Goldman Sachs BDC, Inc. (NYSE:GSBD) Q4 2023 Earnings Call Transcript

Goldman Sachs BDC, Inc. (NYSE:GSBD) Q4 2023 Earnings Call Transcript February 29, 2024

Goldman Sachs BDC, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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 2023 Earnings Conference Call. Please note that all participants will be in a listen-only mode until the end of the call when we will 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 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 close, 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 annual report on Form 10-K filed yesterday with the SEC. This conference call is being recorded today, Thursday, February 29, 2024, for replay purposes. I will 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 fourth quarter and 2023 fiscal year-end earnings conference call. I’m here today with David Miller, our Co-Chief Executive Officer; Tucker Greene, our Chief Operating Officer; and Stan Matuszewski, our Chief Financial Officer. I’ll begin the call by providing an update on the Goldman Sachs private credit platform before providing a brief overview of our fourth quarter results and then discuss the current market environment in more detail. I’ll then turn the call over to David and Tucker to describe our portfolio activity and performance before handing it off to Stan, to take us through our financial results. And then finally, we’ll open the line for Q&A.

So with that, I’d like to provide a brief update of the Goldman Sachs private credit platform and the positive impact on GSBD of being part of it. We are proud to announce that next week marks the second anniversary of our platform integration process. This endeavor brought all of Goldman Sachs’ private credit origination and underwriting capabilities as well as various pools of capital with track records that stretch back over 28 years under a single roof within our asset management business. As you may recall, historically, our BDC complex, including GSBD, operated as a separate and distinct platform on the public side of the house that was walled off from the rest of the firm and could not take full advantage of being part of the Goldman Sachs ecosystem.

In these two short years, GSBD has been able to take advantage of the full origination capabilities of the broader private credit platform and its scale, enhance our infrastructure and improve upon our underwriting capabilities. I’d like to highlight a few examples. Amidst the volatile market and muted deal environment, the Goldman Sachs private credit platform remained active deploying $12 billion in 2023. The Direct Lending Americas platform comprised the majority of activity with over $6 billion deployed. Furthermore, taking advantage of the broader scale and origination capabilities, GSBD served as agent or lead lender and well above the majority of its new deals in 2023. Second, the team has spent the past two years actively upgrading GSBD’s portfolio quality.

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Q&A Session

As a point of reference, in the fourth quarter of 2021, just prior to the integration, GSBD had 89.3% at fair value and first lien senior secured loans, whereas as of the fourth quarter of 2023, that figure stood at 95.3% at fair value. At the same time, in the fourth quarter of 2021, second lien loans comprised 8.2% of the portfolio at fair value versus the fourth quarter of 2023 where second liens made up only 1.9% at fair value. This is a result of actions we discussed in previous quarters, whereby repayments and junior lien positions have allowed us to redeploy capital into attractive opportunities, higher up in the capital structure, and we proactively took marks on legacy junior positions. Finally, our integration has allowed for the significant expansion of our overall deal funnel to provide more proprietary and unique direct lending opportunities for GSBD.

For example, since 2004, Goldman Sachs private credit has been the leading lender to the middle market wireless tower sector, deploying close to $7 billion of capital with no losses to date. During the quarter, the Goldman Sachs private credit platform served as a lead arranger on a senior secured facility to Skyway. Founded in 2005, Skyway is a Florida-based wireless tower operator with 445 towers in its portfolio. The facility continues a longstanding Goldman Sachs relationship with the Skyway team, which began with the financing of the Skyway’s first portfolio in 2011 before its sale to American Tower, followed by the financing of multiple subsequent tower portfolios, including the current one. This is but – one example of a new set of investment opportunities made available to GSBD, resulting from our integration efforts.

Harrington is another example of an investment in the quarter where GSBD utilized the scale of the broader senior direct lending platform to provide a commitment for the entire facility that allowed the sponsor to win the asset, and we served as lead arranger. Harrington is a California-based specialty distributor of precision fluid control products across a variety of industry sectors. We are proud that we’ve been able to capitalize on the thesis that we communicated to our shareholders and lenders when we integrated GSBD, and we remain committed to leveraging the broader private credit platform for the benefit of GSBD shareholders in the quarters and years ahead. As we announced after the market closed yesterday, our Board declared a first quarter $0.45 per share dividend payable to shareholders of record as of March 28, 2024.

This marks the company’s 36th consecutive quarter of a $0.45 per share dividend totaling $16.20 per share since our IPO, excluding the special dividends we paid in 2021 post the merger with MMLC. Net asset value was $14.62 per share as of December 31, 2023. This increase was primarily attributable to net investment income exceeding our quarterly dividend, partially offset by net realized and unrealized losses for the quarter. We had previously expressed confidence that deal volumes would increase as the year progressed and the trend indeed continued in the fourth quarter as it did in the third quarter. During the fourth quarter, we reviewed more than 150 investment opportunities across our direct lending Americas platform and deployed capital at strong levels, as David will expand upon in a bit.

While we acknowledge that recent deal volumes have improved from recent lows in the past several quarters, we’ve also witnessed greater competition in the direct lending space, resulting in spread tightening over the past several months. We anticipate that as the overall deal environment improves, supply demand for private credit will align to support spread premiums and tighter lending terms in line with historical private credit underwriting experience. At the same time, it’s worth considering that while the broadly syndicated loan market has also reopened, although primarily for near-term refinancings, this is a dynamic that’s more impactful to the upper middle market to larger cap segments whereas GSBD is more focused on the core of the middle market.

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

David Miller: Thanks, Alex. During the quarter, we originated $166.2 million in new investment commitments to 14 new and four existing portfolio companies. Sales and repayment activity totaled $224 million, primarily driven by the full repayment and exit of investments in seven portfolio companies. In particular, as we continue to upgrade the quality of the portfolio, we are pleased with the full repayment of one junior lean position, an exit of two equity positions, which will allow us to continue redeploying capital into new first lien-oriented opportunities. Turning to portfolio composition. As of December 31, 2023, total investments in our portfolio were $3.4 billion at fair value, comprised of 97.2% in senior secured loans, including 91.1% first lien, 4.2% first lien last out unit tranche and 1.9% in second lien debt as well as a negligible amount in unsecured debt and 2% in a combination of preferred and common stock and warrants.

As of quarter end, the company held investments in 144 portfolio companies operating across 38 different industries. The weighted average yield of our investment portfolio at cost at the end of Q4 was 11.8% as compared to 11.6% from the prior quarter. The weighted average yield of our total debt and income-producing investments at amortized cost remained at 12.6% at the end of Q4. I will now turn the call over to Tucker Greene to discuss our overall credit quality.

Tucker Greene: Thank you, David. The weighted average net debt-to-EBITDA of the companies in our investment portfolio increased to 6.1x from 5.9x during the third quarter. This increase is primarily attributable to a single position that had a dip in EBITDA, which we believe is one-time in nature. Excluding this one-time move, weighted average net debt-to-EBITDA would have been 5.9x. Importantly, our portfolio companies have both topline growth 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 remained flat at 1.5x as SOFR rates decreased very slightly for the quarter. We continue to monitor interest coverage sensitivity at underwrite for new investments and for each name in the portfolio.

The underlying borrowers EBITDA growth, combined with lower rate increases has provided stability to the coverage ratio. And finally, turning to asset quality. As of December 31, 2023, one portfolio company was placed on non-accrual status, LCG Vardiman Black, LLC, also known as specialty dental, a first lien position, representing less than 1% of fair value. Further, certain investments in three portfolio companies were removed from non-accrual, two of which were due to repayment and one due to improvement in performance. As of December 31, 2023, investments on non-accrual status remained consistent at 2.3% of the total investment portfolio at fair value compared to 2.3% as of September 30, 2023, and decreased to 3.8% of the total investment portfolio at amortized cost from 4.2% as of September 30, 2023.

With respect to underperforming credits in the portfolio, it is worth noting that our upgraded platform also includes embedded workout resources and expertise to address the aforementioned underperforming credits that were predominantly originated prior to the integration. Of note, our restructuring team currently has an average of 13 years of industry workout experience. Now I will now turn the call over to Stan Matuszewski to walk through our financial results.

Stanley Matuszewski: Thank you, Tucker. We ended the fourth quarter of 2023 with total portfolio investments at fair value of $3.4 billion, outstanding debt of $1.8 billion and net assets of $1.6 billion. Our ending net debt to equity ratio as of the end of Q4 was 1.11x, which continues to be below our target leverage of 1.25x. At quarter end, approximately 47% of the company’s total principal amount of debt outstanding was in unsecured debt, and we had $724 million of capacity available under our secured revolving credit facility. As previously mentioned, during the quarter, we executed an extension of the maturity of our secured revolving credit facility from May 2027 to October 2028. As a reminder, we have two separate unsecured notes due February 2025 and January 2026, respectively.

As we mentioned on last quarter’s call, 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 will 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 were $61.8 million and $60.7 million, respectively, as compared to $72.9 million and $69.7 million, respectively, in the prior quarter. On a per share basis, GAAP net investment income was $0.56. Excluding the impact of asset acquisition accounting in connection with the merger with MMLC, adjusted net investment income for the quarter was $0.55 per share, equating to an annualized net investment income yield on book value of 15%.

Importantly, we would note that while total investment income declined between the third and fourth quarters, the decline was driven by lower non-recurring investment income, resulting from a decrease in repayment-related activity despite an increase in recurring investment income. Finally, the PIK percentage of our total investment income decreased slightly quarter-over-quarter and is only slightly up year-over-year, remaining in the single digits. Distributions during the quarter remained consistent at $0.45 per share. Our spillover taxable income is approximately $118 million or $1.08 per share on a per share basis, which we believe provides continued stability on our consistent dividend since inception. As Alex mentioned, net asset value per share on December 31, 2023, was $14.62 as compared to $14.61 last quarter.

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

Alex Chi: Thanks, Stan, and thanks, everyone, for joining our earnings call. We remain optimistic about the performance of our portfolio, the current environment and outlook for deployment into attractive opportunities. With that, let’s open the line for Q&A.

Operator: [Operator Instructions] We will go first to Finian O’Shea with Wells Fargo Securities.

Finian O’Shea: Hey, everyone. Good morning. Alex, we were interested on some of your earlier comments on the private credit integration in…

Alex Chi: Operator, could you open the lines for Q&A, please.

Operator: Your line is open, sir.

Finian O’Shea: Hi. Can you hear me?

Operator: I can hear you, sir.

Finian O’Shea: Alex – I can’t hear the Goldman team.

Alex Chi: Operator?

Operator: Yes, I am here. Can you hear me?

Finian O’Shea: I can. It’s Fin. Okay. Can anyone hear me?

Operator: This is operator. Yes, I can hear you, Mr. O’Shea.

Finian O’Shea: But can the team hear me?

Operator: It appears not. Give me just a moment. The host would like you to unmute your microphone. [Operator Instructions]

Finian O’Shea: I don’t think I’m muted.

Operator: You’re not, sir.

Finian O’Shea: Okay.

Operator: The host would like you to unmute your microphone. [Operator Instructions] We can hear you now.

Finian O’Shea: All right.

Alex Chi: Can you hear us?

Operator: Yes, we can hear you now.

Alex Chi: Can you hear us?

Finian O’Shea: All right. Why don’t we start over?

Alex Chi: Sorry about that. We were experiencing some technical difficulties here. Fin, how are you?

Finian O’Shea: Good. Thanks for having me on. And we’ll start the Q&A. So Alex, we were interested in some of your initial comments on the integration there are historically three credit franchises with distinct strategies. So does this mean it’s all collapsed into one strategy now? Or is there – or else, like what’s new about the way the platform works?

Alex Chi: That’s a good question. And again, it’s all part of one platform now. And to your point, just for historical reasons, we had three different arms of Goldman Sachs that were in the private credit direct lending business and then two years ago, we brought it all together. With respect to the various vehicles that we – they continue to pursue their own distinct strategies. So for example, we have other pockets of capital that earned the large-cap senior growth lending space, and that continues. GSBD has and will continue to focus on the core middle market. And then we have other pockets of capital that focus on mez, on hybrid special sits, et cetera. And so it all brings it together. It’s all on the private side here at Goldman.

And so it just allows us to take advantage of the broader ecosystem, as I mentioned, where we can get the full benefit of all the sourcing and the origination and the army of bankers that we have, talking to companies and sponsors every single day, and it just brings a full weight of the firm, and it just allows us to have a wide funnel we’ve talked about proprietary deals and the benefit of just really strong due diligence. At the same time, it’s one team. So we don’t have three different teams. So in the U.S., we have about 80 investment professionals, and they’re all focused on origination and core underwriting. And then when we source a deal, an investment, we know exactly where it’s going to go based upon the various vehicles and the strategies that we have.

So we just want to be a direct lending solutions provider to our borrowing clients.

Finian O’Shea: Sure. How – like within the other strategies, what’s the benefit of like a core middle market deal? How much more capital do you have to say, lead a deal or drive terms and all of the above, like what helps the – go ahead, sure.

Alex Chi: No, it’s a great question. So first of all, what we couldn’t do before was if the large cap pocket of the firm, originated a deal that was call it core GSBD focus area, $50 million of EBITDA. It was just – it was too small for the large cap. We could not refer it to GSBD just even if we wanted to, just weren’t allowed to. So when we obviously collapsed it, GSBD now gets the benefit of that origination. On top of that, as we’ve also talked about, GSBD has its own vehicle as it’s capital, as you know. But when we’re in an increasingly competitive environment, where scale matters, for example, the Harrington deal that I just talked about. We have other pockets of capital that can speak for that deal in its entirety.