Q4 2019 Earnings Call
Good morning, This is Dennis and I will be your conference facilitator today.
Welcome everyone to the Goldman Sachs BDC Inc. fourth quarter 2019 earnings conference call. Please.
Please note that all participants will be in listen only mode until the end of the call. What do we will open up the line for questions.
Well now turn the call over time as Katherine Schneider head of Investor Relations at Goldman Sachs BDC. Katherine you May begin your conference.
Thanks, Dennis Good morning, everyone before we begin today's call I would like to remind our listeners that today's remarks may include forward looking statement.
These statements represent the company's belief regarding future events that by nature by their nature or inside and outside of the company's control.
The company actual results and financial condition may differ possibly materially somebody's indicated in there. So we're looking statements as a result of a number of doctors.
Leading that was described from time to time in the Companys FCC filing.
This audio cast is copyrighted material of Goldman Sachs eating 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 home page ever website at Www Dot Goldman Sachs BDC dotcom under the Investor Resources section.
These documents you'd be reviewed in conjunction with the company's forms 10-K filed yesterday with the FCC.
This conference call is being recorded today [laughter] when he first 2020 for replay purposes.
With that I'll turn the call over to Brendan Mcgovern CEO of Goldman Sachs BDC.
Thank you Catherine good morning, everyone and thank you for joining us for fourth quarter and year end 2019 earnings conference call.
I'm joined on the caught me by John Ritter, Our Chief operating Officer, and Jonathan Lamm, Our Chief Financial Officer.
I'll begin the call by providing an overview of our fourth quarter and for your results, including an update on a proposed merger of GSP de <unk> with Goldman Sachs Middle market lending Corp., which we refer to as M.M.L.C.
Jon Yoder will then discuss what investment activity you activity and portfolio.
Before turning over to Jonathan Lamm to walk through a French results in more detail.
Finally, I'll conclude with some closing remarks before we open the line for acuity.
So with that let's start with our fourth quarter results.
Q4, net investment income per share was 48 cents bring anyhow I per share for the full year to $1.98 cents or at 11.5% return on common equity for 2019.
Our net investment income covered our dividend by 107% during the quarter and 110% for the full year 2019.
As we announced after the market close yesterday, our board declared a 45 cents per share dividend payable to shareholders of record as of March 31st 2020.
This equates to a dividend yield up 10.7% based on net asset value per share at the end of Q4.
We believe that these are strong quarterly and full year financial results for our shareholders.
Looking back on the fourth quarter and the full year 2019, we saw a continuation of the steady execution several facets of our strategy.
On the asset side, we leveraged our origination platform to significantly strip, our investment mix toward more senior loans over the past here and we also increased overall portfolio diversification.
These improvements in portfolio attributes have in turn facilitated improvements in our liability mix.
Earlier this month, we executed <unk> institutional bond offering.
The $360 million offering came with a coupon of 3.75% and the proceeds were used to repay borrowings under our secured credit facility.
The offering diversified our funding mix toward more unsecured debt, which improved our financial flexibility without increasing our overall cost borrowing.
And finally on December nine we announced the proposed merger of GSP D with our affiliate vehicle M.M.L.C.
Those of you who may not be familiar with the transaction.
MLC as a private affiliated BDC that commenced operations in 2017.
Since its formation MLC has participated in a common investment program alongside the SPD would result that over 90% of the investment portfolio of MLC overlaps with GSP These portfolio.
I'd like to reiterate the key the five key reasons why we believe the merger of just Pee Dee Ann MLC is such a compelling transaction.
First we expect the merger to be highly accretive to just be these net asset value per share.
That's just goes in the joint proxy statement filed with the FCC on January 2020, the transactions expects to result in over 5% accretion GSP. These net asset value per share.
Second we expect the combination with MLC to be accretive to net investment income per share both in the short and long term.
In the short term, we expect accretion Shanghai, we delivered primarily by the variable cap on juice hasn't happened fees. That's used to have agreed to as part of the transaction.
In the long term, we expect the increase net asset value per share will allow us to grow the investment portfolio and add additional income producing assets to drive growth.
Third we believe that the transaction results in an overall improvement in portfolio metrics, including an increase in the yield on the portfolio at amortized cost and a reduction in the percentage of investments on nonaccrual status.
Fourth the increase size and scale to combine copies should facilitate greater access to institutional debt markets and fifth the transaction offers all these benefits without the typical due diligence risks that accompany M&A since over 90% of <unk> and then they'll sees portfolio overlaps with GSP These portfolio.
The only announced for the transaction in December just be follow the preliminary joint proxy statement with the FCC in early January.
This filing starts to review and comment process with the FCC. That's typically takes several months you complete though the exact timing is difficult to predict.
However, based on our current expectations, we expect to hold a stockholder meeting for each of G.S.P.D. and M.L.C. in Q2 of 2020 to vote on the proposed merger.
If we obtained approval from both shareholder basis, we would anticipate closing the transaction shortly thereafter.
We look forward to providing future updates on the size of this merger as they progress.
With that let me turn over to Jon Yoder will discuss our portfolio investment activities for the quarter in greater detail.
Great. Thanks Brendan.
We continue to operate in an environment that is broadly supportive our of our investment strategy of directly originating loans to middle market size companies operating in the United States.
The U.S. economy continues to produce steady gains in GDP in unemployment remains at historically low.
This backdrop has created a very active dealmaking environment, which in turn has presented us with a lot of investment opportunities to choose from.
During the course of 2019, our team originated approximately 2.4 billion of new investments across our platform, including 605 million Fergie SPD.
These new investment commitments were across 30, new portfolio companies and 22 existing portfolio companies.
As a result of this activity and inclusive of the consolidation of the senior credit fund onto our balance sheet.
We increased the total number of companies Ngs Bds portfolio from 72 to 106, that's nearly a 50% year over year increase in single name diversity.
The percentage of GSP. These portfolio invested in first lien loans also materially increased.
From 53% to 74% year over year.
I would emphasize that while the operating environment for our strategy continues to be strong we've maintained our focus on investments in durable businesses that we believe are less impacted by cyclical pressures.
Let's turn to specific investment activity for the quarter.
New investment commitments and funding for approximately 159.8 million and 160.8 million, respectively, which included net fundings of 11.5 million of previously unfunded commitments.
100% of new investment commitments were in first lien floating rate debt instruments.
These new investment commitments were across seven new portfolio companies in 10 existing portfolio companies.
Sales in repayment activity totaled 126.1 million.
Driven by the full repayment of investments in six portfolio companies.
Several of our exits this quarter were from older vintage investments that were fully repaid.
In addition to these we were repaid out of our investment in a company called continuum.
This was an investment that we originated back in 2017.
We made a first lien loan to the company.
Together with a small equity investments because we believed that the company had multiple avenues of growth.
As well as margin up optimization and acquisition opportunities.
Well or a while our equity investment was small the sale of the company resulted in a 3.4 times multiple on our equity investment.
We think that this investment is a good example of how we selectively make small equity investments in connection with certain lending opportunities to drive attractive overall returns.
Regarding portfolio composition.
As of the end of the year total investments in our portfolio were 1 billion 454.3 million at fair value.
Comprised of 92.8% senior secured loans, including 74.3% in first lien.
2.4% in first lien last out unit tranche and 16.1% in second lien debt as well as 0.5% an unsecured debt and 6.7% in preferred and common stock.
We also had 87.2 million of unfunded commitments as of December 31st, bringing total investments and commitments to 1 billion 541.5 million.
As of quarter and the company had 206 investments across 106 portfolio companies.
As Brian mentioned earlier, we've been very pleased with our ability to diversify the companys second lien portfolio exposure in recent years.
Huh.
The weighted average yield of our investment portfolio at cost at the end of the fourth quarter was 8.2% as compared to 8.3% at the end of the third quarter.
The weighted average yield of our total debt in income producing investments at cost was 9% at the end of the fourth quarter as compared to 9.1% at the end of the third quarter.
This slight decrease is primarily attributable to the decline in LIBOR that transpired during the fourth quarter.
Now turning to credit quality.
The underlying performance of our portfolio companies overall with stable quarter over quarter.
The weighted average net debt to EBITDA of the companies in our investment portfolio was 5.7 times at quarter end versus 5.4 times at the end of the third quarter.
The weighted average interest coverage of the companies in the investment portfolio at quarter end was 2.4 times, which was flat from the prior quarter.
I'll now turn the call the Jonathan to walk through our financial results.
Thanks, John.
We ended the fourth quarter of 29, Jim.
Total portfolio investments at fair value.
1.45 billion.
Outstanding that 773 million and net assets of 676 million.
Our net investment income per share was 48 cents, which was up one cents from the prior quarter.
Earnings per share were 22 cents equal to the prior quarter.
During the quarter, our average debt to equity ratio was 1.11 times versus 1.22 times in the prior quarter.
We ended the fourth quarter was the debt to equity ratio of 1.14 times versus 1.07 times at the end of Q3.
Turning to the income statement.
Our total investment income for the fourth quarter was 35.5 million, which was down from 36.9 million last quarter, driven by the lower average debt to equity ratio in the quarter as well as from the decrease in line for.
Net expenses were 15.6 million for the fourth quarter as compared to 17.4 million in the prior quarter.
Expenses were down quarter over quarter.
Mainly driven by a decreasing interest and other debt expenses as a result of lower average borrowings and a decrease in my work.
We ended Q4 with net asset value per share at $16.75 is compared to $16 in 98 cents from the prior quarter.
Driven by unrealized depreciation on select investments, partially offset by the realized scaling continuum as John mentioned in his remarks.
The company had 46.7 million in taxable accumulated undistributed net investment income a quarter, resulting from net investment income has exceeded our dividend.
This equates to $1.16 per share on current shares outstanding.
Consistent with prior years, we spilled over all of the undistributed and I into 2020, as we believe a cost of the spillover in the form of the excise tax is a small price to pay relative to the much higher cost of issuing new equity.
Subsequent to quarter on we have been active on the right side of the company's balance sheet.
As Brendan mentioned earlier the company conducted its inaugural institutional debt offering in February.
Our notes offering.
Offering closed on February 10, 2020, we were very pleased with the execution.
I know, it's priced at a fixed rate of 3.75%.
The spread in issuance was 230 basis points to five year U.S. treasures.
At this pricing level, we were able to price or unsecured debt at nearly the same level as our secured revolving credit facility.
In addition to increasing the company's exposure to attractively priced that you were also able to further diversify the company's funding Max and enhance our overall financial flexibility.
We're pleased to report that the company received a second investment grade rating.
Three for Moody's in January 2020.
In addition, the company's investment grade Triple B minus rating from Fitch was reaffirmed.
As a company now has to I'd ratings, we recently launched an amendment with our lenders in our revolving credit facility.
Juice spread on our facility from LIBOR, plus 200 basis points to LIBOR, plus 187.5 basis points and extend the maturity date the 2025.
These amendments to the credit facility. Among other items are expected to close by the end of February and are subject to certain closing conditions.
As a result of these financing actions, we believe the company's balance sheet and funding profile will be materially strength.
With that I will turn it back to Brenda.
Thanks, Jonathan.
In closing, we're pleased with our execution on behalf of our shareholders in Q4 and for the full year 2019.
As we look forward to the coming year. We believed he SPD continues to be well position to take advantage of the attractive opportunities in the middle market lending landscape.
As always we thank <unk>. Thank you for the privilege imagine your capital and we look forward to continuing to work hard on your behalf over the course from 2020.
With that Dennis what's built up line for questions.
Ladies and gentlemen, we will now.
All the Q1 day roster.
And your first question is from lineup Finian O'shea with Wells Fargo Securities. Please go ahead.
[noise] Hi, good morning, Thanks for taking my question.
Just a first on your market strategy I'm looking at the deal you know being mostly in the core middle market you know mix of sponsored on sponsors. So I'd have you do historically.
Oh understanding the continuum to Connectwise commitments did you see a few other of these large sponsor backed private transactions your parts town your equity a so it has to be thinking is this.
Just sort of one off or is there a shift in you know what you're the deals you're looking out and what you're interested in investing in now.
Hey fan Brendan Thanks for joining a I'll take a crack I'm sure John has comments as well no. There's there's no change at all fit in our strategy I think when you look at the underlying portfolio metrics, a we've been quite consistent and a in the portfolio. Construction here you know the average size of accompanying our portfolio is under $40 million.
EBIT da we do find ourselves from time to time in circumstances, where we've made alone to accompany that grows and matures you mentioned one of them a in this in your question here, which is continue on that alone that we've had a in the portfolio going back to 2017 or it was acquired by.
Another company called Continuum, John mentioned, we had a very nice Oh, sorry, Mike connect wise. So we did a role a small amount into that it's that new loan on a heads up basis with that with the lead lender. There. So I would describe that as a situation, where we had a very strong very profitable investment.
In one company, we had the benefit of Ah many years and watching it perform.
And and just decided you participate.
In the continuing exposures the company in the context of it being merged by competitor in a great industry is a great space with a great sponsor. So no change at all a in the overall approach to what we're doing here yeah. I mean, the only thing I'd add to that then is that.
You know a lot of these Ah well so some of the keys sponsors that we've worked with for years on the spot you know I've seen the sponsors side are increasingly raising larger and larger funds and that's going for larger and larger companies and so I think you know.
Probably some of the deal flow that we get as result of that can be from larger companies. So it's not it as Brian said, we're not changing our strategy, we're not now targeting the upper middle market, but occasionally a sponsor that you know we know trust and work with for very long time, given the size of their funds or is growing the size of deals that they're doing is growing that result.
In you know selective opportunities, we might participate in but up but I agree with Brendan that's not that's not where we're targeting our originations.
Okay. Thank you I guess, just a couple portfolio questions I'll start with a good one.
Oh, a hunter looks like it's a little bit of Ron can you. You know this is a I don't know how this works. It's a preferred stock would obviously has some common stock element to it.
I think holdings almost doubled can you give us any update there and I guess first can you remind us does that does that pay income and is there you know of potential.
Exits on the horizon.
Yeah, I'll give a little bit about contacts there and you recognize there's there's limitations on will be what we what we what we I can't I can't say, but but you're right. The business has been a improving his performance cadence for it for sometime now this was an investment that we made an earlier mentioned investments.
That was restructures, we've taken back a significant amount of preferred stock here and have had ongoing exposure to the company is a positive performance since that that since that deal was done which has allowed us to recoup a very significant amount of that initial investments. So they they vest. We have today is not an income producing assets.
But I think suffice to say as we look forward and working collectively with a with a well charlesbank was the sponsor here in the same as well Oh, we do see potential opportunities for an exit nothing I mean to speak to here, but I think a good opportunity for us to take what is eight income non income producing assets.
And reinvest that anything income producing proceeds a again hopefully at a at a total value a that's going to be at or near the amount of initial capital that we put into say there's this transaction. So I'd be a quick quite quite a good story here.
Oh sure. Thank you for that one and then you know a.
Comment you provide on.
H S. It was a.
Second lien so it'll be more sensitive to seeing spot you know.
Hey context on the fairly steep.
Drop quarter to quarter, Yeah, I'll speak this was I I just is a small 10 million dollar at cost position that a that we have we made back in 2015, yeah. The business is focused on what I'll call were please health care programs. They do things like I'd say screening for employees they quite.
Data for the employers all Bocamina goal is to help reduce the overall cost and health care for the employee base. So there's been some competitive pressures in the business and you're right as a second lien you as a as that has had has unfolded with a few customer losses more more more recently is the only a bit more challenging situation. So we did put this onto.
Not a cool a this quarter and a and did market down, but again, a relatively small position overall in the context of the billion five a portfolio here.
Okay, and it's just a small fall use did you say it was based on customer loss.
Yeah, how it you know to the extent you May say Oh, you know severe or was that is there just a couple of customers on this one I is it something that you know that that I would say overall, there's been competitive pressures in the company has been been lagging somebody's peer.
Or is in the offerings.
Which have a which have led to a couple of these customers 'cause customer losses, there's a little bit of a cadence the business, where there's there's a there's a renewal periods. So somebody has come through quicker than one might otherwise have expected and so that's been the dynamic with respect to the speed. We yeah. We marked it down a significantly last quarter and that continues through a this is of course here.
And so something that we can teach them entre quite closely again here, but you know context is this. This is this is you are quite a small investments overall in terms of a in terms of or exposure here in the context in the portfolio.
Okay. Thanks, so much.
Okay.
Your next question from a line of Robert Dodd with Raymond James. Please go ahead.
Hi, guys I'm on the the debt to EBITDA for the portfolio, obviously, it ticked up a little this quarter. The portfolio did go well touch but can you give us any color I mean was that entirely related to just the mix of repayments racism origination. So was there anything in.
Yeah.
Well there was a an EBITDA deterioration at one of the.
At any particular up is so that.
Yeah, no yeah that makes Robert the tick up this quarter was really a function of that portfolio a turnover that you typically see inside <unk> as you know what do you make an investment typically you'll end up seeing the company a de leveraging overtime and that might result in a repayment those proceeds or are they are then reinvested.
Into new loans, so there's nothing driving that number higher that's company specific where EBITDA has picked up or or portfolio specific I would say look across a broader portfolio performance continues to be quite steady and consistent <unk>. We had no major changes in our risk ratings for the quarter in terms of the percentages of the company's well.
Going down in the overall risk ratings, we mentioned I it yes.
As a as as a small one off that had already been <unk> rating three for us that moved to a rating for other broadly speaking cross portfolio, we continue to see healthy trends and the dynamic in the number. This quarter is really just that you have some movements of companies coming in and out yeah and ended just add to that Robert I guess [noise].
On the I mentioned in prepared remarks, we had a couple of sort of older vintage deals. They got it often fall and they happen to be quite at this point in there in their lifecycle quite low levered companies. So we had one company called artisan, which we've had for very long time. It did it frankly, the only reason we hadnt been refinance.
A lot earlier is because it had very very strong call protection in the form of a make whole and we effectively you know the company took advantage of refinancing as soon as that does it says that make whole obligation expired, but by the time, we got to the end of that it was it was quite quite conservatively levered.
The other one and the other another older vintage one was a company called I think as I referred to as legacy buyer, but the the brand name in the company is legacy our and again that was a situation where we had been in it since I think 2015, roughly a 10 timeframe and the company just de Levered a lot in so when when you.
Is there a couple of examples of new lose kind of older vintage deals that are you know frankly very low levered at this point in their lifecycle is Brent was mentioning on the can have an it can have an impact in terms of the weighted average on your overall on your overall portfolio.
Yep Yep understood and moving onto the kind of the transaction I know there's limited amount you can say about that box.
You know, there's a high level of overlap between the GE SPD and Hmm see portfolios, but some of the assets a G.S.P.D., obviously well on that well would put on the balance sheet the BDC before.
Just so that's that's the lit a segment.
The legacy.
Fold that.
Could you comment to you know, obviously that will become a meaningfully smaller portion when you combine the two can you give us any color on what would you would.
Uh huh.
Individual company risk ratings.
Well.
What kind of benefit do you think you're going to get.
Piece of the business shrinking materially because I if I'm right. Those are some of the relatively speaking whiskey of access yeah.
Yeah, I wouldn't necessarily Robert point to that dynamic as as the as the overall Oh, yeah, what's kind of what improves the euro portfolio construction here, we're talking about a isaac numbers, 7% of the of the assets that are GSP, the or not in M.L.C.. So it's a it's a pretty small number overall.
But you are right that there is a little bit that that legacy issue, which when you combine the two companies together. So for example, MLC today has no investments on non accrual.
I'd say, there's you know what presented at a at fair value investments and just BD on non accrual. So just given the nature of the transaction that number will be have a pro forma for the deal. So that's a positive we do have a handful of non income producing assets I mentioned hunter in a intends question as one of them, that's only ngs Pee Dee Ann.
Not in M.L.C. and so again when you combine the two companies there'll be a greater proportion of income producing assets overall, none of those numbers are really dramatic one way or another and so there is I I would say certainly a pro forma benefit that the combined comp company, we'll get a but nothing I think is a is it something about that.
Yeah, I would focus on.
Yeah to exclusively.
Got it fish and then one one more if I'd had on the the undistributed income that the Bucks 16, obviously, a g. SPD.
Yeah. The is it is they're gonna be any you've acquired my expectation that any of that will get distributed by Apple, but try to the close of the message out because if I I don't think.
And then I'll see has has the same kind of spill over characteristics.
Right. So if there's there's no requirement for GE SBB for the merger to distribute any of its or any of it spillover.
Income there's no.
There are no Rick issues that we're not we're coming up on with respect to with respect to but the merger that would cause us to have to distribute out of G.S.P.D. animal see we'll have to make whatever spill over distribution. It has a spillover income it it has.
In order to meet the requirements prior to the merger because that's effectively be end of its existence.
But as you mentioned, it's it's not it's not a significant amount.
We you know.
Given where our spill over income is now we would project given the fact that were keen to you know that where we've been over earning the dividend that in 2020 at some point, we would have to pay out a special dividend out of G.S.P.D. in order to meet the Rick tax requirement.
Absent the merger so if the merger were not to close and we would at some point in September October timeframe. When we file our tax return would be required to pass some of that spill over just given the fact that we're we're sort of bumping up against that limit later in the year effective or.
Or or pro forma for the merger closing prior to that be though that issue goes away and we would not be required to pay out any of that spill over so a lot of detail there Robert but I just want to make sure you had the entire <unk> I appreciate it and and I follow together.
[laughter]. Thank you.
Yep.
And at this time there are no further questions. Please continue with any closing remarks.
Okay. Thanks fast and thank you of course, everybody for joining us for the conference call today as always if you do have any additional questions or follow ups Oh, Please don't hesitate to reach out to the team in the meantime injury weekend. Thank you.
Ladies and gentlemen, this does conclude the Goldman Sachs BDC IEC fourth quarter 2019 earnings Conference call. Thank you for your participation you may now disconnect.