Goldman Sachs BDC Q2 2023 Earnings Call Transcript

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August 4, 2023

There are 8 speakers on the call.

Operator

Good morning. This is Austin Neary, 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. 2nd 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 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 these results and forward looking statements as a result of a number of factors, including those described from time to time in the company's SEC Analyst. This audiocast is copyrighted material of Goldman Sachs BDC Inc. And 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 Relations section and which include affiliations 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, Friday, August 4, 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, Thank you for joining us for our Q2 2023 earnings conference call. I'm here today with David Miller, my 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 2nd quarter results before discussing the current market environment in more detail. I'll then turn the call over to David Miller to describe our portfolio activity Before we hand 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 2nd quarter results. Our net investment income per share for the quarter was $0.59 an increase of 28.3% from the prior quarter. Excluding the impact of asset acquisition accounting in connection with the merger with MMLC, adjusted net investment income for the quarter was $0.58 per share, equating to an annualized net investment income yield on book value of 15.9%. The increase in returns is largely a reflection of the increase in base rates during the quarter.

Speaker 1

As we announced after the market close yesterday, Our Board declared a $0.45 per share dividend payable to shareholders of record as of September 30, 2023. This marks the company's 34th consecutive quarter of a $0.45 per share dividend, totaling $15.30 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 $14.59 per share as of June 30, 2023, an increase of approximately 1% from the end of the Q1. This increase was primarily attributable to the increase of net investment income as well as a modest increase in unrealized gains for the quarter. On a fair value basis, 1st lien loans are 92.6% of the investment portfolio as of June 30, 2023, which speaks to our continued focus on maintaining a higher quality portfolio.

Speaker 1

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. In the Q1, we expressed confidence that we will see increased deal volumes as the year progresses with visible green shoots in M and A markets, a resurgence of take privates and refinancings as sponsors reengage private markets to address upcoming maturities. During the Q2, some of those expectations came to fruition as we saw increased deal activity Mainly towards the tail end of the quarter and a higher level of activity has continued into the second half of the year to date. Of note, GSBD participated in the refinancing and recapitalization of Fullsteam, an existing GSBD borrower. The Goldman Sachs Private Credit platform has been involved with the company since 2019.

Speaker 1

In 2021, our initial investment was repaid as part of a broader recapitalization of the company in which GSPD participated. GSPD participated again in the company's most recent $1,000,000,000 recapitalization that is expected to close this quarter. This serves as an example of our incumbency Allowing us to reset economics and terms to match the current market environment. Full steam is a holding company of verticalized software businesses that provide core business management software and payment capabilities to small and medium sized customers. Superior Environmental Solutions is another example of a new origination in the Q2 where the Goldman Sachs Private Credit platform had an existing incumbent position and GSBD was able to participate in financing the buyout of the business by a new financial sponsor.

Speaker 1

In general, we're pleased that we're able to take advantage of the additional investment capacity that was created through our equity offering this past March and higher repayment activity during the Q2. We're more confident now that despite overall economic uncertainties that continue to persist, Deal volumes will continue to grow as companies seek more strategic opportunities and sponsors look to deploy what has grown to more than $1,000,000,000,000 of dry powder. So with that, let me turn it over to my Co CEO, David Miller.

Speaker 2

Thanks, Alex. During the quarter, we originated $86,000,000 in new investment commitments to 4 new and 5 existing portfolio companies. Our new investment commitments were 100% in 1st lien senior secured loans. Sales and repayment activity totaled $24,900,000 primarily driven by the full repayment of investments in 2 portfolio companies. We are particularly pleased with the visibility we have to date of additional anticipated repayments in the second half of the year across a handful of portfolio companies.

Speaker 2

2 of these will further reduce our junior lien positions currently in the portfolio And more importantly, allow us to redeploy capital in the new first lien oriented opportunities while remaining well within our leverage targets. Turning to portfolio composition. As of June 30, 2023, total investments in our portfolio were $3,600,000,000 at fair value, comprised of 97.5 percent senior secured loans, including 89.3% 1st lien, 3.3% in 1st lien last out unitranche and 4.9% in 2nd lien debt. This is well as a negligible amount of unsecured debt and 2.3% in a combination of preferred and common stock and warrants. We also had 366,100,000 of unfunded commitments as of June 30, 2023, bringing total investments at fair value and commitments to 3,900,000,000 As of quarter end, the company held investments in 135 portfolio companies operating across 36 different industries.

Speaker 2

The weighted average yield of our investment portfolio at cost at the end of Q2 was 11.9% as compared to 11.6% from the prior quarter. The weighted average yield of our total debt and income producing assets at amortized cost increased to 12.6% at the end of Q2 from 12.2% at the end of Q1. Turning to credit quality. The weighted average net debt to EBITDA of the companies in our investment portfolio Declined slightly quarter over quarter to 5.9 times compared to 6.0 times in the Q1. Given the level of existing base rates, we would anticipate that future originations and transactions should reflect lower leverage metrics.

Speaker 2

Just as importantly and in response to questions some of you have had in regard to macro headwinds over the past few quarters, Our portfolio companies had both top line and EBITDA growth year over year and quarter over quarter on a weighted average basis. We remain selective from a credit and risk adjusted return perspective and maintain a long term strategic view on capital deployment that is insulated by our orientation to 1st lien credit risk. The weighted average interest coverage of the companies in our investment portfolio at quarter end was 1.6 times, which was flat yet again as compared to Q1 2023 and Q4 20 22 despite an increase in the overall sulfur yield curve. It is important to note that we calculate our coverage ratios based on current quarter metrics rather than a trailing or LTM basis. Were we to use the LTM calculation, then our interest coverage of the companies in our investment portfolio would be 1.9 times.

Speaker 2

And finally, turning to asset quality. As of June 30, 2023, Despite 2 positions that were designated as grade 3 last quarter being placed on non accrual during Q2, investments on non accrual status amounted to 0.8 and 1.8 percent of the total investment portfolio at fair value and amortized costs respectively versus 0.6% and 1.6 percent at fair value and amortized costs respectively as of March 31, 2023. I will now turn the call over to David Pesa to walk through our financial results.

Speaker 3

Thank you, David. We ended the Q2 of 2023 with total portfolio investments at fair value of $3,600,000,000 outstanding debt just under $2,000,000,000 and net assets of 1,600,000,000 Our ending net debt to equity ratio at the end of Q2 remained at the same level of 1.2 times, which continues to be below our target leverage range of 1.25 times. At quarter end, approximately 44% of the company's Total principal amount of debt outstanding was in unsecured debt and had $595,000,000 of capacity available under secured revolving credit facility. With our leverage ratios remaining below our targeted range, dry powder in our credit facility and the aforementioned repayments. This will allow us to deploy capital into attractive risk adjusted opportunities in the current market.

Speaker 3

Before continuing to the income statement, as a reminder, in addition to GAAP financial measures, we will also reference certain non GAAP or adjusted measures. This is intended to make the company's financial results easier to compare to results to our October 2020 merger with MMLC. These non GAAP measures remove the purchase discount amortization impact from our financial results. For Q2, GAAP and adjusted after tax net investment income were 64,500,000 and $63,100,000 respectively as compared to $48,000,000 $47,100,000 respectively in the prior quarter. The increase in quarter over quarter top line investment income was primarily due to the increase in base rates.

Speaker 3

On a per share basis, GAAP net investment income was $0.59 and adjusted net investment income was $0.58 as compared to $0.46 $0.45 respectively, last quarter. As a reminder, Our incentive fee last quarter was elevated due to results from Q1 2020 being removed from the calculation. Those results included the initial impact of COVID-nineteen and meaningfully limited the amount of incentive fees that could be earned during the trailing 12 quarter period. For the current quarter, we saw the inverse effect, which removed the results from Q2 2020, which included the rebound from the impact of COVID-nineteen during the trailing 12 quarter period. Distributions during the quarter remained consistent at $0.45 Our spillover taxable income is approximately $100,600,000 or $0.92 on a per share basis, which we believe provides continued stability on our consistent dividend since inception.

Speaker 3

Net asset value per share on June 30, 2023 was $14.59 as compared to $14.44 last quarter. With that, I'll turn it back to Alex for closing remarks.

Speaker 1

Thanks, David. In conclusion, thank you all for joining us on our call. As mentioned, we're encouraged that new deal activity along with increased repayments will allow us to continue capturing attractive investment opportunities. We appreciate your time and attention today. With that, let's open the line for Q and A.

Speaker 4

Thank you. And we'll go first to Derek Hewett with Bank of America.

Speaker 5

Good morning, everyone, and congrats on the good quarter. Maybe my first question is, could you remind me about the dividend policy, because the core dividend has been flat for quite some time now when most peers Have you increased the dividend to some degree, given the rise of rates? And especially just looking at earnings, You factor in the first half earnings run rate plus the additional tailwinds that you described earlier in terms of accelerating originations, which suggests that this year could be at or near kind of record core earnings.

Speaker 3

Good morning and thanks for the question. As we think about our policy, we like to maintain stability in terms of what our fixed dividend is. So we remained at $0.45 since inception. I think we want to maintain that level of certainty in terms of how our dividend policy does work. In terms of the special, we're taking a long term view of how to manage our balance sheet accordingly, looking at what our spillover is with future run rates, We'll be opportunistic to the extent that it makes sense from a shareholder perspective to potentially issue a special down the road.

Speaker 3

But something that we're evaluating and we'll continue So we assess and what makes the best sense for the balance sheet and shareholders.

Speaker 5

Okay. And then, looking at Slide 7, It looked like there was a significant or somewhat of a sizable move from risk to risk category 3 The prospect of potential further migration to that risk level 4 category.

Speaker 1

Sure. And thanks for the question. So that migration was really driven by a couple of names that were facing some liquidity pressures during the quarter. And we were in active discussions with the sponsors during the quarter. We expect to them to support these companies.

Speaker 1

But because it was unresolved, we thought it was prudent to downgrade those investments from rating category 2 to rating category 3. I think you've gotten to know us. We are quite conservative with respect to how we look at our ratings categories. And so as soon as those Those situations are hopefully resolved shortly. We'll reflect them appropriately.

Speaker 5

Okay. And then my last question is just in terms of the pipeline. How would you describe it just in terms of the yield and leverage turns Relative to the existing portfolio, it seems like the terms are even more attractive Today than what you currently have in your legacy book.

Speaker 1

Yes. Certainly compared to the legacy book, The terms that we're seeing today are very attractive in comparison. The average spreads that we're seeing right now in the private credit market still are in the 600s. We have seen some spread compression quarter to quarter, just given the supply demand dynamics in the private credit market. But having said that, leverage levels are still lower versus the legacy book.

Speaker 1

As you saw, the leverage levels And that's really driven by the higher borrowing costs that sponsors face with the portfolio companies. And so having said that, the overall yields are quite attractive The legacy book, which is why we're very excited about our position right now where we've created capacity To make new investments in the current environment, as you saw, we saw an increased level of repayment activity in the quarter, And we have visibility into a significant amount of repayments that are coming already due to announced activity. You can probably see that and the increased number of companies that we put into reading Category 1. And so we're going to be able to repay those legacy investments And reinvest them into much more attractive yielding opportunities.

Speaker 2

And on top of that, I would just add that we're seeing the pipeline pick up pretty dramatically when you Particularly at the end of Q2 going into Q3, our pipeline has picked up, activity is picking up. So we're seeing a number of very attractive investment To reinvest that capital into as we look forward over the quarter.

Speaker 5

Okay. Thank you.

Speaker 1

Thank you.

Speaker 4

We'll go next to Maxwell Futcher with Truist Securities.

Speaker 6

Good morning. I'm calling in today for Mark Hughes. I had a broad question about just the Credit Facility. I was wondering what your experience has been recently with lenders and if you've noticed that any banks have Increased or maintained their appetite towards living to BDCs.

Speaker 3

Yes. And good morning. Thank you for the question. As it relates to our facility, we kind of and how we think about it, we have a wide underlying book in terms of who's involved in Our credit facilities, we've had across our platform 4 different launch corporate revolvers all leading with the same bank and then repeat syndicate banks that are associated with it. So we've been fostering a long term relationship across the board and continue to have the active dialogue and relationships with them that allow us to have active and continued dialogue with our financing providers and feel pretty comfortable with who we're using and Who's involved with our platform.

Speaker 6

Thank you. And for the weighted average Interest coverage ratio, I

Speaker 7

think you mentioned it was

Speaker 6

for the portfolio companies 1.6 times. I was wondering if you could provide the percentage of the companies that were under one times the interest coverage ratio.

Speaker 3

Yes. And for Burt, we did average it was roughly 3%.

Speaker 6

Okay. Thank you. That's all I have.

Speaker 4

We'll go next to Sean Paul Adams with Raymond James.

Speaker 7

Hey, guys. Good morning. I apologize if this is already said. I joined the call a little bit late, but could you guys shed a little bit of light on The percentage of your portfolio and the total number of companies that have been interest coverage trading below 1x and generally your views on interest coverage as the rate environment continues to trend higher.

Speaker 3

Yes. So for your first part of the question, under 1 is roughly around 3%.

Speaker 2

Yes. On the second part, just interest coverage has remained stable. It's right out 1.6 times, which was flat with the prior quarter. And part of that's driven by the way we calculate it, which is current quarter. So we wouldn't expect much change on a going forward basis from an interest coverage perspective.

Speaker 2

That's also in conjunction with and you take a look at the underlying portfolio companies, they continue to grow both top on a quarter over quarter basis to support increased borrowing costs.

Speaker 4

And at this time, there are no further questions.

Speaker 1

Thank you everyone for joining our call and have a great weekend.

Speaker 2

Thank you everyone.

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Key Takeaways

  • Net investment income per share was $0.59 in Q2, a 28.3% increase quarter-over-quarter, with an adjusted annualized yield on book value of 15.9% reflecting higher base rates.
  • Goldman Sachs BDC declared its 34th consecutive quarterly dividend of $0.45 per share, payable on September 30, 2023, underscoring the company’s commitment to distribution stability.
  • Net asset value rose to $14.59 per share, driven by investment income growth and modest unrealized gains, while the portfolio remained high quality with 92.6% first-lien senior secured loans.
  • The firm originated $86 million in new first-lien commitments during Q2 and realized $24.9 million in repayments, leveraging additional capacity from the March equity offering and an active pipeline of refinancing and sponsor-led transactions.
  • Credit metrics remained solid with a net debt-to-equity ratio of 1.2x (below the 1.25x target), a weighted average net debt/EBITDA of 5.9x, interest coverage of 1.6x, and non-accruals at 0.8% of fair value.
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Earnings Conference Call
Goldman Sachs BDC Q2 2023
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