Goldman Sachs BDC Inc (GSBD) 2021 Q2 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. Second 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 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 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 homepage 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, August 6, 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 second 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. I'll begin the call by providing a brief overview of our second quarter results, and I'll hit on some platform highlights to give you a sense of how the team is navigating the current market environment. 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 second quarter results. Net investment income per share was $0.57. Excluding the impact of asset acquisition accounting in connection with the merger with MMLC, Q2 adjusted net investment income was $0.48 per share, reflecting a continuation of strong operating trends in the business. Net asset value per share increased to $16.05 per share as of June 30, an improvement of approximately 30 basis points from the end of the first quarter.

Against an accommodative overall market backdrop, the NAV increase resulted from ongoing stable to improving performance in our portfolio companies, offset slightly by the impact of the $0.05 per share special dividend paid during the quarter. 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, 2021. The last of the 3 $0.05 per share special dividends we declared in November of 2020 will be paid on September 15, 2021, to shareholders of record as of August 16, 2021.

On our last earnings conference call in May, we described a healthy and overall active market environment that was characterized by strong capital markets activity, as the economy continued to rebound from the depths of the COVID-19 health crisis. Notably, we anticipate a continuation of elevated prepayment activity in our portfolio as our favorite sector exposures such as software, health care technology and health care services have demonstrated resilience throughout the pandemic. And as a result, names in our portfolio are right targets in an active M&A and refinancing environments. Indeed, this repayment trend did continue in Q2.

For the third consecutive quarter, GSBD experienced a new high watermark for repayment activity, which amounted to $277 million of market value across 12 different portfolio companies this quarter. Fortunately, our powerful origination engine has largely kept pace during this active repayment environment. Gross originations for the first half of the year represented record levels for the company. And notably, as we look at our forward pipeline, we expect to resume balance sheet growth in the back half of the year, moving closer to more normalized net debt to equity ratios from this quarter end level of 0.91x.

In this competitive environment, we are extremely focused on maintaining investment discipline. For example, and consistent with our history, none of our investment activity this quarter was the so-called covenant-light structures. Furthermore, in certain positions where we were the incumbent lender, we opted not to roll into new deals that did not meet our standards for risk reward characteristics, sometimes based on rate and other times based on structure and document integrity. From time-to-time, companies in our portfolio grow to a size and scale that allows them to access the lower cost of capital and looser terms, often associated with the syndicated markets.

In these scenarios, we've generally opted to recycle the capital back into our platform, trusting that our market presence and reach will enable us to originate new loans to middle-market businesses that do meet our criteria. As evidence of our discipline, yields on new originations this quarter of 8.1% were roughly equivalent to repayment yields of 8.2%.

Furthermore, and despite the significant growth of our platform's overall capital base over the last several years, we have maintained our focus on direct originations to middle-market businesses, and we have generally avoided competition with syndications. I'd note that the median EBITDA of the company in our portfolio this quarter was $38 million, evidence of our continued focus on the part of the market that we currently believe offers the best value proposition for our stakeholders. We believe this discipline has and will continue to bear fruit.

Asset quality at GSBD remains strong. There were no new nonaccruals in the quarter, and overall nonaccruals represented 0.0% and 0.3% of the total investment portfolio at fair value and amortized cost, respectively. Suffice to say, we are keeping our eye on the long-term prospects of the business and often focus on high-quality businesses with capital structures and stewardship that we believe can withstand a variety of market environments.

Switching gears and moving to the personnel front. We disclosed in our Form 8-K on July 19 that Carmine Rossetti will become this company's Chief Financial Officer effective November 2021. Carmine previously served as GSBD's Principal Accounting Officer from May 2017 to March 2020, and we are extremely excited to welcome him back to the organization. I'd like to thank Joe DiMaria for his focus and diligence as the interim CFO over the past several months. Clearly, the business has not skipped a beat, and we -- as we await Carmine start date, which is a testament to Joe and his capabilities. With that, let me turn it over to Jon Yoder.

All right. 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 fronts. Our new investment commitments remain focused on first lien senior secured loans in covenanted structures.

During the quarter, we made 16 new investment commitments amounting to $369 million, 6 of which were to new portfolio companies and 10 that were to existing portfolio companies. As Brendan mentioned, sales and repayment activity totaled $277 million, driven by the full repayment of investments in 12 portfolio companies.

Turning to portfolio composition. At the end of the quarter, total investments in our portfolio were just under $3.2 billion at fair value, comprised of 96.8% in senior secured loans. This included 80.1% in first lien, 4.4% in first lien/last-out unitranche and 12.4% in second lien debt as well as a negligible amount in unsecured debt and 3.1% in preferred and common stock. We also had $377 million of unfunded commitments as of the end of the quarter, which brought total investments and commitments to just over $3.5 billion. As of the quarter end, the company had 114 portfolio companies operating across 37 different industries, and the weighted average yield of our investment portfolio, at cost, at the end of the quarter was 8.4%, which was the same as at the end of the first 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 the portfolio was 5.9x at quarter end, which is a slight improvement from 6x at the end of the last quarter. The weighted average interest coverage of the companies in our investment portfolio was 2.6x, again, a slight improvement from the 2.5x at the end of the prior quarter.

As of June 30, investments on nonaccrual status decreased to 0.0% and 0.3% of the total investment portfolio at fair value and amortized costs, respectively, down from 0.3% and 0.7% as of the end of Q1. This decline in nonaccruals is primarily a result of the repayment of our investment in GK Holdings. On June 11, GK Holdings consummated a merger with a competitor in conjunction with incremental capital from SPAC. As a result, GSBD received partial repayments on both first lien and second lien positions and received past due interest on the first lien position. In addition, GSBD rolled a portion of the existing loan into a new loan to the combined company, which is called Skillsoft, in a delevered structure. Subsequent to quarter end, Skillsoft refinanced its capital structure and repaid that remaining loan.

So as a result of these transactions, we have fully exited our investments. And while we're never pleased to place an investment on nonaccrual, we do think that this transaction is a demonstration of the care and effort that we put into our underperforming positions. In this case, our recovery on this investment allowed us to earn an IRR of approximately 6% since inception on our investment to GK Holdings, which began in 2015.

I'll now turn the call to Joe to walk through our financial results.

Thank you, Jon. We ended the second quarter of 2021 with total portfolio investments at fair value of nearly $3.2 billion, outstanding debt of $1.58 billion and net assets of $1.63 billion. We also ended the second quarter with a net debt-to-equity ratio of 0.91x, down from 0.96x, at the end of the first quarter. At quarter end, 63% of the company's outstanding borrowings were unsecured debt and $1.1 billion of capacity was available under GSBD's secured revolving credit facility. Following the close of the quarter, the company engaged its lender group to discuss an extension of the maturity on the revolving credit facility, which is currently set for February 2025. Given the company's current debt position and available borrowing capacity, we continue to feel we have ample ability to fund new investment opportunities with borrowings under our credit facility.

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 the results prior to our October 2020 merger with MMLC. In connection with the merger, purchase discount was written off and is subsequently amortized. These non-GAAP measures remove the amortization impact from our financial results.

For Q2 2021, GAAP and adjusted after-tax net investment income were $58.2 million and $48.8 million, respectively, as compared to $57.6 million and $48.4 million, respectively, in the prior quarter. The increase quarter-over-quarter was primarily due to an increase in accelerated accretion related to repayments. On a per share basis, GAAP and adjusted net investment income were $0.57 and $0.48 per weighted average share, respectively, both consistent with the first quarter of 2021.

Distributions during the quarter totaled $0.50, consisting of the $0.45 regular distribution declared in May and paid on July 27 as well as the second of 3 $0.05 special distributions which was paid on June 15. As Brendan noted, we will be paying the final special dividend on September 15 to eligible holders of record. Earnings per share were $0.54 for the quarter, fully covering both the regular and special distributions mentioned earlier. This contributed to a net increase and net asset value per share of $0.05, with ending NAV per share of $16.05, representing a 31 basis point increase quarter-over-quarter.

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

Thanks, Joe. In conclusion, thank you all for joining us for our call. We believe the current market environment is an attractive one for our company. The strengthening domestic economy provides a stable backdrop for growth and opportunity at our portfolio companies, and we remain confident that our platform will continue to compete well for new lending opportunities owing to our targeted approach in attractive segments of the middle market. As always, I'd like to thank all of you for the privilege of managing your capital.

And with that, Erica, let's open the line for questions.

(Operator Instructions)

And there are currently no questions at this time.

Why don't we give a second, Erica.

(Operator Instructions)

You do have a question in queue from Arren Cyganovich with Citi.

Just talk a little bit about the competitive environment a little bit more. I know you mentioned it in your prepared remarks, but maybe just discuss the -- what you're seeing from a quarter-to-quarter standpoint? Is there any growing intensity? With still a lot of dry powder out there, is there essentially too much capital chasing, too few deal opportunities?

Yes. Look, thanks, Arren. I appreciate the question. And I think it's probably the most common question we get. I think, it is most on top of investors' minds, investing in the private credit space. And as a general matter, look, this is always a competitive business. I don't think there's been a point in time in the company's life cycle where that wasn't a topic that we were well focused on. And I think our job here is to make sure we're leveraging the power of our platform, our origination capabilities to find the best opportunities, maintaining discipline as is appropriate in this space and finding those niche areas that continue to be ones. And I think, suffice to say, the current environment, I would say, is more competitive than most environments have been in different points in time. And I think that does ebb and flow over different periods of time.

Coming into the COVID crisis back in the late back half of 2019, we probably would have said the same thing. And I think there was -- certainly hope that there will be a little bit of a washout over the course of 2020, where credit differentiation and platform performance might win the day with more discipline to allocation of capital. But I think there's been just such a general reflation of the capital markets that more natural organic flush out, frankly, just didn't really take place as we would have hoped or expected.

And I do think in certain parts of the market, there's probably a bit more capital than there has been historically. I think that's most notable in the upper segments of the middle market. I think there's been certain platforms that have been able to grow and scale their business. And I think when you find yourself with a bit more capital than opportunity, the general playbook has tried to be a bit more efficient, lending to bigger businesses where you can write bigger check sizes is going to be a heck a lot more efficient than playing the orders where we tend to fish, which is really the heart of the middle market.

As we talked about on the call, the focus of the platform continues to be that heart of the middle market, that business that does maybe up to 50% of EBITDA, focusing on sectors where there can be bigger capital structures in parts of, for example, the technology and software space. But the nature of the underwrite, the nature of the growth trajectory of those businesses requires a little bit of a more structured credit investment, and we've been doing that for quite a long period of time. Even in those bigger cap opportunities, our history, our position in that market allows us to continue to be quite successful there.

And so I think -- again, I think when you sort of try to quantitatively look at what's going on in the book, I think investors should be encouraged by what they see. Our discipline certainly is coming through in the form of very, very strong credit quality as we've described, no new nonaccruals, very low -- frankly, market value 0 nonaccruals within the business. When you look at an environment where we are seeing significant repayments, the fact that we're able to effectively keep pace with those repayments and do so at yields that are consistent with what's coming out of the book, which, of course, is -- those are 2017, 2018 vintage deals that are now coming out of the book, we're able to maintain the overall profile of the book in a way that I think should give investors some positive feelings, notwithstanding a lot of commentary around the more competitive parts of the market.

We continue to scale the platform. We continue to have access to a lot of capital, but we've scaled the platform thoughtfully and in a way that allows us to continue to execute in the part of the market where we've been quite successful for a long period of time.

And I know this is a little bit different than what we've been seeing with rates recently. It looks like they're a bit higher today on the long end. But how are you positioned for whenever rates rise? A lot of middle-market PDC loans have floors. What percentage of your portfolio has floors? And do you have any that are under 1%?

Yes. The -- if you look across the portfolio, the average floor on the portfolio is 98 basis points. I think something like 96% of our book has a floor of 1%. So we're -- yes, I think that's a good thing. That obviously reflects the ability to achieve a better economic outcome in an environment where rates are quite, quite low and sort of a bit unnaturally depressed. And at the same time, as you know, Arren, we've been active on the financing side. There's been a significant, I would say, opening up of the unsecured debt capital markets available to companies in this space. We've always been quite prudent about balancing and having diversified sources of capital in our business.

Today, 2/3 of our liability structure is in fixed rate unsecured debt. And so that puts us in a good spot in a rising rate environment. And as you know, Arren, in our Ks and Qs, we do give sensitivity tables. So when you think about our exposure, today, with LIBOR where it is, the initial move up in LIBOR is actually a little bit of a headwind, where because we do have floors on the vast majority of our loans, our assets won't re-rate higher in terms of overall yield, but about 1/3 of our financing structure would go higher.

But it does become an inflection point where there's a significant and substantial benefit based on the current structure that we have today, where should there continue to be a march upward in the rate environment then it's probably what most people would be predicting there would be a substantial benefit in that investment income to the company.

Your next question is from Finian O'Shea with Wells Fargo Securities.

Brendan, I think you've partially answered my question there with Arren. On your new origination roughly matching the roll-off of the 2017, 2018 vintages, which is great -- and just, I guess, can you comment on how I think repays will remain pretty strong, maybe not as strong as they have in the past few quarters as you said, but strong? Is this something new? I think you can kind of keep going in the current environment, say, for the -- on your guidance for the rest of the year in terms of new origination repays?

Yes. Look, when we look at the -- as I mentioned in the prepared remarks, there's been 3 consecutive quarters of increasing highs of repayments. That's a good thing when you're making loans, you'd like to see that capital come back to you. That's obviously a sign of good discipline and good underwriting. But I think in the environment that you and Arren and others are focused on certainly does create a challenge that we have to rise up and meet here.

So our focus has been on maintaining that discipline, not just growing the balance sheet for the sake of growing the balance sheet, while we have capacity in this environment. And I think, yes, we've been able to maintain basically the overall balance sheet composition. The -- of course, the run rate income has been positive. As we sit here today and look at the pipelines, I do think that we will start to see a bit of a moderation at least in the short term of some of that repayment activity relative to our pipeline of investment activity and that should give rise to some portfolio growth.

One thing I would note when you look at our numbers, this quarter, you will see probably a little bit of an unusually high amount of unfunded commitments compared to fund commitments in the portfolio. That's just a little bit of a quirk of timing where we had a couple of deals at quarter end where we had committed, but the funding didn't take place to a couple of weeks later. So we do have visibility into that trend. So I do think we'll be able to grow the portfolio a bit deeper into our target leverage this quarter. And again, without really, I think, having to change our discipline and where we're focused on an overall basis. So that should be a positive.

Long term, of course, it gets a little bit more challenging to predict those sorts of things. But I think in addition to the overall capital markets environment, which is quite busy as people know, coupled with, as I mentioned, our portfolio exposures today happen to be in sectors that are performing well, and therefore, our targets for new M&A. I do think there's also a little bit of a platform vintage element where a lot of our new private capital formation and new growth took place in that 2016, 2017, 2018 time period.

So there's a significant uptick in overall platform originations during that period, and we're naturally starting to see that roll off, which is probably -- which probably makes us a bit over-indexed than maybe the broader market to the current repayment environment. So I think that vintage element, I think, Fin, should start to moderate as well. And I think that should, again, give a bit more confidence in the overall portfolio growth opportunities.

Great. And then just a follow-on, I guess, a 2-part question on Pluralsight. First is, it looks like a pretty good size bite for you guys, about $60 million. Maybe my frame of reference is off with the MMLC merger. But is that sort of a big hold? Or is that sort of the new -- are you going to start doing 50s and 60s with the new capital base?

And then the second part of the question is, this was a very big enterprise value. I'm not sure it has EBITDA, so it doesn't throw off your $38 million average. But yes, I guess, would you comment like does this indicate you're going more upmarket, even though you're still able to advertise the sort of middle-market EBITDA threshold?

Yes. No, good question. Pluralsight, certainly an interesting, really attractive opportunity. This is a LIBOR plus 800 piece of paper for a transaction that was a take private of a public company with Vista as a sponsor here. So I think that take private and public company created a pretty interesting and unique dynamic in terms of how the sponsor here sought to finance this business, and quite a large recurring revenue structure, where I think when you think about the uniqueness of that structure, I think the appropriate approach on the part of the sponsor here was to have probably a broader syndicate of investors that might other be the case in a smaller type of ARR deal, ensuring that they have the adequate capacity and they certainly meet the committed financings to get the transaction done.

And so in this case, across our platform, the total exposure was a multiple of the $60 million that we see in the B2C. I think we are the third largest lender in the syndicates of lenders in this particular transaction. So I think it speaks to the range of opportunities that we're able to originate on the platform. We've, as you know, been early and focused on attractive themes within enterprise software for quite a long time and have gained a significant amount of market share within that space. And so from time-to-time, I think notwithstanding a general focus on smaller businesses, we will see opportunities that are large but large and also quite attractive.

I think in this case, the LIBOR plus 800 for what is a public marker value here, give rational loan to value here, around the 25%, 28% range, really, attractive risk reward opportunity and I think is a platform, a lot of capabilities within the space. So I wouldn't, Fin, take this to mean that there's any shift in our approach to bigger businesses, bigger capital structures. I think this is a unique way to source an opportunity where given the private -- the public to private nature, the take private and public company, a pretty unique lending opportunity.

(Operator Instructions)

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

Thanks, Erica. And of course, thank you all for joining us on a summer Friday. As always, we appreciate your time and attention and questions. And if you have any additional questions, please don't hesitate to reach out directly to the management team. I hope everybody enjoys a happy and healthy, safe rest of your summer and look forward to catching up soon.

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