Q3 2019 Earnings Call
Good morning. This is the and then I'll be your conference facilitator today I would like to welcome everyone to the Goldman Sachs BDC Inc. third quarter 2019 earnings Conference call. Please note that all participants will be they listen only mode until the end of the coal we will open up the lines for questions.
I'll now turn the call over time as Katherine Schneider head of Investor Relations at Goldman Sachs BDC. Katherine you May begin your conference.
Thanks, Dan Good morning, everyone before I 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 Companys actual result, and financial condition may differ possibly materially from what it indicated in those forward looking statement as a result of a number of factors I.
Including those described from time to time in the company's FCC filings.
That's audiocast is copyrighted material of Goldman Sachs, BDC, Inc. and may not be duplicated reproduced or rebroadcast without our consent.
Yesterday after market close the company issued an earnings press release and posted a supplemental earnings presentation, both of which can be found on the home page ever website at <unk>.
Www Dot Goldman Sachs BDC dotcom under the Investor Resources section.
These documents should be reviewed in conjunction with the company's Form 10-Q filed yesterday with the FCC.
This conference call is being recorded today November eight 2019 for replay purposes.
With that I'll turn the call over the brand the Mcgovern CEO of Goldman Sachs BDC that.
Thank you Catherine.
Good morning, everyone and thank you for joining us for our third quarter earnings Conference call.
As usual in terms of the agenda for the call I'll start by providing an overview of our third quarter results.
And there John your will discuss our investment activity and portfolio metrics before handing over juggling to Scott's rough math results in greater detail and finally I'll conclude with some closing remarks before we open the line for Tonight.
So with that.
Q3, net investment income per share 47 cents was often dividend coverage of 104% and equated to an 11.1% annualized return on common equity.
As we announced after the more close yesterday, our board declared a 45 cents per share dividend payable to shareholders of record as of December 31st 2019.
This equates to a dividend yield of 10.6% based on net asset value per share at the end of Q3.
Moving onto investment activity.
This quarter was characterized by a significant by significant portfolio activity.
And your continued robust private capital markets backdrop, as well solid execution by the team.
During the quarter, we made 173 million or what about some commitments to 10, new portfolio companies and seven existing portfolio companies.
Repayments totaling 241 million driven by the full repayment of loans by nine different portfolio companies.
We pay with nearly one shift on the Q2 any portfolio balance coupled with diversified origination and they love to continue to shape the portfolio composition consistent with previously stated goals.
First we improved the asset mix toward more senior loans.
New originations were comprised almost exclusively a person investments over one third of repayments were in junior capital investments.
As a result, the percentage of personally investments in the portfolio increased to 72% during the quarter, continuing we execution of our strategy to reposition the portfolio into more senior investments and away from junior capital investments.
We're pleased with the pace at which we've been able to execute the strategy.
For context first lien investments were 33% the total portfolio just six quarters ago.
Second we continue to reduce.
Reduce single name concentrations.
This quarter, we received the food payment for older vintage investments.
All these investments were made prior to our receipt of cone that's been Exemptive relief, which now allows us to cross allocate lose across our platform.
As a result these older loans were significantly larger on average than the size of new loans edits that portfolio since we're paying and co investment really.
At the end of Q3, our top 10 investments represented 24%, although total portfolio down significantly from 40% at the end of 2016.
Finally, we believe that it can be this quarter improved overall credit quality.
Lords repayment wasn't NCS communications portfolio copy that we've discussed at length in prior quarters, which was placed on nonaccrual in Q4 2018.
One was repaid this quarter consistent with the Mark we signaled in prior discussions.
Notwithstanding the fact that we chose to turn off the NCS interests are cool a few quarters ago per hour now cool policy do you SPD ultimately already 7% IR and agreed and 1.3 times money multiple on the transaction.
At quarter end, Nonaccruals were just 1% and 1.4% of the tool investment portfolio at fair value and cost respectively.
I read a portfolio company metrics were stable to improved quarter over quarter as measured by the portfolios net debt to EBITDA and interest coverage ratios.
Portfolio yield did come down this quarter consistent with our plan asset mix shift towards senior assets, but exacerbated by concentrated repayments of higher yielding earlier vintage investments in the downward trajectory of LIBOR.
We do see opportunities over time to kind of this dynamic.
Rotating lower yielding assets that we received upon the unwind or senior credit fund into directly originated loans, having higher spreads.
In addition, our success in shifting that portfolio into more first time investments with lesser known in concentration why is the opportunity to move our debt to equity ratio somewhat fire, which should contribute positively to income generation.
Let me turn it over to Johnnie Walker.
Alright, great [noise]. Thanks Brendan.
So the third quarter presented an interesting market backdrop talked to our activities.
In particular treasury yields fell precipitously in August and briefly inverted as trade tensions and evidence of slowing global growth provoked expectations of further rate cuts and a flight to safety.
Broadly syndicated loan markets showed stress in certain industries, which weighed on average bid prices.
Investor sentiment regarding leverage loan markets turn more cautious and loan funds experienced outflows well see a low formation was muted.
In general we think that these developments are healthy and over the long run can lead to increased discipline.
We've been cautious for quite some time and as Brendan mentioned in his remarks, we made the strategic decision early last year to shift the portfolio away from junior debt.
We were very pleased this quarter to get repaid from two of our larger remaining junior debt investments.
This quarter also continued our multiyear effort to enhance the durability of the portfolio by reducing single name concentrations at some of our largest single name positions were repaid.
At the end of the quarter. The average single name position size in our portfolio is just 1% of total assets down from 2.5% prior to implementing our co investment order in January 2017.
In addition, we believe that the some of the origination and repayment activity. This quarter further folks as our portfolio on durable businesses with strong cash flow profiles, which we expect will be resilient. It's the fears that drove market sentiment. This quarter in fact do come to pass.
So, let's turn to some specific activity for the quarter.
New investment commitments in fundings were 172.5 million and 145.5 million, respectively, which include net fundings of six and a half million of previously committed unfunded commitments.
98.7% of new investment commitments were in first lien floating rate debt investments.
These new investment commitments were across 10, new portfolio companies and seven existing portfolio companies.
Sales and repayment activity was elevated as Brendan mentioned.
And was 240.7 million, which was driven by the full repayment of investments in nine different portfolio companies.
Regarding portfolio composition.
At the ended the quarter total investments in our portfolio were 1 billion 430.2 million at fair value.
Comprised of 92.5% senior secured loans, which includes 72.4% in first lien.
2.5% in first lien last out unit tranche and 17.6% in second lien debt as well as half half a percent in unsecured debt and 7% in preferred and common stock.
We also had 93.4 million of unfunded commitments as of September Thirtyth, bringing total investments and commitments to 1 billion $523.6 million.
As of quarter end, the company had 199 investments across 100 into portfolio companies.
The weighted average yield of our investment portfolio at cost at the end of the third quarter was 8.3%.
Down from 8.7% at the end of the second quarter.
The weighted average yield of our total debt in income producing doesn't that cost was 9.1% at the end of the third quarter, that's compared to 9.8% at the end of the second quarter.
This quarter over quarter decline was driven in equal parts by the decline in LIBOR and the exit from some older vintage higher yielding investments during the quarter.
Turning to credit quality.
Formats of our portfolio companies overall was stable to slightly improved quarter over quarter.
The weighted average net debt to EBITDA other companies in our investment portfolio was 5.4 times at quarter end, which is down from 5.5 times at the end of the second quarter.
The weighted average interest coverage of the companies in our investment portfolio.
Was 2.4 times, which was modestly up from the prior quarter at 2.3 times.
I'll now I'll now turn the call over to Jonathan to walk through our financial results.
Thanks, John .
We ended the third quarter of 29 team with total portfolio investments at fair value of 1.430 billion outstanding debt of 732 million and net assets at 685.
Our net investment income per share was 47 cents, which was unchanged from the prior quarter.
Earnings per share were 22 cents is compared to 40 cents in the prior corner.
During the quarter or average debt to equity ratio was 1.22 times versus 1.11 in the prior quarter.
We ended the third quarter with a debt to equity ratio of 1.07 versus 1.22 at the end of Q2.
Much of a repayment activity occurred towards the end of Q3, providing the company with ample available liquidity for reimbursement.
Turning to the income statement.
Our total investment income for the third quarter was 36.9 million, which was down from 38.4 million last quarter.
Well, our average balance of income producing assets were up quarter over quarter. The climate interest income quarter over quarter was largely attributed to lower prepayment related income.
As Brendan mentioned, although we had elevated repayments this quarter relative to prior quarters.
Majority of this quarter's repayments were older vintage loans were prepayment related income protection had already expired.
Additionally, older vintage loans have a lower amount of remaining on amortize discount to be accelerated upon a prepayment.
Total expenses were 17.4 million for the third quarter.
As compared to 18.9 million in the prior quarter.
Expenses were down quarter over quarter, primarily driven by a decrease in incentive fees, which was partially offset by higher interest expenses due to higher average borrowings during the quarter.
We ended Q3 with net asset value per share at $16 immediate sense as compared to 17 21 from the prior quarter.
The company at 48 million and accumulated undistributed net investment income at quarter end.
Resulting from net investment income that has exceeded our dividend.
This equates to $1.18 per share on current shares outstanding.
With that I'll turn it back to Brendan Thanks, Jonathan.
Close in Q3 was a solid quarter for our investors as we continue to produce strong net investment income while simultaneously threatened portfolio attributes in single name diversification and lead type.
We have the company continues to be well positioned for long term take advantage of opportunities and the growing middle market landscape.
As always we thank you for the privilege imagine your capital look forward to continue to work hard on your behalf over the remainder of year without again, let's open up for questions.
Ladies and gentlemen, we will now take them over to compile the kuni roster.
Your first question comes from line Finian O'shea from Wells Fargo Securities.
[laughter] hi, good morning extraordinary.
Just first question.
Towards the end to your remarks.
On the like worse shrunk [laughter].
The impact on the topline machines, so little more.
And then a lot of your peers I know, there's a couple of moving parts there you talked about.
The season Prepays.
But looking at.
More you know you have a pretty.
Pretty [laughter] recent vintage profile so [noise].
Would've thought that.
Floors should be better you know us they've been slowly, but surely trending up [laughter] and you talk about sort of where are you are on the floor side and what you think the next 25 steps has for a topline impact for you.
Yes and.
Yeah, I think the last part of the question what makes the weakness of is that the totality of it. So Jonathan mentioned, if you look at the yield impact this quarter about about half of that was the moving library or.
I would say as a general matter <unk> reasonably consistently the LIBOR floors on the asset side of a portfolio is around one so given where we are a with a with whiteboard today.
I think that next 25 days when would we go because he'd be exposure I think I'd be consistent across all go across much much much would be much of the industry.
Yeah from time to time, you might be able to get one transactions quarter, where we did get one.
At or better for that was the transactions were up by wealth.
Work that we originated but in general I think our profile is going to be consistent with most market participants.
Thank you for the color there [laughter] and on you know you talked a bit about the market opening up then [laughter].
We're certainly hearing that's that's the case, especially on the larger ended up.
Therefore, I'm I'm sure it helps.
Private part of it as a whole in terms of deal flow [laughter], but if you take that backdrop, assuming that sustains for some time.
Alongside your.
Form gross.
Is there a shift and portfolio company.
Sure side that is currently underway or perhaps expected.
What sort of frame do you view.
Your sweet spot no end down the road [laughter] for EBITDA, let's say.
Yes, so thin, obviously really good question, and obviously, you're well into the markets here.
What we are seeing a little bit you're playing out is.
Some of the private credit some opportunities coming for deals that are otherwise would have normally been syndicated.
So I think it's been reported that particularly from lower.
These would garner lower ratings, it typically I'll see having higher leverage profiles and like.
The public capital markets are less accommodating of those types of names.
And so some of those at the moment at least and so I'm a number of those companies are otherwise he couldn't capital in two private private distance.
I think we're monitoring it I don't I don't expect that we're you know we're not went out sort of a leading the charge there or expecting to be particularly active I think what we'd want to see is what's important to us is you know.
You're doing private credit the value proposition that ultimately we're offering to our investors here is that.
Is that this is a.
Higher return lower better credit protection kind of strategies and once you can get in broadly syndicated markets.
So its all the private credit for instance, our game is replicating what otherwise would have been available in the public credit markets in the same sort of covenant light in fairly low spread terms and that doesn't seem like a real value to be adding to our investors.
So I'm not saying that that is what's going on I'm, just saying that that you know until they're strong evidence that you can get really good terms and attractive spreads that are better than what our available in public markets. It doesn't feel like something that we would want to two to stretch into.
For the time being you know, we're pretty focused continuing pretty focus on what we think is the core of the middle market kind of $15 million to $50 million EBITDA business. You look at the you know the though a weighted average EBITDA of our portfolio companies. It's right around 30 $537 million, a kind of right in the middle that range.
Pretty consistent you know, we're not you know quarter over quarter, that's that's kind of where we've been living and so I don't we don't anticipate any change again in less.
Suddenly became obvious that there was a lot of just really attractive better than sort of traditional capital markets execution terms that you can get in larger transactions, but at the moment on I don't know that that's true.
Hi, Thank you for the context, there [laughter] just one more if I may small question offline.
Animal supply that's Oh.
So common stock what part of your fall this quarter Oh, one you know.
Is that.
Broad based I'm, sorry, sorry market valuation based.
Or or companies decline and then second [laughter] that would obviously be Oh, you know.
Accretive or to sort of rotate into earnings so any update on your pathway to to move from from that name or that you're a lot able to provide thanks.
Yeah. So can we get we talk a bunch, but this one and the passage or recent restructuring. So we currently hold a you're really non income producing paper. So would agree a in general with a focus on a on doorbuster rotate that but doing so in a way that can optimize outcomes. We did much support for that pushed down.
A bit this quarter, a I would say that there's a little bit of a a mixed bag.
And there are some industry headwinds with respect to shorten the products at the company is distributing which lowered some some volumes there.
But on the other had I would say we're becoming.
Increasingly excited about potential synergistic.
Opportunity is in terms of industry consolidation, that's taking place here I think you've heard US described that in the past. So your overall continued to remain optimistic in terms of b or the trajectory in the path here and when we look at these type situations. There's the balance as you're describing between you know you know perhaps.
Quickly rotting fish and it's just something that can be more income producing versus optimizing and I think we're quite.
Aware of that and think about that are all the time.
And here I think specifically with us with this investment yeah. We're hopeful that just given some of the industry trends route consolidation or there could be an opportunity, but nothing to report a yet and of course, a if and when there is a will be a fourth right not quite descriptive about that.
Thank you for the color there that's all for me.
And your next question comes from the line of Robert Dodd from Raymond James Robert.
Hi, guys.
[laughter], obviously the rotation you compare in the portfolio like I mean first lien. This is up a lot you've reduced particularly the second lien exposure versus a year ago more yeah, when I look at where the Big mall.
Oh.
So it seemed to be this quarter they seemed to be not surprisingly primarily in the junior side.
Of the portfolio so.
Can you give us any color on how much if any that this adverse selection. Obviously you in the second lien side the ones that are doing relatively well of the easiest ones to encourage to refinance et cetera, et cetera, and the ones that stick with you longer can be more problematic. So could you give us some some color.
On the relative quality of what's left on that you cited the book [laughter], particularly in light of Tomorrow.
This quarter Yeah, no. Robert appreciate the question I think I think fair observation as well when when you look at this at this quarter.
<unk> are terribly large but that yeah. Those are the biggest one was <unk>, which Ah what's your actually describing was earlier benches in 2014 vintage second lien investment that that that we made there and I think wouldn't when do you know that's a company that is yeah. It's a good business that does precision autoparts, it's it's our own.
<unk> auto type exposure. So I think when we look at that business, yeah, what's impacting the Mark and this go around is pretty significant valuation changes taking place in that specific industry.
I wouldn't read anything sort of a that would impact other parts of the investment is very much a function of other specific industry that that that company sits within a and the other together or the other bipartisan, which and secondly in which took mark. This quarter is a is that that's one it's actually bigger company, we look at that business there's been.
Yeah, I'd say some management missteps the fundamental value proposition for the business. It's it's basically branded cleaning supplies, yeah pretty pretty stable market trends and a little bit of some a a management missteps round or a salesforce reorganization nothing I think it that's going to permanently impact the the earnings profile.
Oh that business and we're looking at things you know stabilizing there. It's also yeah.
A a little bit of an unusually large in terms of the size of the business <unk> to the company is on the bigger and end of the scale, we actually knew that company through our senior credit fund.
You'll go going back a ways and opted to move into the second lien.
More opportunistically and I would say, that's one where you know we look at that position, it's Mark I'm, a you know where it where it is but longer term, yes. So optimism with respect to the final outcome for that investment I don't think Robert there's there's much more across the portfolio that we would point you to it and in fact, it and John mentioned this in his prepared.
Remarks, much of our repayment activity. This quarter was in some of those older vintage Secondly investments I'm you know that goes for example, with would be would be one that comes mine. So we're actually quite please when you look at the sort of the quarter over quarter, you'll portfolio quality. So on one hand as.
You talked about in the discussion improving mean type a significantly also improving the overall portfolio concentration and also at the same time many of those older benches investments were actually repaid and into a pretty significant degree this quarter. So in other words, you had the vintage and the the cleanliness. If you will have the existing portfolio.
So it still feels like good about okay got it I appreciate the color that and then if I can own on kind of he just I didn't quite a question about your pipeline because if I look at obviously you know a lot of the repayments. It could end up late in the quarter, So you're starting off the fourth quarter with with a yeah.
Well the earnings run rate add on to that libel add on to that but hypothetically. If any if he is stable this quarter incentive fees, a higher and it looks like you know he may be in a position where wet and <unk> earnings perhaps wouldn't covered the dividend in the fourth quarter based on the.
Oh, sorry at the end of the third quarter. So can you give us any color on on.
That said the pipeline and the ramp right to get the portfolio size back up to your point lower yield more leverage et cetera, I mean, I don't think that's any long term.
My view questions about your ability to run it but once again Uh huh.
Well, we're certainly got stuck in this projection Robert about that's where we'll be happy to have sat with that with unions team on lot of questions offline on that being said you're getting the portfolio optimized phone calculation perspective is not something we've got a lot of concerned with a the pipeline continues to be quite good again, we feel good that commentary there.
Quarter in terms of the portfolio activity you a highly highly diversified and 10 portfolio companies into the book a this quarter.
I didn't hear from a lot of other management teams most of what they're doing is a follow on two different portfolio companies, we get some of that benefit, but we've been a bit more skewed towards would go towards new deals, which augurs well for the continued growth in the business I think I think speaks well of just a our positioning within the market. So in terms of all the variables that that that sort of.
Go into a you know the the net missing coming at the end of the day or you know getting the portfolio ramped relatively unequivocal it balances out one we have pick or was that.
Okay I appreciate it thank you.
[noise].
And your next question comes from the line of Dershowitz from Bank of America Merrill Lynch.
Good morning, everyone.
Circling back to M.P.I. products.
And given that it's a us it seems to be a sector specific issue or will this be rolling off the books shortly given the near term maturity or will be investment need to be restructured over the next two to three months.
Yes, so as we as we mentioned you know dart. The you know it's a fluid situation right now the company is in a sale process as I mentioned when when you. When you look at the Mark today, I think what where it what we're looking at his industry valuations are in particular coming from coming down quite quite dramatically. So in terms of the reads of outcomes.
It could be a full repayment it could be a partial repayment it could be a variety of different a a different outcomes, but I think specific to the sector commentary a in any of that you were talking about quite quite small exposure. A we had one other a company that was that was your lives the ought to industry that would repeat this quarter.
Ah yes, even if this one continues to be part of the exposure it would be literally the only a exposure in the sector and would be quite quite small I think as a general matter. When you do look at that where we do have most of the capital. It certainly is away from a more cyclical more capital intensive more industrial type of businesses and much more focused on.
Areas like health care Health care I see a there's a services technology, which is exactly where we want to be based on where we are within the overall economic cycle and as you heard you know really has been a focus for us in terms of active repositioning to get to get to where we are.
Okay. Thank you and then could you provide a little bit more color on the yield I realize roughly 50 50.
A percent of does have a 70 basis point decline was due to lower benchmark rates in an older vintage loans, but at this point will be yield to trend a little more closely to benchmark rates or could we see additional pressure.
Due to further portfolio rotation from.
Older vintage investments.
Derek though so I don't think that so if you look at the totality of kind of where our portfolio looks like today remember one of the big driving factors on the topline is that we brought on balance sheet all of the lower yielding loans that used to be in art in our joint venture our senior credit fund.
And if you remember that the strategy in that joint venture was upper middle market. It was not our directly originated deals. It was like near NIM, mostly narrowly syndicated type deals that generally keane with lower spreads and so if you look at the you know the average yield at cost from that legacy not you know that that.
Portfolio from something that we took on its you know just under 8% I.
I think compare that to what we are originating today and we've been pretty consistent in recent quarters. It being just right around 9% in terms of the yields on the direct originations that we do on balance sheet I think one of the opportunities that we have and that you know and you've seen us execute on is no two to rotate some of those senior they then the old senior.
Our to fund assets into higher yielding directly originated deals.
So yeah, we think that's a pretty powerful sorta toggle that we have here to cite any further decreases in rate should they come to pass obviously the rate environment has been fluid at the moment it feels a bit more stable, but but obviously you know I think things can change as they have been throughout the course of the here.
So I don't I don't think that broadly speaking.
You know, we feel like well I should say broadly speaking, we do feel like there are opportunities to to maintain its attractive topline here.
Even in the face of.
Potentially further declines in rates and the only I'd add dark two to one specific part of your question with respect to the Prince Rupert for future repayments of someone's earlier, but since investments I think when you look at our at or after like and we look at this quarter I think I think you'll see that there's there's not a time exposure remaining and so we wouldn't it.
Expect there to be that continued trend of getting repaid or out of some of those are some of those earlier a much higher yielding deals I think we borne the brunt of that at this at this point I think it examination of our as to why would that would would show that got quite clearly.
Okay, great. Thank you very much.
And.
At this time there are no further questions. Please continue with any closing remarks, well. Thanks again and thank you of course, everyone for joining us but for this up with this conference call as always if you have any additional questions. Please don't hesitate to reach out directly to the management team here a enjoy your weekend. Thank you.
Ladies and gentlemen, this does conclude the Goldman Sachs BDC Inc. third quarter 2019 earnings conference.
Thank you for your participation you may now disconnect.