Goldman Sachs BDC Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 8, 2023

There are 8 speakers on the call.

Operator

Good morning. This is Austin Eary, a member of the Investor Relations team for Goldman Sachs BDC, Inc. And I would like to welcome everyone to the Goldman Sachs BDC, Inc. 3rd quarter 2023 earnings conference call. Please note that all participants will be in listen only mode until the end of the call when we will open up the line for questions.

Operator

Before we begin today's call, I would like to remind our listeners that today's remarks and 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. That may not be duplicated, reproduced or rebroadcast without our consent.

Operator

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 quarterly report on Form 10 Q filed yesterday with the SEC. This conference call is being recorded today, Wednesday, November 8, 2023, for replay purposes. I'll now turn the call over to Alex Gee, Co Chief Executive Officer of Goldman Sachs BDC, Inc.

Speaker 1

Thank you, Austin. Good morning, everyone, and thank you for joining us Q3 2023 earnings conference call. I'm here today with David Miller, our Co Chief Executive Officer Tucker Green, our Chief Operating Officer and David Pesa, our Chief Financial Officer. I'll begin the call by providing a brief overview of our 3rd quarter results before discussing the current market environment in more detail. I'll then turn the call over to David Miller and Tucker Greene to describe our portfolio activity and performance before handing it off to David Pesa to take us through our financial results.

Speaker 1

And then finally, we'll open the line for Q and A. So with that, let's get to our Q3 results. Our net investment income per share for the quarter was $0.67 an increase of 13.6% over the prior quarter's $0.59 Excluding the impact of asset acquisition accounting in connection with the merger with MMLC. Adjusted net investment income for the quarter was $0.64 per share, equating to an annualized net investment income yield on book value of 17.5%. The increase in investment income during the quarter was primarily driven by an increase in repayments and related accretion of discounted positions.

Speaker 1

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 29, 2023. This marks the company's 35th consecutive quarter of a $0.45 per share dividend totaling $15.75 per share since our IPO, excluding the special dividends we paid in 2021 post the merger with MMLC. Net asset value per share increased to $14.61 as of September 30, 2023, an increase of $0.02 from the end of the prior quarter. This was primarily attributable to the increase of net investment income, which is partially offset by an increase in unrealized losses for the quarter. On a fair value basis, 1st lien loans are 94.9% of the investment portfolio as of September 30, 2023, which speaks to our continued focus on maintaining a higher quality portfolio.

Speaker 1

Again, this quarter, we continue to invest only in directly originated 1st lien senior secured debt with no participation in the secondary market for broadly syndicated loans. As our portfolio continues to evolve, we believe it's particularly important to proceed with an abundance of caution with new underwritings as the economic cycle evolves over the next few quarters, while base interest rates are expected to remain higher for longer. We've previously expressed confidence that deal volumes will increase as the year progresses. During the Q3, We reviewed more than 150 investment opportunities across our Direct Lending Americas platform, which is sizably more and the opportunities seen to start the year. Although recent macroeconomic and geopolitical headlines may delay the timing of current deal closings by a quarter or so, we believe our existing pipeline of new opportunities remains extremely robust and we expect that 2024 will be an active year for private credit across the spectrum.

Speaker 1

Of note this quarter, GSBD was a lead lender in the refinancing of Blue Brick, one of the first investments we made post integration of the BDC platform with the broader Goldman Sachs Private Credit Complex. Rubrik is a provider of data backup and recovery software for enterprise customers and is an existing GSPD borrower. The latest transaction also involved the partial financing of an acquisition, which keeps the company's pro form a capital structure at a very attractive loan to value. RV Media is another example of a new origination in the 3rd quarter where the Goldman Sachs Private Credit platform was a lead lender and GSBD was able to participate in financing the buyout of the business by a new financial sponsor. GSPD stands to benefit from deploying into a more favorable vintage and high quality credits and where we are an incumbent, not only resetting economics to current market pricing, but setting covenants and documentation to align with our orientation towards downside risk management.

Speaker 1

With that, Let me turn it over to

Speaker 2

my Co CEO, David Miller. Thanks, Alex. During the quarter, we originated $168,200,000 in new investment commitments to 8 new and 5 existing portfolio companies. Sales and repayment activity totaled 257 point $4,000,000 primarily driven by the full repayment and exit of investments in 7 portfolio companies. In particular, we are pleased with the full repayment of 3 junior lien positions, which will allow us to continue redeploying capital in the new 1st lien oriented opportunities while remaining well within our leverage targets.

Speaker 2

Turning to portfolio composition. As of September 30, 2023, total investments in our portfolio were $3,400,000,000 at fair value, comprised of 97.5 percent senior secured loans, including 91.3% in 1st lien, 3.6% in 1st lien last out unit tranche and 2.6% in 2nd lien debt as well as the negligible amount in unsecured debt and 2.2% in a combination of preferred and common stock and warrants. As of quarter end, the company held investments in 137 portfolio companies operating across 38 different industries. The weighted average yield of our investment portfolio at cost at the end of Q3 was 11.6%. Amortized cost remained at 12.6% at the end of Q3.

Speaker 2

I will now turn the call over to Tucker Green to discuss our overall credit quality.

Operator

Thank you, David. The weighted average net debt to EBITDA of the companies in our investment portfolio remained flat at 5.9 times in the 2nd quarter. Importantly, our portfolio companies have both top line and EBITDA growth year over year on a weighted average basis. The weighted average interest coverage of the companies in our investment portfolio at quarter end declined slightly from 1.56 to 1.51 times as so far rates continue to increase for the quarter. It is important to note that we calculate our coverage ratios based on current quarter metrics rather than on a trailing or last 12 month basis.

Operator

Were we to use the LTM calculation, then our interest coverage ratio The companies in our investment portfolio would be 1.7x. We continue to monitor interest coverage sensitivity. The quarterly increase in SOFR is slowing and the Fed held rates flat, which creates more stability. We also see our interest coverage levels a reflection of legacy vintage exposure within the book that will continue to be supported with repayment activity and new deployment in the current environment. And finally, turning to asset quality.

Operator

As of September 30, 2023, 2 new positions were placed on non accrual and one portfolio company was removed from non accrual during Q3. Investments on a non accrual status amount to 2.3% and 4.2% of the total investment portfolio at fair value and amortized costs respectively. Subsequent to quarter end, One additional name was placed on non accrual status. The size of this position does not constitute a meaningful change to the percentage stated above. I will now turn the call over to David Pesa to walk through our financial results.

Speaker 3

Thank you, Tucker. We ended the Q3 of 2023 with total portfolio investments at fair value of $3,400,000,000 outstanding debt of $1,900,000,000 and net assets of 1,600,000,000 Our ending net debt to equity ratio as of the end of Q3 was 1.13x, which continues to be below our target leverage range of 1.25x. At quarter end, approximately 46% of the company's total principal amount of debt outstanding was in unsecured debt and had $671,000,000 of capacity available under our secured revolving credit facility. Subsequent to quarter end, we executed an extension to the maturity of our secured revolving credit facility from May 2027 to October 2028. As a reminder, we have 2 separate unsecured notes due in February of 2025 and January of 2026 respectively.

Speaker 3

We plan to address these maturities at the appropriate time. Before continuing to the income statement, as a reminder, in addition to GAAP financial measures, We 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 MNLC. These non GAAP measures remove the purchase discount amortization impact from our financial results. For Q3, GAAP and adjusted after tax net investment income were $72,900,000 $69,700,000 respectively, as compared to $64,500,000 $63,100,000 respectively in the prior quarter.

Speaker 3

The increase in net investment income was primarily driven by repayment related activity that was discussed earlier. On a per share basis, GAAP net investment income was $0.67 And adjusted net investment income was $0.64 as compared to $0.59 $0.58 respectively last quarter. Distributions during the quarter remained consistent at $0.45 per share. Our spillover taxable income is approximately $124,300,000 or $1.13 on a per share basis, which we believe provides continued stability on our consistent dividend since inception. Net asset value per share on September 30, 2023 was $14.61 as compared to $14.59 last quarter.

Speaker 3

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

Speaker 1

As you all are probably aware, On September 7, we announced that David tendered his resignation from his position at the company effective November 10 to pursue a new professional opportunity. On September 25, the Board appointed Stanley Matyshevsky as our CFO and Treasurer, effective immediately upon David's resignation on November 10. Stan has been at Goldman Sachs since 2013 and has been managing the product controllers team for our entire BDC platform. We want to congratulate and welcome Stan to our management team and wish David, all the best for the future. In conclusion, thank you all for joining us on our call.

Speaker 1

With that, let's open the line for Q and A.

Speaker 4

Thank And our first question will come from Maxwell Fritchard with Truist Securities.

Speaker 5

Hi, good morning. I'm calling in for Mark Hughes. And I joined a little late, so I'm sorry if you mentioned this, but can you touch on spreads you're seeing Currently a couple of other BDCs have mentioned a contraction in the quarter.

Speaker 1

Hey, good morning. Thanks a lot for the question. So we certainly saw a bit of further spread compression in the quarter. In the prior quarters, I think the average spread that we were seeing It was well into the 600s, probably the mid-600s on average. We've seen some spread compression now where for the kind of standard rate for the middle of the fairway credit is more like 600 basis points plus or minus.

Speaker 1

For some of the larger credits, you might see a bit more spread compression and for some of the more middle market credits, you might see a little bit wider, but it's around 600 is what we're seeing.

Speaker 5

Okay, thank you. And could you provide a figure for the percentage of your portfolio companies That are below 1x interest coverage ratio?

Speaker 3

It's a we haven't disclosed that in

Speaker 1

the past, But it's a very small percentage, single digit percentage. Okay. Thank you.

Speaker 4

Thank you. And our next question will

Speaker 1

come from

Speaker 4

Sean Paul Adams with Raymond James.

Speaker 6

Hey guys, good morning. Quick question, I know you guys talked a little bit about the 2nd lien book. I know you said you had some junior lien positions that exited. What's the status of the remainder of your 2nd lien book? What are you guys seeing on the pipeline?

Speaker 2

Yes, I mean from a pipeline It's not something we're actively pursuing. We look at them from time to time, but it's not the focus where we're expanding that. I think as we said in our prepared comments, Our first lien book is right around 95%, so the legacy book continues to run down and is a very small percentage of the overall portfolio today.

Speaker 6

Excellent. Thank you. And I didn't notice if you said the 2 new non accruals, which companies were those?

Speaker 2

Grassfield and Zodiac.

Speaker 6

Got you. Thank you. As far as far as Grazio, has there been any communication between the sponsor as far as the

Speaker 1

status of that? Yes. So we're in active discussions amongst the lender group with the sponsors behind the company, which is relatively sizable group lenders that are in the club. So we're in active discussions and this is a relatively sizable position for us. Drazio is, as you might know, it's a market leader in the online ecosystem, where many of the players in that ecosystem are experiencing some issues and we wouldn't be surprised if consolidation is the likely outcome, but more to come on that.

Speaker 6

Got it. Thank you.

Speaker 4

We'll take our next question from Derek Hewett with Bank of America.

Speaker 7

Good morning, everyone. Most of my questions were already asked and answered. But could you, from a modeling perspective, could you talk a little bit about what was the impact of the look back on Q3 results. How much on a per share basis was that? Thank you.

Speaker 3

Thanks for the question. This is the last Of the 2020 look back from COVID impact, it was roughly it was about $0.04 of cap To the per share calculation itself that was removed because of the look back.

Speaker 1

Okay, great. Thank you.

Speaker 6

Thank you.

Speaker 4

And that concludes today's question and answer session. Mr. Chi, at this time, I will turn the conference back to you for any additional or closing remarks.

Speaker 1

Thanks everyone for joining our call. We appreciate the interest and support and then we look forward to closing the year. Thank you very much. Thank you. Goodbye.

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Key Takeaways

  • Net investment income per share rose 13.6% to $0.67, with an adjusted NII yield on book value of 17.5% and a maintained quarterly dividend of $0.45 marking 35 consecutive quarters.
  • The portfolio remains heavily weighted toward first-lien senior secured loans (94.9%), totaling $3.4 billion at fair value across 137 companies with a weighted average yield of 11.6% at cost.
  • Originations totaled $168.2 million in Q3 across 13 companies, while the firm reviewed over 150 opportunities and led key transactions like Blue Brick and Rubrik refinancing, underscoring a robust pipeline amid higher-rate caution.
  • Credit metrics held steady with net debt/EBITDA at 5.9x, interest coverage of 1.51x (1.7x LTM), and only 2.3% of the portfolio on non-accrual status by fair value.
  • Leverage and liquidity remain strong with a net debt-to-equity ratio of 1.13x, $671 million of undrawn revolver capacity, and an extended secured credit facility maturity to October 2028.
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Earnings Conference Call
Goldman Sachs BDC Q3 2023
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