Regarding placement in the capital structure, new originations this quarter were comprised of 89% first lien loans, 11% second lien loans and less than 1% in unsecured debt. These new investments were across 7 new portfolio companies and 8 existing portfolio companies.

Sales and repayment activity totaled $111.7 million, driven primarily by the full repayment of the 2 investments I mentioned.

Our sales repayment activity was elevated this quarter as compared to historical averages in recent years. This is a trend that, as Brendan mentioned, we do not expect to continue throughout the remainder of the year.

During the quarter, the yields on our investment portfolio were relatively steady. The weighted average yield on our investment portfolio at cost at the end of the third quarter was 10.8% as compared to 10.9% at the end of the second quarter.

Regarding portfolio composition. As of the end of the quarter, total investments in our portfolio were $1,318.3 million at fair value, comprised of 89.6% senior secured loans, including 46.3% (sic) [56.3%] in first lien, 10% in first lien/last-out unitranche and 33.3% in second lien debt as well as 0.5% in unsecured debt, 2.9% in preferred and common stock and 7% in our Senior Credit Fund.

We also had $72.8 million of unfunded commitments as of September 30, bringing our total investments and commitments to [$1,391.1 million]. We increased the company's single lien diversity by 12% quarter-over-quarter and 29% year-over-year. As of quarter end, the company has 121 investments across 66 portfolio companies operating across 32 different industries.

Turning to credit quality. The underlying performance of our portfolio of companies was stable quarter-over-quarter as measured by weighted average net debt-to-EBITDA, which was 5.3x at quarter end versus 5.2x at the end of the second quarter. The weighted average interest coverage of the companies in our investment portfolio at quarter end was 2.2x, which is unchanged from the prior quarter.

The Senior Credit Fund continues to be the company's largest investment at 7% of the company's total investment portfolio. Over the trailing 12 months, the Senior Credit Fund produced an 11% return on invested capital.

During the quarter, the Senior Credit Fund had new originations of $63.7 million across 3 new companies and 3 existing companies. Sales and repayments were $62.7 million, resulting in net funded portfolio -- a change in net funded portfolio of negative $3.9 million during the quarter. The total size of the investment portfolio was $488 million at quarter-end. As of the end of the third quarter, the weighted average yield at cost on investments in the Senior Credit Fund was 7.5%, which was relatively unchanged from the prior quarter at 7.6%. First lien loans comprise 96.9% of the total investment portfolio in the Senior Credit Fund, and all of our investments are floating rate. The Senior Credit Fund portfolio remains well diversified with investments in 35 portfolio companies operating across 20 different industries. I'll now turn the call over to Jonathan to walk through our financial results.

Thanks, Jon. We ended the third quarter of 2018 with total portfolio investments at fair value of $1,318,000,000, outstanding debt of $579 million and net assets of $729 million. Our net investment income per share was $0.54 as compared to $0.50 in the prior quarter. The quarter-over-quarter increase in NII was driven by elevated income from prepayments, including in the Senior Credit Fund and a decrease in management fee expense, resulting from a reduction in the management fee to 1% on assets from 1.5%.

Earnings per share were $0.47 as compared to $0.43 in the prior quarter. During the quarter, our average debt-to-equity ratio was 0.7x versus 0.72x in the prior quarter. We ended the third quarter with a debt-to-equity ratio of 0.79x versus 0.7 at the end of Q2.

As Brendan mentioned earlier during the call, our utilization of higher balance sheet leverage will be dictated by underlying asset selection each quarter. As a result, we have not set forth the specific target leverage range for the company as the reduced asset coverage requirement provides the company with overall greater balance sheet flexibility. However, we will seek to maintain a meaningful cushion relative to the regulatory asset coverage requirement as we have done historically.

Turning to the income statement. Our total investment income for the third quarter was $38 million, which was up from $37.2 million last quarter. The increase quarter-over-quarter was primarily driven by elevated income from prepayments, including in the Senior Credit Fund. Total expenses were $16 million from the third quarter as compared to $16.8 million in the prior quarter. Expenses were down quarter-over-quarter, primarily driven by a decrease in investment advisory fees and other operating expenses, which was partially offset by an increase in interest and other debt expenses.

NAV was up quarter-over-quarter as we ended Q3 with a net asset value per share at $18.13 versus $18.08 in the prior quarter. Our supplemental earnings presentation provides a NAV bridge to walk you through these changes. The company had $38.3 million in accumulated undistributed net investment income at quarter-end, resulting from net investment income that has consistently exceeded our dividend. This equates to $0.95 per share on current shares outstanding. During the quarter, we closed on an issuance of $40 million in principal amount of 4.5% convertible notes due April 2022. These notes have identical terms and are part of the company's outstanding $115 million principal amount of convertible notes. We were very pleased with the terms that we were able to achieve in this reopening.

This quarter, as Brendan mentioned earlier, we were pleased to execute an amendment with our lenders in our revolving credit facility. We expect to continue to finance the company in a prudent manner. Our current debt capacity provides the company with sufficient runway to gradually increase our balance sheet over time. That said, as part of our overall financing strategy, we continue to evaluate other sources of debt, with a particular emphasis on continuing to diversify our sources of funding. With that, I will turn it back to Brendan.

Great. Thanks, Jonathan. Overall, we believe this quarter was characterized by solid execution on multiple fronts. In addition to producing strong net investment income and an uptick in NAV, we completed important changes to our lending agreements, which allow us to take advantage of the recent relaxation of the leverage rules for BDCs. As we look forward to the remainder of the year in 2019, we hope to continue to maintain the positive momentum. As always, we thank you for the privilege of managing your capital. With that, let's open up for Q&A.

(Operator Instructions) And our first question comes from the line of Finian O'Shea from Wells Fargo Securities.

Just wanted to start on your comments on how the platform and strategy is evolving pursuant to the higher leverage regime and perhaps, lower fee. You talk about a more dynamic and flexible composition of originations. Can you touch on how flexible that will be? Specifically addressing, will you be butting up against the upper middle market senior deals that, at this time, go into the Senior Credit Fund? Or will you be just focusing on the best stuff or better stuff in the core middle market? Sorry.

Yes, no. Sure, I think I got the crux of the question. A few things in there. One, the word you used in which we've used many times is flexibility. As we look at the changes in the regulation, the first thing that strikes us is availing ourselves of that change allows for a lot more flexibility. In certain environments, we may choose to be very focused on senior originations. And with the benefit of leverage, we can continue to produce returns on equity consistent with our historical returns and consistent with our shareholder's expectations. In different environments, there may be a different opportunity set. And so by moving as assertively as we have to take advantage of these opportunities, we think we put the company in a great spot. And so one of your questions was with respect to the Senior Credit Fund, and you've characterized, I think, upper middle market was part of your discussion point there. We continue to be focused on the core of the middle market. If you look at the underlying EBITDA of the companies on our book, I think it's about $36 million of EBITDA. That's the heart of the middle market. That's where we see the best opportunities. And so now, we can continue to serve that part of the market with a different product set, including some unitranche products, which is higher yielding. And so I wouldn't look at what we've done and assume that we're going to start going up market and competing with the parts of the market that are straddling the syndicated part -- parts of the market. And in fact, when you look at our Senior Credit Fund, I don't think that's really what we've done there as well. I think the average EBITDA there is probably around $65 million or so, and I may be off by a bit. But we have historically, across all the vehicles that we've managed, really been focused on the heart of the middle market. That will continue to be the case. That's where we have seen the best opportunities and returns, and nothing that we've done changes that approach.

Okay. And will you -- do you also, at this time at least, intend to keep that structure intact? Or is there any discussion of collapsing?

Yes. So look, this -- when you look at our Senior Credit Fund, if you go back in time and look at what we and what others who have those fund structures in place, a lot of what they're designed to do was to have the ability to get off balance sheet leverage. The structured is -- we don't control it, therefore, we don't consolidate it. And therefore, the debt at the Senior Credit Fund does not count against our statutory leverage limits. So you've seen us do first lien yielding assets within that fund. And so on the back of the regulatory changes, fair to say that utility of that structure is less than what it once was to us. And in fact, when you look at the financing markets, the financing markets value first lien collateral. And so there may be some sensibility to unwinding that structure and putting those assets on our balance sheet. We're in no rush in that regard. We have a great relationship with (inaudible) reasons. We have ongoing conversations, so there may be more to come. But I do think it's worth, in light of changes, looking to overall, the asset composition, where and how we invest. And I think there is some elegance in simplicity.

Sure. Appreciate all that as well. And then just also another item on the lower fee. The -- it's obviously very well-received and appreciated by the market and shareholders and even sell-side research analysts. You sort of -- you're entering sort of a new frontier on the public BDC side, providing direct lending with -- what traditionally on BDCs would have the fee structure you have for the more senior floating asset funds. Can you talk about sort of any pressure on human capital systems? Just keeping the machine going and improving the machine to stay competitive in the direct lending asset class which, of course, as we all know, is very difficult to continue to onboard the best assets and then maintain and monitor those, et cetera?

So Finian, it's Jon Yoder. So look, great question. I appreciate the question. I mean certainly, we've thought all that through before we proposed the changes. One of the things I -- one of the things that I would highlight about that is that if you look at what sort of the market is in terms of asset management fees for managing private credit assets, the vast bulk of that private credit assets are not in BDCs. They're in private fund structures, separate accounts for large institutional investors and what not, where frankly, I think the fee levels that we have in our public BDC are much more consistent with that level, where frankly, most managers are managing the bulk of their asset. So we don't think we're in a disadvantaged position relative to others just because in our BDC, we have a slightly lower fee level than other public BDC managers. Rather, I think it's really a lot more consistent with what we see, even what we see the market doing in terms of what they charge for private vehicles and institutional separate accounts. So we don't think that, that there creates any particular pressure on human capital.

I'll just add, Fin. When you look at what we did, effectively by going from [1.5] on assets to [1] on assets in one respect what we have done is foregone the asset management fees that we might have earned with higher balances with more leverage. But that's ignoring the fact that we have the opportunity as a platform to actually earn more incentive fee in that calculus as well. And so that's what our investors want to pay us for. They want to pay us for performance. That's what, in other vehicles, our LPs want, and that's a positive thing that actually has the opportunity for us to expand the platform in a way that's -- that makes us a really robust place to be, a robust place for investment professionals. And so when you consider that factor, more capital on the platform, and frankly, more flexibility with that capital to be solutions providers to our clients, that's a very, very powerful story, one that resonates across all our discussions. And yes, as we look at, again, the results of this quarter, for the validation that we think we're really doing the right thing here, very good quarter, in part driven by some of that change in those fees. Furthermore, I'd say, as we simply take out pen and paper and think through different investing environments, absent that change in fees, we struggle to see how we can improve our returns on equity under a different fee regime. So we want to be able to have a flexible pool of capital that can do some second lien in the right environment and do more senior investments in a different environment. But in any event, if we're going to be competitive in, for example, in certain parts of the senior market, we want to make sure that when we put those assets on our balance sheet and finance them appropriately, that will still generate returns on equity that will attract more capital. And so all that together is what causes us to make the changes that we did, and it's been a very overwhelmingly positive response across the board.

And your next question is from the line of Leslie Vandegrift from Raymond James.

So you've answered a few of my questions already with that. But you talked about increasing to the new target leverage, and now you have that ability. Obviously, this quarter was really strong on originations. But I -- correct me if I'm wrong, but it was -- all of the repayments were then -- those portfolio companies were reinvested in this quarter, correct?

The 2 large repayments this quarter, Leslie, were both -- we reinvested into the new loan that refinanced the old loan effectively. But as I mentioned in the prepared remarks, the size of our position, we decided to bring down.

Okay. And then, I guess, for fourth quarter and into the beginning of '19 then, for the outlook on originations, you feel like it will be as strong as it was this quarter? Or maybe back a little bit because of those reinvestments?

Yes, I mean -- so look. I think that as we look forward to the fourth quarter, and we touched a little bit on this on the prepared remarks, but the first 3 quarters this year have really been record -- a record sort of year-to-date in the first 3 quarters for middle market transaction volumes. And I think we and others in the space have benefited from the heavy -- the high levels of transaction activity. We are detecting, as we sit here in the fourth quarter, obviously, we're only a month into it, we've got a couple of months to go. And frankly, the last 2 months of the quarter are usually a bit more active than the first month of the quarter. But that -- all that being said, we are detecting a bit of a slowdown in transaction activities here in the fourth quarter. I don't know if that's attributable to anything. I don't think it's attributable to some of the volatility that we're seeing in the public market. And I don't think that it would filter into the private market so quickly. So I wouldn't -- I can't say that I think there's any obvious reason for why that slowdown may be occurring. I think it could just be a little bit of a breather whether there's been just so much transaction activity, that it's part of the natural ebb and flow there. It takes a little time to restock deal flow pipelines and so on and so forth. Now again, it could change. Sometimes, we see things become very active in the last, let's say, month or 6 weeks of the quarter that you weren't expecting. But as we sit here today, we would expect there to be lower levels of transaction activity. Lower -- less growth in the portfolio in the fourth quarter than what we saw in the third.

Okay. And then on Associations. One of the reinvestments after paid, it went from a unitranche to a couple of first lien investments. But the yields actually went up, so from a unitranche product to a pure first lien. Could you give me some color on that on why or how that was restructured that way?

Yes, sure. So I mean, this is a transaction that we actually have talked about on prior calls. It's an investment that we initially were introduced to through our Private Wealth Management network. It's a really -- we think, a really, really strong company that effectively manages homeowners associations and community associations, which we think provides very sticky recurring revenue insulated from a lot of economic cycles and so on. The initial deal we did, I believe, was back in 2014. In that deal, we was structured as a first-out last-out unitranche, and there was also a piece of mezz behind that. The company has performed well and executed a strategy that we expected. It did -- it was -- it did get an offer of refinancing that was put together by another platform. It's a -- it's now a straight unitranche transaction, which would include -- which refinanced both the initial first-out last-out plus that mezz piece. And so it allowed the company, because it is inclusive of probably a larger capital structure than what we had initially underwrote back in 2014, the structure goes a little bit deeper in terms of the unitranche. It did allow for a little bit of an increase in pricing relative to what it was before. But again, we think it's -- this company is deserving of a bit of a higher leverage level, just given the nature of its business and how it's performed.

Okay. And so -- but the pieces you hold now are pure first lien, right? Not part of the new unitranche?

Correct. Well, no. Sorry. It's unit -- let me just be clear. It is first lien, but it's first lien unitranche. It's not a last-out piece, it's just a regular straightforward unitranche.

Okay. And then on the new portfolio companies, the new investments, it looks like the yields were L plus 550 to L plus 750. Is that kind of the range you're seeing now? What we can kind of look at for new yields?

Yes, I mean -- so look. I think that we always are a little reluctant to provide that guidance, Leslie, in terms of what we're going to see going forward. Because every quarter, every -- look, we did 7 new deals this quarter. That's probably, as we were saying, a bit on the higher end. If you look at our historical average, probably more like 3 to 8. So you can have a very small -- a couple of deals that make it seem as though that, that kind of drive your weighted average yield on your new investments higher or lower just because there's a small sample size. And so I would say the deals that we did this quarter perhaps, if anything, were skewed a little bit higher. There's a couple of deals that we did that were a little bit higher-yielding deals. Whether we're going to be able to continue to find those, again, I wouldn't necessarily guide you to say it will always be in that range. We're -- but I think that the range that you gave is certainly something that we aim to get, and we'll continue to try to be there.

Okay. And then given that other BDCs also have been using the increased leverage capacity, have you guys noticed a change in your direct competitors for deals? Are there more people at the table that before were some of the smaller names? Or have some even moved further into the upper middle market out of what you guys have been looking at?

Yes. So good question. I mean, interestingly, because I know there's been a lot of focus and rightly so on sort of capital flows into the private credit space. We haven't really seen a lot of new competitors over the last 12 to 24 months. We have seen the -- some of the same competitors that sort of get larger as capital has flowed in. So I wouldn't say that there's a lot of new people at this space or people that used to be smaller that were kind of below our market segment that are suddenly into our market segment. If anything, and you kind of alluded to this, perhaps there's a few folks that we used to compete with more regularly that have raised capital and are going up market a little bit to deploy that capital. But we really haven't seen an influx of new competitors. It's really, for the most part, I would say the same folks we've been competing with for years.

Maybe what I'll add, Leslie, is often times when we get that question, it's hard for any one particular quarter to divine what's going on. The most objective way for us to think through that competitive dynamic is to look at what we did, look what we accomplished in the quarter. And so as you alluded to, it was a very strong origination quarter. We were able to grow the balance sheet consistent with the levers that's available to us now. We were also able to change the asset mix to be much more skewed toward senior loans. So the numbers we gave was 89% of those originations in first liens. And as you described, the target yields are still quite healthy. And so yes, competitive environments. I think when you look at the size of our platform and what's also a growing market opportunity, we continue to find deals that are meeting our criteria, that are meeting a structure and yield that we think is consistent with good returns over the long term.

Perfect. And one last modeling question on the dividend from the Senior Credit Fund. It was higher this quarter than it has been, and the fund itself did not grow. It had net repayments in the quarter. And so I'm looking for an outlook on the payout ratio. I remember last quarter, you all mentioned something about the second quarter payout ratio being a bit higher than the long-term run rate. But then it went up again this quarter.

Yes. Well, Leslie, so with respect to the Senior Credit Fund, that income with that incremental dividend income was primarily driven by significantly elevated prepayments versus the prior quarter and prepayment fees that are -- we would not necessarily expect to occur again. So that number is -- was an elevated number. We talked about that in the -- in our prepared remarks.

(Operator Instructions) And our next question is from the line of Christopher Testa from National Securities.

Just curious, how do you guys view the unitranche composition of the portfolio in the context of debt-to-equity? What I'm getting at is, are you kind of breaking this out into first-out and last-out? And if there's more first-outs combined with more first lien loans, you take up more balance sheet leverage? I'm just wondering kind of how you view that.

Yes. So Chris, your question is exactly right. So as you saw, we're really not doing much by way of taking last-outs in unitranches anymore. And that's largely a function of the fact that there's not really a need to do that, given the more -- the greater flexibility we have with the lower minimum asset coverage requirement. So you probably won't see us do a lot of last-outs. In fact, we had, as we've talked about earlier, one of our largest last-outs get repaid this quarter. And we participated in a true unitranche where there isn't a bifurcation in that same -- in that loan to the same borrower. So the way you sort of alluded to in your question is, in fact, exactly how we think about it. And as Brendan mentioned, when we think about debt-to-equity ratios, when we think about expanding the size of our balance sheet, it's completely a function of what is the nature of the assets that we have. And so if we're going to expand the size of our balance sheet, we're going to be more focused on first liens -- true first liens, not last-outs of unitranches and so on. More -- I mean to say it even more bluntly, we would not take the exact same static portfolio and just say, "Hey, we're going to put on more leverage just because we can now." Just the opposite, we think through what we think is the overall risk in the portfolio and match the leverage levels accordingly. So -- and I hope that answers your question.

Yes. No, that's great detail. And with you guys moving into, I guess, safer credits, if you're able to, should we expect the sponsor-backed composition of the borrowers get increased as well?

No, I wouldn't say that, actually. I mean, I think that there's as much opportunity to do first liens with nonsponsored as there is for sponsored. In fact, I might even argue that there's more opportunity in the nonsponsored space in first liens than there is in the sponsored space. I think that -- and we talked about this about a bit before, over the last couple of years, certainly the last 18 to 24 months, we've really seen a lot more activity out of the sponsored side than the nonsponsored side. And I think that's been a function of just elevated enterprise values. If you're the owner of a business, and you're thinking about what you want to do next, whether that's raise capital to continue to grow the business, whether that's sell the business and monetize and move on, the weight of the sort of analysis is shifting -- has been shifting towards well, look, if I could get 12 or 14x EBITDA right now, cash on the barrel head for selling my business, that's pretty attractive relative to what it was some years ago when maybe that business was only worth 9 or 10x EBITDA. And so you might just take advantage of a high level of valuations instead of continuing to try to grow the business and potentially erode value because valuation's declining even if you are growing EBITDA. So that's kind of a dynamic that has continued to persist. But I think that, as they say, on the balance, we're probably going to be more attracted to between first lien and second lien, likely more attractive to first liens and nonsponsored deals. So I would think that going forward, we would not expect an increase in sponsored deals, at least the trajectory of sponsored deals compared to nonsponsored deals.

Okay. That's good detail. And just kind of switching gears and looking at the other side of the balance sheet. I'm just curious, you guys have alluded to maybe looking for a different financing source, which I think many would take to maybe be another bond issuance. But have you guys given any thoughts on securitization market as that's kind of back open for BDCs? And with you guys having more of a first lien composition on the portfolio and, obviously, a good brand name, it seems like this might be something that would give you guys very good terms and, obviously, not have any covenants or restrictions on it in terms of what you could actually fund with it.

Yes, Chris. Great question. And I -- we continue to really evaluate both incremental sources of financing for a fortune yet. The unsecured markets, which certainly afford great balance sheet flexibility as well as the securitization markets, which are very, very attractively priced and certainly with a more first lien-oriented portfolio, you can drop assets into that. And the way that we structured the amendment with our lenders, we can -- we have the flexibility really to look at all of those possibilities from a financing perspective.

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

Well, as always, we thank you for joining us and attending our conference call. To the extent that you do have additional questions, please feel free to reach out directly to the team and have a great weekend.

Ladies and gentlemen, this does conclude the Goldman Sachs BDC Inc. Third Quarter 2018 Earnings Conference Call. Thank you for your participation, you may now disconnect.