Goldman Sachs BDC Inc (GSBD) 2020 Q3 法說會逐字稿

Good morning. This is Dennis and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs BDC, Inc. Third Quarter 2020 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 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 homepage 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, Friday, November 6, 2020, for replay purposes.

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

Thank you, Dennis. Good morning, everyone, and thank you for joining us for our third quarter earnings conference call. I'm joined on the call today by Jon Yoder, our Chief Operating Officer; and Jonathan Lamm, our Chief Financial Officer.

I'll begin the call by providing an overview of our third quarter results, including commentary on the performance of our portfolio and how we've navigated the economic uncertainty resulting from the COVID health crisis. I'll also provide a recap of our recently completed merger with our previously affiliated business development company, Goldman Sachs Middle Market Lending Corp. which we refer to as MMLC. Jon Yoder will then discuss our portfolio activity in more detail before turning the call over to Jonathan Lamm to walk through our financial results. Finally, I'll conclude with some closing remarks before we open the lines for Q&A.

So with that, let's get to our third quarter results. Q3 net investment income per share was $0.45 on after-tax net investment income of $18.2 million. Our GAAP earnings per share was $0.80, which reflected both the solid net investment income generated during the quarter as well as net gains in our investment portfolio. The net gains reflected continued improvement in underlying portfolio company performance, coupled with the tightening of market spreads.

Net asset value per share increased to $15.49 per share as of September 30, an improvement of 2.3% from the end of the second 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 December 31, 2020. This equates to an annualized dividend yield of 11.6%, based on net asset value per share at the end of Q3. Furthermore, our board declared special dividends aggregating to $0.15 per share, which will be payable in 3 $0.05 per share installments to shareholders of record on each of February 15, 2021, May 14, 2021 and August 16, 2021. Recall that these special dividends were first approved last December when the initial merger with MMLC was announced.

Next, I'd like to take a moment to reflect on the overall state of the portfolio. As all of you are aware, it has now been over 7 months since the beginning of the COVID-19 health crisis, which caused unprecedented social and economic disruption across the globe, as government-mandated lockdowns put tremendous stress and strain on businesses. Against this extraordinary backdrop, we are extremely pleased with the performance and resilience of our investment portfolio. We want to share some further insights and observations that evidence the strength of the portfolio.

First, revenue at our portfolio companies increased by over 2% year-over-year based on the most recently available data, despite the broad economic upheaval and broader contraction of economic activity. We attribute this solid performance to our focus on high-quality businesses in durable and dynamic sectors of the economy, such as technology, business services and certain areas of health care that have non-discretionary demand drivers, coupled with strong management performance at our portfolio companies. We've observed that healthy companies with forward-looking owners and management teams have capitalized on long-term expansion opportunities in this environment, primarily through M&A, which has further solidified leadership positions.

Net debt-to-EBITDA at our portfolio companies ticked up modestly quarter-over-quarter, but at 5.7x still remains consistent with historical levels. Furthermore, weighted average interest coverage, a measure of cash flow coverage of debt service, remains very healthy at 2.6x. We know that investors are keenly focused on loan amendment activity as an indicator of any portfolio stress. We did observe that low amendment activity was elevated in Q3 compared to historical levels. With that said, however, the majority of amendments were granted to companies that are performing well. We're seeking technical relief in many cases to pursue the accretive M&A transactions I described earlier. This dynamic has given rise to growth in our pipeline of attractive investment opportunities, which we are well positioned to pursue.

In those instances where companies are seeking covenant relief to manage the business impact from the health care -- health prices, we have generally been successful in negotiating for junior equity capital to come into the businesses to support both liquidity and debt service. In Q3, 7 of our portfolio companies received commitments of new junior capital, evidencing the confidence that business owners have in the enterprise value and future prospects of these businesses as well as the safety and stability of the more senior portion of the capital structures where we invest. Presently, among the 110 companies in our portfolio, just one company is out of compliance with covenants.

In addition, we continue to observe that our portfolio companies have the wherewithal to remain current on their cash obligations to us. And as a result, payment in kind or PIK income represented just 5.3% of total income during the quarter. We believe the demonstrative ability for our portfolio companies to meet their interest obligations in cash is a testament to their underlying health and durability, and bodes well for credit performance. During the quarter, no new investments were placed on non-accrual and total non-accruals were de minimis at 0.1% of fair value and 0.9% at cost at quarter end.

Next, I'm delighted to announce that on October 12, 2020, GSBD completed its previously-announced merger with MMLC. We believe the transaction delivered significant benefits to all stakeholders. For example, the transaction increased GSBD's portfolio yield at cost, while at the same time reducing the percentage of non-accrual assets. With $3.5 billion of assets, the company has significant scale, which we believe delivers benefits to all stakeholders, including enhanced access to diversified sources of funding to further strengthen our balance sheet position. To that end, perhaps the greatest benefit of the merger was the substantial deleveraging that occurred.

As of the closing date of the transaction, GSBD's net debt to equity ratio was just 0.93x down from 1.29x at the end of the third quarter. As a result of this deleveraging, the company is now well positioned to patiently deploy incremental capital and increase net investment income in the current environment. Finally, in connection with the completion of the merger, our Board of Directors has reauthorized and amended the company's 10b5-1 plan. This -- the amended plan increases the buyback authorization to $75 million from $25 million previously, subject to certain conditions.

With that, let me turn it over to Jon Yoder.

Great. Thanks, Brendan. So to pick up on some of the comments you made, we are certainly pleased with the stability and resilience demonstrated by our portfolio under adverse economic conditions over the past several months. In part, this strong performance can be attributed to a notable and deliberate shift in our asset composition towards more senior first lien loans over the past several years.

To recap our portfolio statistics at quarter end, total investments in our portfolio were $1,431.2 million at fair value, which was comprised of 93.2% in senior secured loans, including 75.5% in first lien, 2.4% in first lien/last-out unitranche and 15.3% in second lien debt as well as 0.5% in unsecured debt and 6.3% in preferred common stock and warrants. We also had just under $60 million of unfunded commitments as of September 30, bringing total investments and commitments to $1,490.4 million.

As of quarter end, the company had 110 portfolio companies operating across 38 different industries. The weighted average yield on our investment portfolio at cost at the end of the third quarter was 7.7% as compared to 7.5% at the end of the second quarter. The weighted average yield of our total debt and income-producing investments at cost remained at 8.3% at the end of the quarter.

During the quarter, we made 5 new investment commitments, 4 of which were to new portfolio companies and 1 of which was to an existing portfolio company, totaling $11.6 million. In addition, we received $24.7 million in repayments, which was driven primarily by the full repayment of investments in 2 portfolio companies. Overall, both sales and repayment activity was relatively muted this quarter. As previously discussed, new asset origination was constrained during the quarter as we were operating at the high end of our target leverage ratio going into the merger with MMLC.

As we look forward, we see significant incremental operating flexibility afforded by the deleveraging that resulted from that merger transaction. And as Brendan mentioned, we expect to be patient and thoughtful going forward as we deploy new capital into new investments. Similarly, while repayment activity slowed significantly during the depths of the crisis, we do anticipate an increase in repayments consistent with the general uptick of transaction activity that we've experienced in private markets in recent months.

Already in the fourth quarter, we received full repayments of 2 portfolio companies and a third portfolio company called GK Holdings has agreed to merge with one of its competitors in conjunction with the sale of the combined company to a stack. GK had been -- GK Holdings had been an underperforming asset and as part of this SPAC transaction, we're going to -- we expect to receive a nearly full recovery of our first lien claim. In the recovery on our second lien claim, we expect to be significantly in excess of our mark as of the third quarter. As a result, we marked up the investment value prior to the closing of our merger on October 9. And we expect this transaction to close in early Q1 of 2021.

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

Thanks, John. We ended the third quarter of 2020 with total portfolio investments at fair value of $1.43 billion, outstanding debt of $920 million and net assets of $626 million. Our net investment income per share was $0.45, which was unchanged from the prior quarter. Earnings per share were $0.80 as compared to $0.86 in the prior quarter. We ended the third quarter with a net debt to equity ratio of 1.29x versus 1.33x at the end of Q2. Importantly, as Brendan mentioned, subsequent to the closing of the merger, the net debt to equity ratio came down to 0.93x, thus providing the company with incremental capacity to deploy capital into new investment opportunities.

During the crisis, the company maintained a significant amount of cash and cash equivalents directly on the balance sheet, as evidenced by the large difference between our gross and net debt to equity ratios. Subsequent to the closing of the merger, we used a significant portion of that cash to pay down our secured revolving credit facility. In addition, pro forma for the completion of the merger at the end of Q3, the company had approximately $690 million of liquidity. I would also add that as of Q3 2020, our unsecured debt percentage was 56%, but pro forma for the merger it is approximately 30% due to the high percentage of secured financing ported over from MMLC.

I would reiterate comments made on previous calls that we are keenly focused on ensuring a healthy balance of unsecured debt in our capital stack as it provides the company with significant financial flexibility, especially as evidenced on our own balance sheet during the crisis.

Turning to the income statement. Our total investment income for the third quarter was $31.5 million, which was up from $30.6 million last quarter. The increase was primarily driven by an increase in prepayment-related income and amendment fees. Net expenses were $12.9 million for the quarter as compared to $12 million in the prior quarter. Net expenses were up quarter-over-quarter, primarily driven by the lower management fee waiver in Q3. NAV was $15.49 per share, up 2.3% from the prior quarter, driven by net gains in our investment portfolio as a result of continued improvement in portfolio company performance as well as from further tightening of credit spreads.

The company had $46.6 million in taxable accumulated undistributed net investment income at quarter end resulting from net investment income that has exceeded our dividend historically. Pro forma for the completion of the merger at the end of Q3, this equates to $0.46 per share. As discussed on prior calls, we believe that the cost of spilling over this income in the form of excise tax is a small price to pay relative to the much higher cost of issuing new equity.

With that, I will turn it back to Brendan.

Thanks, Jonathan. In closing, we are pleased with the performance of the company under these challenging operating conditions. During the quarter, asset values continued to improve, non-accrual investments remained low, and we deleverage the company's balance sheet which gives us great flexibility to navigate the current environment. As a result, we believe the company is on a strong footing to continue to deliver attractive results for all of our stakeholders. As always, we thank you for the privilege of managing your capital and please don't hesitate to reach out if you have any questions.

With that, Dennis, we'll turn it back to you to open up the line for questions.

(Operator Instructions) And your first question is from the line of Finian O'Shea with Wells Fargo Securities.

First is, Brendan, can you remind us on the special dividends? Were those related to -- were those related to the waivers or just spillover in general or something else?

Yes, Fin, good to hear from you. Yes, you'll recall when we initially announced the merger back in December of last year and we put in place the fee waiver, the thought we had that since we're putting in this place with fee waiver, there's incremental earnings that would have known that. It would be better to actually put that back into shareholders' hands directly in the form of these specials. So back in December, we announced this 15% aggregate dividend and so that's the background there. This is something we've talked about going back since December. So no broader change in our dividend policy or share. But we did think in connection with the merger and given those fee waivers, better to put it back that cash back into shareholders' hands.

And then just on GK. So obviously, a good outcome. For a while, I think that was at least on partial non-accrual, will you have like your restore amount of income next quarter. Any color there? And then I suppose just on the mark, you had that marked down to, I think, 70 or so or below just for sort of context that look like. Did it improve? Did it like recently get out of any duress? Or was -- any color on how -- go ahead.

Yes, thanks. I'll give you a little bit of background here on what's going on with GK. So this is a business that does IT, educational training, types of services and had bid in process. So it's, frankly, a lot of it in classroom, but some of it online as well. And so had been underperformance for quite some time. And our marks coming into -- at the end of Q2, we have a position in both the first and the second lien. The first lien, I think we had marked somewhere around the $0.50 from the dollar context in $0.52 and the second was on non-accrual. We had that marked lower at around $0.25. And so what's happened in the context of COVID, the company has made some strides in moving their offerings to the online domain, but that's been a process there. But the real value proposition here was merging with their -- with one of their big competitors. And the stack capital is coming in to effectuate that merger here.

And so on the combined basis and thinking of the synergies that are new to the company, the value that was offered to the -- in this case, to the debt holders of GK was effectively getting a full recovery on the first lien and a significant recovery back to the second lien. And so we've -- in the context of that announcement, which was after September 30, but before the October 9 closing of the merger, post the quarter, we did mark up those positions in conjunction with that merger. That deal will close in the first quarter of next year, so that the character of our investment will be a cash take-back as well as some take-back paper, which will be performing debt.

So very, very good outcome. And I think really indicative of, I would say, one, conservatism on taking to remarks and also just the valuation opportunities in an environment here where there's a lot of capital looking for good opportunities. And so very good to be the beneficiary of that.

Then just one. I'm just doing really quick math here, I could be wrong. I think it's something like $6 million and that helps -- and that brings your NAV up around $0.10 even after the closing -- yes, yes. Is there anything else going on or it --?

Yes. So again, let me take you through little of the bridge. Jonathan Lamm can chime in as well, if I guess something wrong here. But again, going back to the timing of the merger, we closed the merger on, I believe it was October 12. And if you think about that process there in a NAV-for-NAV deal, what we did was a full bring-down of the NAVs of both GSBD and MMLC at the time of that merger, which was effectively October 9, the Friday before that weekend. And so what we did was look across the portfolio, look for any incremental news. The GK News was obviously significant, which engendered that markup. But in addition, in both GSBD and MMLC's NAV, we included the income that had been generated in that sub period into the NAVs. Of course, that will end up getting distributed in dividends. But when you look at that at the ending, 1,557 NAV as of October 9 that we just described, a lot of that is the GK Holdings and part of that is the -- that subperiod of income.

(Operator Instructions) Your next question is from the line of Robert Dodd with Raymond James.

Congratulations on closing the merger. But if I can go back to your comments on loan amendments. I mean most of them, it sounds like we're the technical, to your point, so they can maybe go to add-on acquisitions, but there were some that were not. Can you give us a -- of those that were, were those -- I want to say concentrated if they were. How many of those were in kind of those -- there's more legacy like about to more difficult positions at GSBD versus were any of them in the more traditional assets that also overlap with MMLC i.e. were they in positions that now have obviously shrunk as a piece of the portfolio? Can you give us any color there?

Yes. No, good question. So I'll just reiterate some of the comments I made upfront. So like I said, loan amendment activity was elevated. The majority of that, like I said, was really companies going on offense looking for incrementals, looking for flexibility to pursue those acquisition opportunities and incur debt and the like, which is, we think, a positive event. And so I don't want to leave you with the impression probably that there was a lot of those other companies that were seeking incremental capital. And I think I noted that in those cases where we were offering up flexibility, really pleased that it was in partnership with the sponsors and the owners who were willing to provide junior capital. And that's consideration for giving flexibility and it really speaks to the evidence of the value there. As I sort of catalog in my head those names, I don't think there's any significant lack of on LAP. I think those are names that are really across both of those vehicles as we've been co-investing those vehicles for the past many years.

And then just on the other one, I mean, obviously, now leverage is down you've got capital, you've got liquidity. What are you seeing out there, not just doing opportunities, obviously, M&A activity, et cetera, private equity activity is up, will lead to more repayments as well, potentially. But in terms of terms that you're seeing there, in terms of the type of industries, obviously, you want the more tech defensive, the kind of businesses that produce lot revenue in a recession. So are you seeing the right kind of industries and what are the terms that are available in the market right now?

On the industry, absolutely. And I think as we look at the prospective environment, we're going to continue to focus on those industries where having had the ability to observe how they performed in a very stressful economic environment and seeing the resilience, we're very pleased with the sectors where we've been active in the sectors that we've avoided. I think of oil and gas, retail and other couple of areas. We've done a nice job of mixing those. So we will definitely continue to focus on those areas of technology and business services and health care that you definitely feel more resilient. And the good news is, by virtue of having been quite, quite active there over many years, we feel like we've got excellent access to those opportunities, both on new deals as well as those add-ons that I talked about in the context of M&A.

On terms, look, it's a dynamic environment for sure. We've all observed what's going on in the broader public markets and there's typically a lag with private markets. But things have definitely tightened. I wouldn't say we're back at pre-COVID levels by any stretch of the imagination. But relative to, call it, the summer time or September as we've been getting more active, certainly new opportunities have tightened. But we think there are still opportunities to do transactions that are in the part of the capital structure that we prefer that are in needs of industries that we prefer, that can be accretive to the overall portfolio yield and that's where our focus is.

And just -- I mean, obviously now in many cases the opportunities that do come up, you have the data on how they performed, to your point. You know how these companies now outperform during COVID. Does that mean you're going to have more appetite for doing some junior deals? And by junior, I mean like second lien, I don't mean this, but what we consider?

Yes. No, we haven't changed our orientation. We've not gotten more active in capital. I think you can certainly envision an environment -- and look, we've talked about this since the early days of the Small Business Credit Availability Act. Markets are dynamic. There certainly can be points in time when the supply, meaning the lenders that are willing to offer that junior capital diminishes relative to the demand, which could give rise to outsized opportunities. And so we're always mindful of that. I don't think we're quite there yet in terms of seeing that flip to being quite, quite obvious. But it's something that we will certainly consider if and when those opportunities do arise.

And as you know, Robert, there's a relationship between the ultimate balance sheet leverage and your asset mix as well. And so as we sit here today, I think our focus will continue to be on the margin on first lien deals as we're -- and we're using the incremental debt capacity we have in the company to finance those assets. Could that change? Absolutely. I don't think I'm sitting here today signaling any change in that profile. But we're certainly eyes wide open to the possibilities.

(Operator Instructions) And at this time, there appear to be no further questions. Please continue with any closing remarks.

Great. Thanks, Dennis. And thank you, all of you, of course, for joining us for the earnings conference call today. Obviously, a lot going on in the world. Would be always eager and happy to answer any questions and feel free to reach out directly and we look forward to chatting soon. Have a great weekend.

Ladies and gentlemen, this does conclude the Goldman Sachs BDC, Inc. Third Quarter 2020 Earnings Conference Call. Thank you for your participation. You may now disconnect.