Q1 2020 Earnings Call
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Please standby the conference will begin momentarily, we think for your patience and I see please remain on the life.
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Welcome to the Golub capital BDC Inks December 31st 2019 quarterly earnings Conference call.
Before we begin I would like to take a moment to remind our listeners that remarks made during this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act 1995.
Statements other than statements of historical facts made during this call may constitute forward looking statements and are not guarantees of future performance or results.
And involve a number of risks and uncertainties.
Actual results may differ materially from those in a forward looking statements as a result of a number of factors, including those described from time to time Golub capital BDC Incs filings with the Securities and Exchange Commission.
For materials the company intends to refer to it on todays earnings conference call. Please visit the Investor resources tab on the whole page of the company's website at Www Dot Golub capital Bdcs Dot com and click on the events <unk> presentations link.
Golub capital Bdcs earnings release is also available on the company's website in the Investor resources section.
As a reminder, this call is being recorded for replay purposes.
I'll now turn the call over today it fits all live Chief Executive Officer of Golub capital BDC.
Thank you Hello, everyone. Thanks for joining us today.
I'm joined by Ross TDR, Chief Financial Officer, Red Robins ins on Simmons on managing directors your called <unk>.
Yesterday in the morning, we issued our earnings press release for the quarter ended December 31st thing, we posted an earnings presentation on our website.
Referring to that presentation throughout today's call for those of you were needed GBDC our investment strategy is in some inception.
<unk> focus on providing first lien senior secured bonds to healthy resilient middle market companies.
My strong partnerships oriented private equity sponsors.
He's going to start today with an overview of Gbdcs results for the first quarter of 2020, Ross will then review those results in more detail and I'll close with.
On our market out.
I mean, just start with a headline.
Quarter ended December 31st was another solid consistent corner for GBDC last quarter, you'll recall that Gbdcs reported GAAP results weren't complicated by onetime noncash accounting items related to our merger with our capital investment Corporation or do you see I see we said we expected GAAP net income to.
Getting in the first fiscal quarter of 2020 to more accurately what she sees fundamental economic performance and we believe it stops and we believe it will continue to do so going forward. Our first fiscal quarter post merger results show strong gap, yes in excess of more regular distributions per share 33 cents corn.
Driven by solid net investment income and two cents per share of net realized and unrealized gains with that I'll turn the call over the Gregory who you're going to go through the details. Thank.
Thank you David <unk> before I go through the details. Please note that in addition to the GAAP financial measures in the Investor presentation.
Provided certain non-GAAP financial measures to meet Gbdcs, Oh, Gee I see merger financial results easier to compare <unk> pre merger.
These non-GAAP measures referred to as adjusted measures seek to strip out the impact of the merger related purchase premium write off and amortization.
For the described in the appendix our earnings presentation.
Our first the adjusted measures where appropriate.
Better indicators.
But that context, let's turn to slide three looked at the results for the quarter.
Adjusted net investment income per share or as we call. It income before credit losses for the quarter ended December 31st 2019 was 33 cents.
This compares to adjusted net investment income per share.
Three cents or the park.
Adjusted net realized and unrealized gain per share was two cents.
This compares to adjusted net realized and unrealized gain per share up two cents for the September Thirtyth score.
Earnings per share and adjusted earnings per share for the quarter ended December 31st 2019 were 35 such.
As we communicated last quarter, we expect earnings per share will equal adjusted earnings per share going forward as any purchase premium amortization should be offset by a corresponding reversal of the unrealized depreciation on the loans acquired from GE I see in the merger.
Adjusted earnings per share for the quarter ended December 31st 2019, 35 cents remain unchanged from the prior quarter.
On December 31st 2019, we paid a quarterly distribution or 33 cents per share an increase of one cents from before the G. I see acquisition.
In addition, we also PD special distribution of 13 cents per share our fourth consecutive calendar year, which we have paid a special distribution.
Absent this special distribution or NAV per share would have increased this quarter.
Primarily as a result of this special distribution, our NAV per share declined to $16.66 as at December 31st 2019 from $16.76. After September 30, yet.
Finally on February four 2020, our board declared a quarterly distribution or 33 cents per share, which is payable on March 27, 2020 to stockholders of record as of March sex.
I'll now hand, the call over wants to go through more details.
Great. Thanks, Gregory turning to slide for the slide highlights our total originations of 271.1 million and total exits and sales of investments of 154.3 million contributing to net funds growth of 155.4 million or 3.6% during the quarter.
Hi shown in the bottom table the weighted average rate of 7.4% a new investments this quarter was consistent with the price prior quarter.
In addition, the weighted average spread over LIBOR or a new floating rate investments of 5.6%.
The weighted average rate and investments that paid off of 7.8% and the weighted average fee received a new investments of 1.4%, we're all relatively consistent with the prior quarter.
As a reminder of the weighted average rate a new investments is based on the contractual interest rate at the time of funding.
For variable rate loans to contractual rate would be calculated using current LIBOR spread over LIBOR and the impact of any LIBOR floor.
The top of slide five shows that Gbdcs average investment size remained at 17.3 million as at December 30, Onest or 0.4% of the total portfolio based on fair value.
The bottom of this slide shows that our overall portfolio mix by investment type has remained consistent quarter over quarter with one stop loans continue to represent our largest investment category at 83%.
Turning to slide six or debt investment portfolio remains predominantly invested in floating rate loans and defensively positioned and what we believed to be resilient industries.
Turning to slide seven this graph summarizes portfolio yields and net investment spreads for the quarter.
Focusing first on the light Blue line. This line represents the income yield or the actual amount earned on the investments, including interest and fee income, but excluding the amortization of upfront origination fees and purchase price premium.
The income yield decreased by 40 basis points to 8% for the quarter ended December 31.
This is primarily due to the continued decline in LIBOR over the past few quarters, which continues in that portfolio yields as LIBOR contracts reset.
The investment income yield or the dark Blue line, which includes amortization of fees and discounts also decreased by 40 basis points to 8.4% during the quarter due to declining LIBOR.
The weighted average cost of debt or the Aqua Aqua Blue line decreased by 10 basis points to 3.9% a smaller changed the decline in LIBOR floor as some of the interest rate contracts on our COO liabilities.
They're not reset into early 2020.
As a result or net investment spread the green line, which is the difference between the investment income yield and the weighted average cost of debt declined by 30 basis points to 4.5%.
Hoping to the next two slides fundamental credit quality remained strong with over 90% of the investments in our portfolio, having internal performance rating or for higher as of December 30 Onest.
During the quarter the number of nonaccrual investments increased to seven investments and nonaccrual investments as a percentage of total investments at cost and fair value were 1.6% and 1.3% respectively as of December 30 Onest.
As a reminder, independent valuation firms value approximately 25% of our investments each quarter.
We're doing the balance sheet, an income statement on slides 10, and 11, we ended the quarter with total investments at fair value of 4.4 billion.
Total cash unrestricted cash of 133.2 million and total assets a 4.6 billion.
Total debt was 2.3 billion, which includes 1.1 billion in floating rate debt issued through our securitization vehicles.
305 million, a fixed rate debentures, and 890.7 million of debt outstanding and our revolving credit facilities.
Total net asset value per share was $16.66 R gap debt to equity ratio was 1.06, consistent with recent quarters and within our target range <unk> 0.85 times to 1.15 times.
Flipping to the statement of operations total investment income for the quarter ended December 30, Onest was 78.6 million and total expenses were 45.9 million.
Due to the acquisition of Juicy IC, which closed on September 16th 2019.
Comparisons to the prior quarter for total investment income and total expenses are not meaningful.
Excluding the impact of the Juicy IC purchased premium amortization adjusted net investment income per share and adjusted earnings per share of 33 cents and 35 cents, respectively were consistent with the prior quarter.
Turning to slide 12, excuse me this graph illustrates our long history of steady growth and NAV per share since our IPO.
Historical comparison purposes, we have presented NAV per share, both including and excluding special distributions.
Turning to slide 13, the graph on the top summarizes our annualized return on average equity over the past five years, which has averaged 8.6%.
Graph on the bottom summarizes our regular quarterly distributions as well as our special distributions paid in each of the past four years.
In addition, it highlights the increase in our quarterly distribution from 32 cents per share for the quarter ended September thirtyth.
33 cents per share for the quarter ended December 31.
Turning to slide 14. This slide provides some financial highlights for our investments in our two senior loan funds.
This will be our final reporting on the senior loan funds.
As we reported in an 8-K filing on January Onest 2020, we entered into an agreement to purchase the remaining 12.5%.
LLC LLC equity interests and the SLS from our minority interest partners.
As a result of the assets and liabilities of the SLS will be consolidated into Gbdcs financial statements for the period ending on or after January Onest 2020.
The next slide summarizes our liquidity and investment capacity as of December 30, Onest, the form of restricted and unrestricted cash availability on our revolving credit facilities and debentures available through our SP I see subsidiaries.
Slide 16 summarizes the terms of our debt facilities as of December 30, Onest as well as our focus on diversified long term and stable sources of debt capital.
Lastly on slide 17, our board declared a regular distribution of 33 cents per share payable on March 27 to shareholders of record as of March six.
With that I'll turn it back to David for some closing remarks.
Thanks Ross.
You had another solid quarter.
Net income was.
Hi, This was good although we just see a small uptick in non accruals and the investment portfolio remain well diversified I want to close with update two topics first what our merger when do you see ITD mean for the BDC industry in the second an update on our strategy for calendar 2020.
Let me start with merger the Montana.
When do you see essentially doubled the size of GBDC insulin terms that we think we're a win win win for the company our existing stockholders in our stockholders.
We believe the transaction represents a potential new growth model for the BDC industry.
But it's interesting it's a model that we believe will only be available to a small number of bdcs recently, what I need by this.
You think historically bdcs have all alone.
The principal strategies for growth.
First is this problem GBDC is perceived prior to that you guys. You merger that strategy involves growing at night needs through small.
They all want equity raises timed to coincide with periods when the manager expects to be able not currently deployed the proceeds Wyndham right. It's a win win for the company in its stockholders on its necessarily slow.
Second strategy on larger follow ons.
Some of these we've seen in the industry has been good managers on recently EMS, even good from existing stockholders typically larger offerings either have caused not dilution, we're earning solution on both.
Third strategy involves acquiring portfolios a few bdcs have successfully granted volume for stockholders. This way, but attractive targets are readily available in the execution risks are quite significant.
Our view is that the merger with GE I see represents and potential for growth strategy.
Good strategy involves acquiring affiliated private bdcs on terms that are accretive for existing stockholders and compelling for new stockholders.
The key to making the math work is that you acquire hostile consistently trend to premium to NAV in other words the strategy isn't available forever.
We think better performing bdcs that train and a consistent premium may get rewarded by softer is over time, because they have access to this new more money shareholder value creating growth.
Which leaves me no.
Next question, what enables a BDC to consistently traded a premiums and now and you've heard my answer to this before we believe the answer is access to a platform with sustainable competitive advantages, which in turn permits the BDC produced consistent premium returns.
And this brings me to the second topic, what's our strategy for calendar 2020.
My answer will be boring, we familiar it's the same one we followed for many years stand the top of the capital structure focused on EUV resilient middle market companies backed by strong private equity sponsors and lean on the competitive advantages that all capital platform.
We look back on 2019, our sponsor relationships income sees a liability market, leading scale industry expertise and the breadth of the financing solutions, we were able to offer sponsors all of these helped us win a high proportion of the deals we wanted to when we.
We expect more of the same in calendar 2020.
With that let me. Thank you for your time today and for your partnership and Christian.
On the line for questions.
Thank you if you would like to register for question. Please press. The one followed by the foreign your telephone you look curious return prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration. Please press the one followed by the tree.
Board asked a question. Please first one for.
And our first question comes from the line of Finian O'shea with Wells Fargo. Please go ahead.
Hi, good morning, Thanks for taking my question.
David just.
First I appreciate the comments on the GC I see.
Merger and the new means to raise capital is there any take away we should have here.
Perhaps.
So timing of dollop, three and then.
Anything you would do differently, whether it be you know size.
A new structures of the new BDC that we would think about I appreciate any commentary.
So by way of contacts for those who arent familiar with with Golub capitals private BDC.
Afternoon, we created Golub capital investment core, which recently merged with with GBDC, We created a second private BDC Ernie created we call Golub capital BDC three.
And our capital BDC three is up almost 500. So you can you can charge as progress through as a publicly filed and using 10-K's.
It is in ramp up mode right now.
And and I I can't.
Promise anything about what will happen with respect to Golub capital BDC three.
Because as you know from the Jeez you merger.
There are many factors in many parties that go into figuring out what's the appropriate path is for a private BDC, but what I can tell you is that.
From from my perspective speaking is as.
As the CEO of GBDC.
The merger with GCI see seems to meet you would have been very successful for all parties and so I think it would be logical for us too.
Look at opportunities to potentially compete.
Approach that we undertook with respect to gcs.
Thank you for the context, there and just a follow on the portfolio credits this quarter.
The two non accruals.
These were marked.
You know reasonable discount say 80 ish, but put putting the names on nonaccrual usually means that you have that used to some extent reassessed.
The recovery.
These credits and the new marks seem to have moved as much show with whatever from understanding their sensitive situations is there any context, you could provide us there as to you know the placement onto non accrual and the very narrow markdowns.
So again, let me first provide some context, so not rules at Austin fair value increased in the most recent corner.
To 1.6% and 1.3% respectively.
Whenever we think about non accruals.
We we feel a degree of concern I mean, we're we're naturally worriers, we worry about everything.
One of the things we worry about is is non accruals.
I want to.
Make sure, though that everyone keeps our concerns in a pump we content. So first.
This quarter GBDC continued its strong proper reading generating positive net realized and unrealized gains on investments and that's the metric that we think is over time. The most important indicator of credit performance. That's why we focused so much in our earnings presentation each quarter on.
The chart in our presentation depicting NAV per share over time.
A second we booking credit and overall credit quality is based on risk ratings and again in respect of risk ratings and we look at most recent quarterly results.
I think there's I think they show a great deal of stability corner of corner and for many quarters in a row.
And.
Earn an excellent point I'll make instead.
Leanest figures.
Anything.
And with this small increase we're still in.
The low end of the range of the industry and we're in.
Our historical range in respect of non accruals and cost so so.
Don't want to make any of this sounds like it's more dramatic finiteness.
With that said, we're working hard with managements.
Companies that we put on non accrual this corner and I can't get into that the details.
I'd number of the two situations, but what I can say is on I'm cautiously optimistic that.
In respect to both companies. We're we're on a good path toward toward conference.
Okay. Thank you for the context, that's all for me.
Thank you. Our next question comes from the line of Ryan Lynch with KBW. Please go ahead.
Hey, good morning, Thanks for taking my questions. The first one just has to do with man acquisition company is it possible provide any background on to onto what has been nature of that business. We were having difficulty actually finding them for any information about what that business actually does.
I.
As a policy matter don't talk about specific credits on our earnings calls.
Having said that I believe there is some public information about this company and and Ryan We will get back to you win win links to that.
Okay that would be helpful.
And then.
Obviously, you had Oliver Street dermatology.
Non accrual this quarter and then you know one another investment that they got Mark down was with dental holdings still on accrual status.
Oh sure obviously, two different businesses, one santyl ones dermatology, but I know there's been some concerns around health care particular health care roll up strategies.
So our either one of the.
Businesses part of part of a health care rollout practiced and are there any sort of similarities of that we could look across to the these two different businesses had but that that are potentially pressuring both of them.
No no really entirely different businesses. One one is in one is not a physician practice ROA.
I described.
Issues that each of them are confronting as as idiosyncratic and specific to them I do think youre.
Hi, This is right which is that.
And our nor are.
Pressures on.
On health care and roll up strategies in general.
We're seeing across the industry in.
Middle market land as well as in probably syndicated flat.
And I've talked about this on prior calls I think it's fair to say in.
In my opinion that Uh huh.
Health care and roll up strategies are harder to execute then.
And people, probably a few years ago.
Okay.
And then one question kind of a higher level question as you guys roll into 2020 in has conversations come along with with with sponsors obviously 2020.
Big election year.
[noise], which always draws you know a significant amount of uncertainty surrounding that time period have you had any conversations or have you heard sponsors talk about.
Potentially trying to move forward deal activity and get deals done.
Before the election.
Have you heard invokes discussion.
I've heard a lot of discussion about.
Yes and about.
The divisiveness of American politics, right now about concerns.
That folks in private equity you have about.
Some of the negative commentary about private equity and has been coming out in some of our.
Campaigns I have not earn anything along lines of what you're describing lunches and desire by by private equity firms to.
Push up.
Well M&A activity that.
In an effort to get done before the election happens.
Surprise me, if we see some.
That phenomenon happened later in the year, but I think as.
Right now right.
Too early.
How many processes.
Don't change.
12 months.
To move along a typical M&A processes is is four to six months. So I think we're too early to see that kind of pattern. Even if we are going to see it later in the year.
Okay.
That's helpful.
And then one more.
In November you guys provided a 1.6 billion dollar facilities risk strategies. Just recently you guys provided another 1.6 billion dollar unit tranche.
So to MRI software.
Those are obviously very pig wins for for your firm and your platform broadly speaking can you just talk about how you are able to.
When those deals and secure those financings and also.
What were maybe the thought process fees of of a maybe those two companies to choose a partner like golub versus obviously that the size of those deals. There's other avenues, particularly the broadly syndicated loan market I would assume that they could have tapped why did they choose the goal that platform versus going into the more.
Additional broadly syndicated loan market route.
So Paul risk strategies, and MRI were one stop executions. So in both cases the sponsor Mena decision that they thought that a one stop was preferable to a traditional first lien second lien broadly syndicated.
Approach.
Sponsors historically have performed one stops for a variety of reasons, including.
Scalability flexibility capacity to.
More gracefully can handle.
Expansions by acquisition.
Yes.
Closing.
A smaller number a parties in ball winch, which facilitates changes down the line reasons along those lines.
Until relatively recently, one stops for a middle market products and not a larger mark.
And whats happened Ryan over the course of 2019 is is that's changed.
In 2019, we tracked 23, onestop executions in excess of $500 million.
And God capital has been the clear market leader in these executions, we led or co lead 13 of the 23. So we.
We letter call led more than all of our competitors combined.
Yeah.
Capacity that we built to meet these transactions is unmatched in the industry. We combine both the capacity to hold a significant portion of these larger one stops and we have a capital markets capability to bring in partners and I.
I think what we've done is over the course of 2019 is proven or sponsors in larger transactions that.
Onetime executions are are worth considering as an alternative to the traditional first lien second.
I think what we're also seeing is as sponsors do try one stops in these larger executions, they're finding that they like the.
And so.
In my opinion, we're at the beginning of the adoption curve.
We're not even remotely close to the the conclusion of the gaining market share of one stops.
And I think we Gallup capital are very well position to maintain our leadership as this larger ones that market grows.
And I believe that's a very good thing for shareholders and GBDC because were strong believers that that these one stops represent very good risk warrants for investors.
Mhm.
Well that's helpful color on yeah, there's no doubt that goal that span.
Does the Premier player and some of these these large one stop so that and I definitely see the benefits for GBC shareholders to be able to to access that that have very unique deal flow. So.
Those are all my questions today I appreciate the time.
Yes.
Thank you once again as a reminder to register for question piece Press one for our next question comes from the line of Robert Dodd with Raymond James. Please go ahead.
Hi, guys just go back to credit if I can for second with the non accruals I mean, obviously, one one or dermatological practice, one industrial flow clean, though I mean.
Completely different parts of the country completely different businesses.
Is there anything thematic between the two like in the same spawn so anything like that I mean lapping is sometimes if I can identify theme.
That means any potential.
Heading of credit deterioration and not just in your book, but in general.
Can be can be constrained, but idiosyncratic can sometimes turned into something much more broad based.
So any color you can give on that.
So the early interesting.
Robert as I said earlier I don't.
And there are there are common themes were threats across.
Ah portfolio companies in our portfolio.
Barry and some credit weakness in the recent period I'm not seeing.
I.
From my Vantage point, what I'm seeing is idiosyncratic issues.
That are.
There are very different.
Hum credits.
Okay got I appreciate that I mean, its itself on the kind of the pricing environment.
Kevin I mean, no annual per se, but in the border Mark I mean January was incredibly competitive again.
We've got forward curves on libel continuing to decline slightly but.
Don't seem to be widening in response, and if anything we've seen libel flaws.
Seemingly coming down in the board market so.
Ed you'd think that the risk reward is evolving right now and obviously get us.
The one thing you may begin to say, one stop but but more broadly it seems like that the pricing environment with the forward curve, having the shape. It is I would have it.
Let Ted maybe spreads and some other things to be moving in a more favorable direction. I think this was discussed on the call last quarter, but we just so far have seen that so do you think there's anything that's that's gotten too.
Early voting get the spread environment to move in a more favorable direction given the directionally.
I don't think whiteboard changes are likely to drive meaningful changes in spreads I think were unlikely to see meaningful changes in spreads.
As a consequence.
Changes in the credit environment.
And in particular.
In response to.
Changes in perceived risk of going forward defaults and recovers so right now we're in an environment in which the economy, particularly the U.S. middle market economy continues to look very strong.
And we reported that in our Gallup capital Middle market Index results in early January.
As long as we continue to see economic activity as robust as we're seeing.
And a.
Associated with that at a reasonable expectation of continued salutary credit environment. I think we're we're likely to continue to be in that kind of spread environment than we've been in for the last couple of years.
East, France by historical standards are not terrible, they're not as good as you and I would like but they're not they're not terrible and the job for us as as as as as credit managers is to be very selective and.
Credits that we have.
We have conviction are are likely to pass back.
Got it got I appreciate that color one last one if I can only given given now with the combined entity is a.
Two X the size roughly and one of the the the.
The discussion point to the time and they are initiating the merger was you know accessing.
You may be the institutional bond market et cetera et cetera.
What can you tell is about.
Where where do you think you can drive the.
The cost to capital debt capital for the BDC versus where it is right now obviously, it's pretty attractive right now, but do you think you can you can move that in in any material way lower as a result of the overall size and that bond market out there right now which seems to be question debt Cody.
Pretty nicely for Bdcs.
As I mentioned last quarter, one of our activities post merger is to look carefully at the right hand side of the balance sheet and to explore all the potential avenues that are available to us.
Optimize the debt capital structure of GBDC.
That expressly includes looking at bond issuance.
Expressly lose.
Other other strategies as well too early for me to give you a rundown on what we've concluded on that front, but but we are we are actively looking at that.
Okay. Appreciate it thank you.
Thank you once again as a final reminder, if you would like to register for question today. Please press one full there.
And there are no further questions at this time.
Thank you Christine and thanks, everyone for joining us today as always we appreciate your time and your questions. If you have any issues that did not come up on todays call that you'd like to talk about please feel free to reach out and in any case, we look forward to talking with you again next quarter.
That does conclude the conference call for today. Thanks for your participation and I say please disconnect your lines.
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