Goldman Sachs BDC, Inc. (NYSE:GSBD) Q4 2022 Earnings Call Transcript

Goldman Sachs BDC, Inc. (NYSE:GSBD) Q4 2022 Earnings Call Transcript February 24, 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. Fourth Quarter and Year-end 2022 Earnings Conference Call. 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 home page of our website at www.goldmansachsbdc.com, under the Investor Relations section, 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 annual report on Form 10-K filed yesterday with the SEC. This conference call is being recorded today, Friday, February 24, 2023, for replay purposes. I’ll now turn the call over to Alex Chi, Co-Chief Executive Officer, Goldman Sachs BDC.

Alex Chi : Thank you, Austin. Good morning, everyone, and thank you for joining us for our fourth quarter and year-end 2022 earnings conference call. I’m here today with my Co-Chief Executive Officer, David Miller; Gabriella Skirnick, our Chief Operating Officer; and David Pessah, our Chief Financial Officer. I’ll begin the call by providing a brief overview of our fourth 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 finally, we’ll open the line for Q&A. So with that, let’s get to our fourth quarter results. We recorded a strong quarter of earnings with net investment income per share of $0.66.

Excluding the impact of asset acquisition accounting, in connection with the merger with MMLC, adjusted net investment income for the quarter was $0.65 per share equating to an annualized net investment income yield on book value of 17.8%. As was the case last quarter, the increase in returns is largely a reflection of the increase in base rates during the quarter. For the year, we paid out $1.80 per share in dividends as compared to adjusted net investment income of $2.11 per share, which equates to a 117% coverage ratio for the fiscal year. As we announced after the market closed yesterday, our Board declared a $0.45 per share dividend payable to shareholders of record as of March 31, 2023. This marks the company’s 32nd consecutive quarter of a $0.45 per share dividend, totaling $14.40 per share since our IPO, excluding the special dividends we paid in 2021 post the merger with MMLC.

Net asset value per share decreased to $14.61 per share as of December 31, a decrease of approximately 2.7% from the end of the third quarter. This decrease was primarily attributable to unrealized losses in more junior non-first lien positions. On a fair value basis, first lien loans are 92.6% of assets as of December 31 versus 91.7% as of the end of the third quarter, which leaves us well positioned to withstand potential headwinds in the current market environment. In addition, we have an emphasis within our pipeline on sourcing first lien senior secured investments. This quarter, we focused more on add-on activity, taking advantage of our incumbent portfolio positions as overall deal volumes remained relatively muted. We also continue to remain dedicated to directly originated private credit opportunities and have not participated in the secondary market for broadly syndicated loans.

Lastly of note, we’re particularly excited to enhance our platform capabilities through the recent exemptive relief that was granted by the SEC on November 16, 2022. This approval expands our existing exemptive relief to further benefit GSBD, which can now invest alongside the Goldman Sachs balance sheet in additional senior credit vehicles on the Goldman Sachs private credit platform. We believe that this development enhances the overall origination platform as a key solutions provider to companies and sponsors. With that, let me turn it over to my co-CEO, David Miller.

David Miller : Thanks, Alex. During the quarter, we originated $47.9 million of new investment commitments, $33.5 million in new investments to 4 new portfolio companies and $14.4 million of follow-on investments to 3 existing portfolio companies, primarily to finance M&A activity. Our new investment commitments were 100% in first lien senior secured loans. Sales and repayment activity totaled $173.8 million, primarily driven by the full repayment of investments by 4 portfolio companies. Turning to portfolio composition. As of December 31, 2022, total investments in our portfolio were $3.5 billion at fair value, comprised of 97.6% senior secured loans, including 89.3% in first lien, 3.3% first lien last-out unit tranche and 5.0% in second lien debt as well as a small amount of unsecured debt and 2.2% in a combination of preferred and common stock and warrants.

We also had $371.1 million of unfunded commitments as of December 31, bringing total investments at fair value and commitments to $3.9 billion. As of quarter end, the company held investments in 134 portfolio companies operating across 38 different industries. The weighted average yield of our investment portfolio at cost at the end of Q4 was 11.0% as compared to 9.9% from the prior quarter. The weighted average yield of our total debt and income-producing investments at amortized cost increased to 11.7% at the end of Q4 from 10.4% at the end of Q3. Turning to credit quality. The weighted average net debt-to-EBITDA of the companies in our investment portfolio had a slight uptick to 6.1x at quarter end from 6.0x at the end of the third quarter.

This is down from 6.4x for the quarter ended December 31, 2021, which is in line with the decline in leverage we’re seeing across the private credit space due to higher base rates that companies face. This is importantly, and in response to questions some of you have had in regard to macro headwinds over the last few quarters, our portfolio companies had both top line and EBITDA growth on a year-over-year and quarter-over-quarter basis. Deal activity was muted through Q4 as M&A volumes slowed for the calendar year. We expect M&A to pick up marginally as sponsors have record amounts of dry powder and are becoming more comfortable with the current macro environment. This should provide a tailwind for pipeline activity. While muted, we’ve seen increased activity where we are the incumbent lender with strong lean in via our investment banking funnel as public credit markets remain turbulent, thereby increasing the opportunity set for private lenders.

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 first lien credit risk. The weighted average interest coverage of the companies in our investment portfolio at quarter end was 1.6x versus 1.8x in the prior quarter. It’s important to note that we calculate our coverage ratios based on the current quarter metrics rather than on a trailing or LTM basis. Were we to use the LTM calculation, then our coverage ratio of the companies in our investment portfolio would be 2.3x. And finally, turning to asset quality. As of December 31, 2022, investments on nonaccrual status amounted to 0.3% and 2.1% of the total investment portfolio at fair value and amortized costs, respectively.

Importantly, the slight increase in nonaccruals is primarily attributable to 1 junior nonfirst lien position. I will now turn the call over to David Pessah to walk through our financial results.

David Pessah : Thank you, David. We ended the fourth quarter and year ended 2022 with total portfolio investments at fair value of $3.5 billion, outstanding debt of $2 billion and net assets of $1.5 billion. Our ended net debt-to-equity ratio decreased to 1.32x from 1.34x last quarter, which is slightly above our target level of 1.25x. Our targeted leverage portfolio remains the same as we expect our leverage metrics to come down as repayments pick up with an expected increase in M&A activity in the back half of this year. At quarter end, 43% of the company’s total principal amount of debt outstanding was in unsecured debt and $548.7 million of capacity was available under our secured revolving credit facility. 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 MMLC. These non-GAAP measures remove the purchase discount amortization impact from our financial results. For Q4, GAAP and adjusted after-tax net investment income was $67.6 million and $66.6 million, respectively, as compared to $61.2 million and $56.7 million, respectively, in the prior quarter. The increase in quarter-over-quarter GAAP net investment income was primarily due to the increase in benchmark rates. Moreover, the NII was also enhanced by our policy of limiting incentive fees due to unrealized losses resulting from markdowns. On a per share basis, GAAP net investment income was $0.66, and adjusted net investment income was $0.65 as compared to $0.60 and $0.56, respectively, last quarter.

Our spillover taxable income is approximately $87 million or $0.84 on a per share basis, which we believe provides continuous stability on our consistent dividend since inception. Distributions during the quarter totaled $0.45. Net asset value per share on December 31, 2022, was $14.61 as compared to $15.02 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. While we think the environment ahead may exhibit further volatility, we are confident that our unique and differentiated private credit platform at Golden Sachs will continue to provide attractive investment opportunities for GSBD in the quarters ahead as we maintain our focus on the portfolio. We appreciate your time and attention today. With that, let’s open the line for Q&A.

Q&A Session

Operator:

Operator: There are no questions at this time.

Austin Neri: All right. Thank you very much for your support. Look forward to next quarter.

Alex Chi : Thank you.