Goldman Sachs BDC Inc (GSBD) 2022 Q2 法說會逐字稿

Good morning. This is Austin Neri, a member of the IR team for Goldman Sachs BDC Inc., and I would like to welcome everyone to the Goldman Sachs BDC, Inc. Second Quarter 2022 Earnings Conference Call. (Operator Instructions) 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 belief regarding future events that, by their nature, are uncertain and outside of the company's control. Company's actual results and financial condition may differ, possibly materially, from what is indicated in those 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 copyrighted 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 Relations section and which include reconciliations of non-GAAP measures to the most directly comparable GAAP measures.

These documents should be viewed in conjunction with the company's quarterly report on Form 10-Q filed yesterday with the SEC. This conference call is being recorded today, Friday, August 5, 2022, for replay purposes.

I'll now turn the call over to Alex Chi, Co-Chief Executive Officer of Goldman Sachs BDC.

Thank you, Austin. Good morning, everyone, and thank you for joining us for our second quarter earnings conference call. I'm here today with my Co-Chief Executive Officer, David Miller; Gabriella Skirnick, our Chief Operating Officer; and Carmine Rossetti, our Chief Financial Officer.

I'll begin the call by providing a brief overview of our second quarter results before discussing the current market environment in more detail. I'll then turn the call over to David to describe our portfolio activity, before I hand it to Carmine to take us through our financial results. And finally, we'll open the line for Q&A.

So with that, let's get to our second quarter results. Net investment income per share was $0.49 excluding the impact of asset acquisition accounting in connection with the merger with MMLC, adjusted net investment income for the quarter was $0.45 per share. As we announced after the market closed yesterday, our Board declared a $0.45 per share dividend payable to shareholders of record as of September 30, 2022.

Net asset value per share decreased slightly to $15.53 per share as of June 30, a decrease of approximately 1.7% from the end of the first quarter. This decrease was primarily attributable to overall credit spread widening that reflects the current market dislocation and more volatile investment environment and not any significant credit events within the portfolio.

With respect to the market environment in the second quarter, we continue to navigate market volatility highlighted by higher rates as a result of dramatic tightening by the Federal Reserve in response to inflationary forces. Nonetheless, our portfolio has some defining characteristics that help insulate it against the impact of these macroeconomic forces.

GSBD is characterized by high selectivity resulting from a stringent due diligence process that is biased towards investing in noncyclical businesses that have strong pricing power, coupled with the management capabilities and expertise to navigate an economic slowdown.

While mark-to-market changes are reflected in our fair value calculation this quarter, we want to remind investors that our portfolio is predominantly floating rate in nature. In contrast to the broadly syndicated loan market, the vast majority of our book has financial maintenance covenant protections.

In addition, the pressures of significant food and gas price inflation have been especially pronounced for individual consumers, but we are focused on lending to more noncyclical business-to-business sectors. It's now been nearly 5 months since the BDC platform was integrated into the broader direct lending business within the Asset Management division of Goldman Sachs.

The benefits of this integrated private platform was especially highlighted this quarter at a time when general M&A volume and capital markets activity faced headwinds. Access to a larger funnel of potential transactions while being viewed as a natural capital solutions provider is especially important at a time when financing actives are limited and the broadly syndicated loan market is largely shut.

We had a few deals this quarter that we sourced through our contacts in the Goldman Sachs Investment Banking franchise, including EnterpriseDB and Rubrik, to highlight one of those transactions Rubrik is a software company that had no debt on the balance sheet and was contemplating an IPO until public equity market conditions led to the deferral of those plans.

The Goldman Sachs investment banking team, which has a close relationship with the company, referred management to us, and we were able to provide a loan that provided additional liquidity for growth at an exceptionally low loan-to-value. This example not only speaks to the power of our platform, but the broader theme of volatile macro conditions, making IPOs and exits difficult, which is driving borrowers to direct lenders like us to help fund growth.

Fidelity Payment is another transaction that we sourced through the broader Goldman Sachs private credit platform and demonstrated the breadth of relationships that we have built over time with both the sponsor and the company. Additionally, the long-standing relationship with Fidelity sell-side adviser was instrumental in getting our team initially involved in the transaction.

The sponsor and the company agreed quickly to use us as a financing partner due to our team's knowledge of the business and the payments industry. We were able to deliver a tailored financing solution at a low loan to value in order to support the acquisition of the company and help fund future growth during volatile market conditions.

This example points to the platform's ability to leverage industry expertise and relationships across the boarder team in order to execute on a transaction within a short time frame. We again supported our shareholders through this period of volatility by waiving a portion of our investment advisory fees.

As previously stated, while we intend to voluntarily waive income-based incentive fees through and including the fourth quarter in an amount necessary to achieve at least $0.45 of quarterly adjusted net investment income per share, we believe that in the second half of this year, we may be able to achieve this level of earnings without additional waivers.

With that, let me turn it over to my co-CEO, David Miller.

Thanks, Alex. During the quarter, we originated $366 million in new investment commitments, $197 million in new investments to 6 new portfolio companies, and $169 million of follow-on investments to 12 existing portfolio companies, primarily to finance M&A activity.

Our new investment commitments remain mainly focused on the most senior parts of the capital structure with $358 million under the $366 million in first lien senior secured loans. Sales and repayment activity totaled $106 million, driven by the full repayment of investments by 2 portfolio companies.

The sales and repayment activity was more muted this quarter as overall capital markets activity slowed in line with increased volatility we've seen in the capital markets. Turning to portfolio composition. As of June 30, 2022, total investments in our portfolio were $3.6 billion at fair value, comprised of 97.4% in senior secured loans, including 88% in first lien, 2.8% first lien last out unit tranche and 6.7% in secured second lien as well as a negligible amount of unsecured debt and 2.4% in a combination of preferred and common stock and warrants.

We also had -- I'm sorry, $569 million of unfunded commitments as of June 30, bringing total investments and commitments to $4.2 billion. As of quarter end, the company held investments in 129 portfolio companies operating across 38 different industries. The weighted average yield of our investment portfolio at cost at the end of Q2 was 8.6% as compared to 7.9% in the prior quarter.

The weighted average yield of our total debt and income-producing investments at amortized cost increased to 9% at the end of Q2 from 8.5% at the end of Q1. Turning to credit quality. The weighted average net debt-to-EBITDA of the company's own investment portfolio decreased to 6.0x at quarter end as compared to 6.2x from the prior quarter.

The weighted average interest coverage of the companies in our investment portfolio at quarter end was 2.1x versus 2.5x in the prior quarter. Nonetheless, we continue to see both healthy quarterly sequential growth in LTM revenue and EBITDA.

And finally, turning to asset quality. Two investments were moved out of nonaccrual during the quarter due to repayment and as of June 30, 2022, investments on nonaccrual status amounted to 0.4% and 0.9% of the total investment portfolio at fair value and amortized cost, respectively.

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

Thank you, David. We ended the second quarter of 2022 with total portfolio investments at fair value of $3.6 billion, outstanding debt of $2 billion and net assets of $1.6 billion. Our ending net debt to equity ratio increased to 1.25x from 1.15x last quarter, squarely in line with our target leverage ratio.

Average net debt to equity for the quarter was 1.18x as compared to 1.16x in the prior quarter. At quarter end, 42% of the company's total principal amount of debt outstanding was in unsecured debt and $527 million of capacity was available under our secured revolving credit facility.

During the second quarter, we closed an amendment to our secured revolving credit facility, which extended the maturity date from August 2026 to May 2027, remove certain financial covenants, and replace the LIBOR benchmark with the SOFR benchmark.

Before continuing to the income statement, as a reminder, in addition to GAAP financial measures, we will also reference certain non-GAAP or adjusted measures. This is intended to make the company's financial results easier to compare to results prior to our October 2020 merger with MMLC.

These non-GAAP measures remove the purchase discount amortization impact from our financial results. For Q2, GAAP and adjusted after-tax net investment income were $49.6 million and $45.9 million, respectively, as compared to $50.2 million and $45.9 million, respectively, in the prior quarter. The decrease in quarter-over-quarter GAAP net investment income was primarily due to a reduction in accelerated accretion and prepayment fees as a result of lower repayment levels as well as an increase in interest expense.

On a per share basis, GAAP net investment income was $0.49 and adjusted net investment income was $0.45, both unchanged from the prior quarter. On May 26, we announced the launch of an at-the-market or ATM equity offering program whereby the company may, from time to time, issue and sell common shares having an aggregate offering price up to $200 million.

During the quarter ended June 30, 2022, we issued approximately 124,000 shares at an average price of $18.17 per share, resulting in proceeds net of underwriting and offering expenses of $1.8 million. Distributions during the quarter totaled $0.45 and net asset value per share on June 30, 2022, was $15.53 as compared to $15.80 as of March 31, 2022.

With that, I'll turn it back to Alex for closing remarks.

Thanks, Carmine. As many of you know, we regretfully announced during the quarter that Carmine was resigning from his position as CFO effective August 10, to pursue another professional opportunity.

We wish Carmine a lot of success in his next career pursuit and thank him for his service to GSBD over the years. At the same time, we're delighted to welcome David Pessah to the position of CFO after spending the past 12 years here at Goldman Sachs, most recently as the company's Principal Accounting Officer responsible for oversight of fund accounting, financial reporting and internal controls for GSBD.

In conclusion, thank you all for joining us on our call. While we think the environment ahead may exhibit further volatility, we're confident in our unique and differentiated private credit platform at Goldman Sachs to provide many exciting investment opportunities for GSBD in the quarters ahead.

We appreciate your time and attention today. With that, let's open the line for Q&A.

(Operator Instructions)

We'll take our first question from Finian O'Shea with Wells Fargo Securities.

Can you touch on the cross-platform, co-investing not sure if you gave that number, but the percent or quantum of cross-platform deals this quarter in terms of your origination? And also remind us, are there certain parameters that you'll look at outside of risk-adjusted yield such as absolute yields, maybe pick covenants, that kind of thing that you most desire in the BDC.

Finian, this is Gabriella. Thanks for the question. So this quarter, we did not have any cross-allocated deals across the platform. We did have one in the first quarter, as we discussed on that earnings call. However, what I would say is that we did have a number of cross-originated deals into the BDC, which is that we are able now to have the BDC draw from the full sourcing engine of the firm in a way that is additive to the BDC platform because it simply increases the funnel of deals that are available to the company.

And so we did see a number of cross-originated deals. And we're happy to be able to allocate those deals to the BDC because we do feel like they are going to be quite accretive to the portfolio and the company over time.

Yes. Fin, it's David. I would further say you asked about the investment appetite. I mean, look, what we're looking for in the BDC complex is purely middle market companies. They typically have maintenance covenants. We like to orient around defensive industries that have protected cash flows. And so that's kind of how we think about what's appropriate for the BDC vehicles versus some of our other drawn funds for various other vehicles.

Sure. That's helpful. And just a follow-up on software recurring revenue, software specifically, a lot of those what we see in the public sphere, the stock market, the unprofitable tech has sold off a bit. I think you have a pretty good lens into this historical focus on the BDC. Are you seeing any sort of crack or decay in the underwriting trajectory? Is there stuff like higher acquisition costs, retention, business spend, any of the above that sort of an emerging challenge for that category?

Look, we -- it's a great question. Thank you, Fin, we, as you know, have been very selective about the loans that we look at on a recurring revenue basis. In fact, if you look at our portfolio as a percentage of our portfolio has actually declined in the quarter, just given the lens that we have into the overall landscape. And so remember, these businesses also have highly variable cost structures.

And so in some cases, we've seen these companies pivot a bit. But again, just given how selective we've been about the types of recurring revenue companies that we lend to, we have not seen any issues in our portfolio.

That's helpful. Actually one final bonus question, if I may. Can you touch on your plans, how you view the at-the-market offering program, I think you commenced this quarter.

Yes. We started the at-the-market offering this past quarter. We expect anywhere from $10 million to $20 million in any given open trading window when it's accretive to the BDC.

At this time, there are no additional questions in queue. I'd like to turn the call back over to our speakers for any additional or closing remarks.

Thank you very much for your time and for your support, and we look forward to reporting in future quarters. Thanks very much.

That will conclude today's call. We appreciate your participation.