Goldman Sachs BDC Inc (GSBD) 2021 Q3 法說會逐字稿

Good morning. This is Erica, and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs BDC, Inc., Third Quarter 2021 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. The company's actual results and financial conditions 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 audiocast 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 Resources section and which include reconciliations of non-GAAP measures to the most directly comparable GAAP measures. 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, Friday, November 5, 2021, for replay purposes.

I will now turn the call over to Brendan McGovern, Chief Executive Officer of Goldman Sachs BDC.

Thank you, Erica. Good morning, everyone, and thank you for joining us for our third quarter earnings conference call. With me on the call today is Jon Yoder, our Chief Operating Officer; and Joe DiMaria, our Interim Chief Financial Officer. Also joining us is Carmine Rossetti, who will be replacing Joe as our permanent CFO on November 8. We want to thank Joe for his interim duties these past few quarters and welcome Carmine back to the Goldman team.

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

So with that, let's get to our third quarter results. Overall, we're pleased to report another quarter of solid income generation for the portfolio.

Net investment income per share was $0.63. Excluding the impact of asset acquisition accounting in connection with the merger with MMLC, Q3 adjusted net investment income was $0.48 per share.

Net asset value per share decreased slightly to $15.92 per share as of September 30, a decrease of approximately 80 basis points from the end of the second quarter. Excluding the impact of a $0.05 special dividend we paid in September, the net asset value decline would have been 50 basis points. The September special dividend is the last of the 3 $0.05 per share special dividends that we paid in connection with the company's close of the merger with MMLC in Q4 of 2020.

As we announced after the market closed yesterday, our board declared a $0.45 per share dividend payable to shareholders of record as of December 31, 2021.

Peeling back the layers a bit further on the quarter, there are a few noteworthy dynamics worth highlighting and discussing. First, at the risk of sounding a bit like a broken record, elevated repayments continued unbated this quarter. At $672 million, the repayments equaled 21% of the fair value of investments at the beginning of the quarter and were 2.4x greater than last quarter, which itself was the previous high watermark for repayments in the company's nearly 10-year history. Repayments were diversified across the book, with the single largest repayment only amounting to less than 10% of the total.

This is a somewhat remarkable level of portfolio turnover in a single quarter, and there are a few takeaways I would offer from this unusual activity. First, I believe this repayment activity is a reflection of our focus on sectors and companies that continue to grow and perform well and are, therefore, increasingly in investor favor. In an environment where M&A activity is high and equity valuations are rising, it's not surprising that high-quality companies are either being sold or graduating to a lower cost of capital.

Next, I would note that relative to the beginning quarter of portfolio composition, the repayments were skewed towards unit capital, which helped improve the seniority of the book. At quarter-end, first lien investments represented 84% of the portfolio, compared to 80% at the end of last quarter.

Finally, I would note that despite the repayment activity, the quarter-end leverage ratio stayed roughly flat, at 0.91x debt to equity. This was a noteworthy feat and a testament to the strength of the team and our origination platform. Given the competitive environment in which we are currently operating, the team did an excellent job of maintaining the portfolio size without sacrificing investment quality. While origination yields were below repayment yields, the overall impact to the portfolio was muted, as the yield at amortized cost this quarter was 8.3%, compared to 8.4% at the end of Q2.

Next, we know that investors are keenly focused on the supply chain disruptions and inflationary pressures that are currently impacting the economy, broadly, and the performance of companies in certain sectors, specifically. Thus far, we have observed modest overall impacts for our portfolio, as we have generally avoided lending to businesses in sectors such as manufacturing or retail, which we believe are most susceptible to parts shortages and rising costs of commodities and shipping, for example.

As you are aware, the main themes in our portfolio continue to be software, health care IT, health care services and professional services. We are mindful that companies in these sectors can see margin pressure from labor inflation, which tends to be sticky as opposed to transitory. That said, strong companies in these sectors can also benefit from pricing power and the ability to pass on price increases resulting from the mission-critical nature of the value proposition they provide to customers, in the case of technology companies, and inelastic demand characteristics of nondiscretionary health care services.

We continue to monitor the impact of the current environment in our book, and we'll keep you updated on any developments. Given the current environment, we are pleased that overall credit quality of the portfolio remains strong. Nonaccrual investments amounted to just 0.7% of the portfolio at cost and 0.1% at fair value.

With that, let me turn the call over to Jon Yoder.

Thanks, Brendan. As Brendan mentioned, the continued strong capital markets environment during the quarter enabled the team to again be active on the new-origination front. Our new investment commitments remain focused on first lien senior secured loans. During the quarter, we made 27 new investment commitments, amounting to $670 million. We originated $312 million in loans to 10 new portfolio companies and made $358 million of follow-on investments to existing portfolio companies, primarily to finance M&A activity.

As Brendan mentioned, sales and repayment activity totaled $672 million, driven by the full repayment of investments in 16 portfolio companies. We continue to see a strong pipeline of new opportunities, and we're optimistic that we will achieve portfolio growth in the coming quarter, assuming the pace of repayments moderates to more normalized levels.

Turning to portfolio composition. As of September 30, 2021, total investments in our portfolio were $3.1 billion at fair value, comprised of 98.3% in senior secured loans, including 84.3% in first lien; 5.2% in first lien/last-out unitranche; and 8.8% in second lien debt. We also had 1.6% in preferred and common stock.

We have $402 million of unfunded commitments as of the end of the quarter, which brings total investments and commitments to just over $3.5 billion.

As of quarter-end, the company held investments in 111 portfolio companies, operating across 37 different industries. The weighted-average yield of our investment portfolio at cost at the end of the third quarter was 8.3%, as compared to 8.4% at the end of the second quarter. The weighted-average yield of our total debt in income-producing investments at cost decreased to 8.6% at the end of the third quarter from 8.7% at the end of the second quarter.

So turning to credit quality. The underlying performance of our portfolio companies, overall, was stable quarter-over-quarter. The weighted-average net debt to EBITDA of the companies in our investment portfolio was 6x at quarter-end, as compared to 5.9x from the prior quarter. The weighted-average interest coverage of the companies in our investment portfolio at quarter-end was 2.5x, as compared to 2.6x at the prior quarter.

As of September 30, 2021, investments on nonaccrual status increased slightly, to 0.1% and 0.7% of the total investment portfolio at fair value and amortized cost, respectively, from 0.0% and 0.3% at the end of the second quarter. This modest increase is due to putting Chase Holdings on nonaccrual.

Finally, during the quarter we exited our equity position in Hunter Defense Technologies. Hunter Defense is a provider of shelters and ancillary products used primarily by the U.S. military in mobile troop deployments. The sale of the position generated a realized gain of $36 million, which resulted in a 1.54x return on our investment since inception. Upon booking the realized gain, an unrealized gain was reversed. As a result, the net impact to NAV was not material in the current quarter.

Let me now turn the call over to Joe to walk through our financial results.

Thank you, Jon. We ended the third quarter of 2021 with total portfolio investments at fair value of $3.1 billion, outstanding debt of $1.63 billion and net assets of $1.62 billion. We also ended the third quarter with a net debt-to-equity ratio of 0.91x, which is consistent with the end of the second quarter.

At quarter-end, 62% of the company's outstanding borrowings were unsecured debt and nearly $1.1 billion of capacity was available under GSBD's secured revolving credit facility.

As noted during last quarter's earnings call, we have engaged our lender group to discuss an extension of the maturity on the revolving credit facility. We're pleased to announce the maturity has been extended by 18 months, to August 2026.

Given the company's current debt position, available borrowings and cash of $172 million which resulted from repayments in the last 2 weeks of the quarter, we continue to feel we have ample capacity to fund new investment opportunities.

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 GSBD's financial results easier to compare to results prior to our August 2020 merger with MMLC. These non-GAAP measures remove the amortization impact from our financial results.

For Q3 2021, GAAP and adjusted after-tax net investment income were $64.3 million and $48.8 million, respectively, as compared to $58.2 million and $48.8 million, respectively, in the prior quarter. The increase in quarter-over-quarter GAAP net investment income was primarily due to an increase in accelerated accretion related to repayments. On a per share basis, GAAP net investment income was $0.63, compared to $0.57 in the second quarter. Adjusted net investment income was $0.48 in both Q3 and Q2.

Distributions during the quarter totaled $0.50, consisting of the $0.45 regular distribution declared in August and paid on October 27 as well as the last of our 3 $0.05 special distributions, which was paid on September 15.

As Brendan noted, net asset value per share on September 30, 2021, decreased to $15.92 from $16.05 as of June 30, 2021. Q3 NAV reflects the impact of the $0.05 special dividend mentioned earlier.

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

Thanks, Joe, and thank you all for joining us for our call.

Notwithstanding the current competitive market backdrop, the platform delivered solid results this quarter, and we believe we have the portfolio primarily positioned in segments of the economy that are less vulnerable to volatility associated with the current economic backdrop.

We appreciate your time and attention today. And as always, I'd like to thank you for the privilege of managing your capital.

With that, let's open the line for questions.

(Operator Instructions) First question comes from the line of Finian O'Shea with Wells Fargo.

First question, on the portfolio yield, it sounds like you're able to keep those at a pretty good level, I think only down a few basis points, I think 8.7% to 8.6%, with all this activity in an obviously competitive market. Can you talk about how -- where you're kind of migrating to or picking your spots, if anywhere different? Or just color on what, as a lot of the maturing stuff goes out through M&A or graduating, what the newer stuff looks like.

Look, I think it's well known and appreciated the current market backdrop is more competitive than most market backdrops that we've experienced in the decade running this business. Our general observation is that there's ebbs and flows to that, some of which are market-driven, some of which are capital formation-driven and some of which are a function of the sectors in which we're focused.

So I think, the headline, definitely some unusual activity in this quarter in terms of the pace of repayments. Safe to say the yields on the originations were below that of the deals that came out of the portfolio. Part of that was also a function of the mix, as I mentioned in some of the remarks upfront. We did have some second liens repay, as well.

And so obviously, the goal and the focus is to as we're putting out new capital, one, ensure that we're focusing on quality opportunities and not really -- just trying to get to an overall portfolio composition or a leverage ratio in the short term for the purposes I was just mentioning in any specific quarter. And I think this quarter really showed that the platform has tremendous capabilities, access to different opportunities.

When you look at the originations across this quarter, I think Jon gave us stats, it was 10 new platforms, 10 new investments, plus some of this in follow investments. And those follow-ons, in numerosity, were much greater, I think it was 17 versus that 10, and a bit bigger in terms of just the total aggregate amount of capital that we invested this quarter.

So I think we do benefit this quarter from that follow-on amount really being a function of deals that were structured, negotiated in previous quarters. So those follow-ons generally coming at the new-issue spreads that were in place at the point in time when we did those deals.

But even just looking at the new platforms, I think we did a really nice job this quarter of continuing to focus on areas that are our strengths. There's no 1 or 2 deals that dominated the activity this quarter. If you look across the schedule, you'll see our biggest deal was, I think, around $43 million. We had another deal for $65 million, which was really a replacement of a deal that was repaid in the quarter, as well.

The sectors continue, Finn, to be the ones that you know us to be focused on historically. We're not leaning into any of the more damaged sectors of the economy where there could be some opportunistic opportunities in a dislocation. What you see is a lot more of the same, which is a lot of software, a lot of health care services, some health care IT and things that you've come to see us [be in] over the last several years.

Sure. That's helpful. And then, I guess, kind of building off that, there's still a bit more yield compression, it sounds like. Obviously, this quarter had a big tailwind of repay, accelerated fees and so forth. How do you -- with all this, you earned the dividend pretty much even without the fee waiver, but there were real tailwinds. So how are you thinking about it going into 2022? What sort of leverage and yield profile do you envision?

For sure, Finn. Look, I think we, first and foremost, need to continue to focus on finding attractive investment opportunities that are going to generate attractive risk-reward for the platform. I think this quarter continues to show that we've got that capability even in this unusual environment.

As you know, we still have room to move the total balance sheet up from where we are. We've been really for 4 quarters running pretty hard [to stand still here] with the pace of repayments coming out as they have here, as well. And from sitting here today, we have had more capacity on the balance sheet to move up higher into our target leverage ratio. I think as I mentioned on the call, we do anticipate that would be the case in Q4. Obviously, certainly, 2/3 of the quarter left to go, but in any more normalized environment I think that should be the case here.

You also heard we talked a little bit about, for example, Hunter Defense, which was a previously non-income-producing asset that's been able to be monetized, recycled back into income-producing assets.

And I think there's also tremendous tailwinds on the liability side of the balance sheet for the company here, as well. I'm sure many of the investors in the space are following what's going on in the financing markets for these assets. There's typically generally a high correlation between -- if there's pressure on asset yields, there's also an opportunity on the liability side. For example, we've got our convertible bond, which has a 4.5% coupon, coming due early next year. That will be recycled. Our current plan would be to refinance that with our existing capacity under our revolving credit facility, which of course comes with a much lower cost of capital. I think there will be ongoing opportunities over the course of the next year to do that, as well.

So I think those are just a few things, Finn, I'd point to that give us some optimism that there's still really good opportunities to perform here.

Your next question comes from the line of Matt Tjaden with Raymond James.

First one for me, maybe more so on the general overall market environment. Beyond spreads, any high-level color you can give on how terms and covenants are holding up?

Matt, look, I don't know that our commentary is going to be tremendously different than probably what you've heard from other managers. I think there's a combination of things going on in the market right now in the context of the economic environment, all the fiscal stimulus coming out of the COVID crisis. That makes this a bit of an unusual time in the market. There's new capital being formed in the space, et cetera.

And so I would characterize this as one of those portions of a cycle in the market that you go through where things sort of are a bit more competitive than they might be on different parts. Like as I mentioned, I think that generally ebbs and flows over the course of time. And I think, yes, for sure, the relative opportunity set in this world that we're operating in continues to be, we think, really, really attractive, overall.

In terms of specificity on changes in terms, et cetera, I think a few things I'd note. One is, and again you look at the originations and the cadence this quarter, we continue to be focused on what we think is the core of the middle market. If you look at the size of the companies in our book, it hasn't changed dramatically over the years. I think the median EBITDA of a company in the book is somewhere around $35 million to $40 million. That's a part of the market that we like. Those are companies that are scaled in their own right, have really good opportunities to continue to grow.

Our focus is on those sectors with secular tailwinds, but they're not so big that they're really bumping up against the more efficient part of the capital markets and the syndicated parts of the market. But when there are things going on in that part of the market, there does tend to be a little bit of a bleed down into our part of the market.

And so an example would be I think there's a little bit of pressure on LIBOR floors. For example, a couple of deals this quarter came with 75-basis point floors. I think this quarter the average floor in our book was 90 basis points. So nothing incredibly dramatic, but on the margin we do see a bit of those types of pressures.

And I'd say the same in the spread world, as well. But as you heard in terms of how we're navigating, we continue to focus in sectors where we think there's better opportunities. And a platform that's got access to those opportunities I think really proved to be the case this quarter.

Got it. Maybe just following up on the convert end. So it sounds like the initial plan is to run the repay through the revolver. Maybe in 2022, would you expect that to be a permanent shift and kind of run secured mix a little hotter? Or do you expect to visit the unsecured market again in 2022?

Look, we are constantly dynamically looking at that. I think there's a few tenets that are really important to us, and I think that really came through during the COVID crisis. I think when you're investing in this part of the market, having a permanent capital vehicle, you've got to build your balance sheet to withstand any and all environments that might come your way. We've historically been thoughtful about leaning into what has been a higher cost of debt in the unsecured part of the market, but a much more flexible overall balance sheet where, obviously, you're not pledging all of your collateral to lenders in a somewhat inflexible solution. So we're really, really mindful of making sure we're maintaining that right focus overall and appropriate mix.

I think there's also been some dynamics in the unsecured part of the market that are really, really quite helpful to the BDC space, in general and I think our platform, specifically, which is an extension of tenor. We've had 7-year deals and even a 10-year deal getting done in the space. So the opportunity to ladder maturities is one that I think is just really emerging and I think would be a really good reason to continue to look at the unsecured part of the market and to not just manage that mix of secured versus unsecured, but also [matter] just the laddering of your maturities.

So we'll keep an eye on all that over the course of 2022.

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

Well, thank you, Erica, and of course thank all of you for dialing in. Of course, as always, if you do have any questions please feel free to reach out directly to the team. And I hope you all have a great weekend.

Ladies and gentlemen, this does conclude the Goldman Sachs BDC, Inc., Third Quarter 2021 Earnings Conference Call. Thank you for your participation. You may now disconnect.