Goldman Sachs BDC, Inc. (NYSE:GSBD) Q2 2023 Earnings Call Transcript August 4, 2023

Austin Neri: Good morning. This is Austin Neri, 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. Second Quarter 2023 Earnings Conference Call. Please note that all participants will be in listen-only mode until the end of the call when we open up the line for questions. 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 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 home page of our website at www.goldmansachsbdc.com, under the Investor Relations 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, Friday, August 4, 2023, for replay purposes. I’ll now turn the call over to Alex Chi, Co-Chief Executive Officer of Goldman Sachs BDC, Inc.

Alex Chi: Thank you, Austin. Good morning, everyone, and thank you for joining us for our second quarter 2023 earnings conference call. I’m here today with David Miller; my Co-Chief Executive Officer; Tucker Greene, our Chief Operating Officer; and David Pessah, our Chief Financial Officer. I’ll begin the call by providing a brief overview of our second 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 Pessah to take us through our financial results. And then finally, we’ll open the line for Q&A. So with that, let’s get to our second 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. 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, 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 first quarter.

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, first 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. This quarter, we continue to invest only in directly originated first lien senior secured debt with no participation in the secondary market for broadly syndicated loans. In the first quarter, we expressed confidence that we will see increased deal volumes as the year progresses with visible green shoots in M&A markets, a resurgence of take privates and refinancings, as sponsors reengage private markets to address upcoming maturities.

During the second quarter, 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. In 2021, our initial investment was repaid as part of a broader recapitalization of the company in which GSBD participated. GSBD participated again in the company’s most recent $1 billion 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.

Fullsteam 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 second quarter, where the Goldman Sachs private credit platform had an existing common position, and GSBD was able to participate in financing the buyout of the business by a new financial sponsor. 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 second quarter. 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’s grown to more than $1 trillion of dry powder.

So with that, let me turn it over to my Co-CEO, David Miller.

David Miller: Thanks, Alex. During the quarter, we originated 86.0 million in new investment commitments to four new and five existing portfolio companies. Our new investment commitments were 100% in first lien senior secured loans. Sales and repayment activity totaled 24.9 million, primarily driven by the full repayment of investments in two 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. Two of these will further reduce our junior lien positions currently in the portfolio, and more importantly, allow us to redeploy capital in a 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 3.6 billion at fair value, comprised of 97.5% senior secured loans, including 89.3% first lien, 3.3% in first lien/last-out unitranche and 4.9% in second lien debt, as well as a negligible amount of unsecured debt, and 2.3% in a combination of preferred and common stock and warrants. We also had 366.1 million of unfunded commitments as of June 30, 2023, bringing total investments at fair value and commitments to 3.9 billion. As of quarter end, the company held investments in 135 portfolio companies, operating across 36 different industries. 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 costs 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 5.9x compared to 6.0x in the first quarter. Given the level of existing base rates, we would anticipate that future originations and transactions should reflect lower leverage metrics. 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 in capital deployment that is insulated by our orientation to first lien credit risk. The weighted average interest coverage of the companies in our investment portfolio at quarter end was 1.6x, which was flat yet again as compared to Q1 ’23 and Q4 ’22, despite an increase in the overall SOFR [ph] 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 1.9x. And finally, turning to asset quality. As of June 30, 2023, despite two positions that were designated as grade 3 last quarter being placed on an accrual during Q2, investments on non-accrual status amounted to 0.8% and 1.8% of the total investment portfolio at fair value and amortized costs, respectively, versus 0.6% and 1.6% at fair value and amortized costs, respectively, as of March 31, 2023.

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

David Pessah: Thank you, David. We ended the second quarter of 2023 with total portfolio investments at fair value of 3.6 billion, outstanding debt just under 2 billion and net assets of 1.6 billion. Our ending net debt to equity ratio at the end of Q2 remained at the same level of 1.2x, which continues to be below our target leverage range of 1.25x. At quarter end, approximately 44% of the company’s total principal amount of debt outstanding was in unsecured debt, and had 595 million of capacity available under our 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.

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 removed the purchase discount amortization impact from our financial results. For Q2, GAAP and adjusted after-tax net investment income were 64.5 million and 63.1 million, respectively, as compared to 48 million and 47.1 million, respectively, in the prior quarter. The increase in quarter-over-quarter top line investment income was primarily due to the increase in base rates. 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 and $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-19 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-19 during the trailing 12-quarter period. Distributions during the quarter remain consistent at $0.45. Our spillover taxable income is approximately 100.6 million or $0.92 on a per share basis, which we believe provides continuous stability on our consistent dividend since inception. Net asset value per share on June 3, 2023 was $14.59 as compared to $14.44 last quarter.

With that, I’ll turn it back to Alex for closing remarks.

Alex Chi: Thanks, David. In conclusion, thank you all for joining us on our call. As mentioned, we’re encouraged the 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&A.

Q&A Session

Operator: Thank you. [Operator Instructions]. And we’ll go first to Derek Hewett with Bank of America.

Derek Hewett: 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 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? It would suggest that this year could be at or near kind of record core earnings.

Alex Chi: 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’ve 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, and will be opportunistic to the extent that it makes sense from a shareholder perspective to potentially issue a special down the road, but something that we’re evaluating and we’ll continuously assess and what makes the best sense for the balance sheet and shareholders.

Derek Hewett: Okay. And then, looking at Slide 7, it looked like there was a significant or somewhat of a sizable move from risk 2 versus category 3 at least on a quarter-over-quarter basis. Could you talk about that migration and the prospect of potential further migration to that risk level 4 category?

Alex Chi: 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 them to support these companies. But because it was unresolved, we thought it was prudent to downgrade those investments for meeting category 2 to category 3. And I think you’ve gotten to know us, we were quite conservative with respect to how we look at our ratings categories. So as soon as those situations are hopefully resolved shortly, we’ll reflect on them appropriately.

Derek Hewett: 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 terms relative to the existing portfolio? It seems like the terms are even more attractive today than what you currently have in your legacy book.

Alex Chi: Yes. Certainly, compared to a 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 is still on 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, as you saw the leverage levels continue to tick down. And that’s really driven by the higher borrowing costs that sponsors face with their portfolio companies. And so having said that, the overall yields are quite attractive versus 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 payment activity in the quarter. And we have visibility into a significant amount of repayments that are coming already due to enough activity. You can probably see that from the increased number of companies that we put into rating category 1. So we’re going to be able to repay those legacy investments and reinvest them into much more attractive yielding opportunities.

David Miller: And on top of that, I would just add that we’re seeing the pipeline pick up pretty dramatically. Particularly at the end of the second quarter going into the third quarter, our pipeline has picked up, activity is picking up. So we’re seeing a number of very attractive investment opportunities to reinvest that capital into as we look forward over the quarter.

Derek Hewett: Okay. Thank you.

Alex Chi: Thank you.

Operator: We’ll go next to Maxwell Fritscher with Truist Securities.

Maxwell Fritscher: 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?

Alex Chi: 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 four 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 financial providers and feel pretty comfortable with who we’re using and who’s involved with our platform.

Maxwell Fritscher: Thank you. And for the weighted average interest coverage ratio that you mentioned for the portfolio companies 1.6x. I was wondering if you could provide the percentage of the companies that were under 1x the interest coverage ratio.

Alex Chi: Yes. And for weighted average, it was roughly 3%.

Maxwell Fritscher: Okay. Thank you. That’s all I have.

Operator: We’ll go next to Sean-Paul Adams with Raymond James.

Sean-Paul Adams: Hi, guys. Good morning. I apologize if this is already said. I joined the call a little bit late. But can you guys shed a little bit of light on the percentage of your portfolio and the total number of companies that have an interest coverage trading below 1x, and generally your views on interest coverage as the rate environment continues to trend higher?

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

David Miller: On the second part is the interest coverage just remained stable, it’s right at 1.6x which was flat with the prior quarter. And part of that is driven by the way we’ve calculated, which is current quarter. So we wouldn’t expect much change on a going forward basis from an interest coverage perspective. That’s also in conjunction if you take a look at the underlying portfolio companies, they continue to grow both top line and EBITDA on a quarter-over-quarter basis to support increased borrowing costs.

Sean-Paul Adams: Got it. Thank you. I appreciate it.

Alex Chi: Thank you.

Operator: And at this time, there are no further questions.

Alex Chi: Thank you, everyone, for joining our call, and have a great weekend.

David Miller: Thank you, everyone.