Q1 2020 Earnings Call

I would like to welcome everyone to the Goldman Sachs BDC Inc. first quarter 2020, <unk> earnings Conference call.

Please note that all participants will be in listen only mode until the end of the call. What do we will open up the lines for questions.

Before we begin todays 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 results in 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, but the company's FCC filings.

This audio cast is copyrighted material from Goldman Sachs, a BDC and may not be duplicated reproduced or rebroadcast without our consent.

Yesterday after the market closed the company issued an earnings press release and posted a supplemental earnings presentation, both of which can be found on the home page of our website at www 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 Tuesday May 12, 2024 replay purposes.

I'll turn the call over to Britain, Mcgovern, Chief Executive Officer of Goldman Sachs BDC.

Thank you Dennis.

Good morning, everyone and thank you for joining us for our first quarter earnings Conference call.

I'm joined on the call today by Jon Yoder, our Chief operating officer, and Jonathan Lamm or Chief Financial Officer.

I'll begin the call by providing an overview of our first quarter results.

Comments regarding our portfolio and covert 19.

And the potential implications for investing environment going forward.

John Your will then discuss our portfolio in more detail with respect to the current environment before turning over to Jonathan Lamm to walk through a financial results in more detail. Finally, I'll conclude with some closing remarks before we open the line for queuing <unk>.

Before beginning this morning, all of US at Goldman Sachs PTC would like to send our best wishes for the health and safety of everybody listening to this call. It's all your loved ones.

I also want to send our deepest thanks to all the frontline and its actual workers around the world, including doctors nurses paramedics and hospital staff and all the police fire and sanitation workers to look supermarkets in pharmacy employees and many others, whose work everyday allows restaurants to stay home safe to say safely at home.

We are grateful to you fear inspired example, apart cars and dedication.

I'd like to acknowledge the extraordinary.

Well I guess professionalism of the entire Goldman Sachs team that manages and supports the Goldman Sachs BDC.

Not surprising it was nevertheless, amazing to watch the speed at which some team was able to absorb the reality of this unprecedented economic environment.

Re underwrite every single investment in light of this new reality and seamlessly ship to working from home, while maintaining unwavering focus on everything we do to manage our shareholders' capital.

I'm very proud to be your colleague and part of this extraordinary Goldman Sachs team.

As a cold in 19 pandemic has unfolded over the last two months, we know that our shareholders are reevaluating their own portfolios and therefore, we have made a priority to communicate information to you about Goldman Sachs.

She SPD quickly and transparently.

[noise] Kerry.

Yes, we can hear you.

Great.

As you like we noticed we issued a press release on March 19th that provide an update on the portfolio, our liquidity profile and our balance sheet.

On April Twentyth, we provided as much of our first quarter operating results, including estimated net investment income and estimated net asset value.

I'm pleased to report that the first quarter results that we announced today are squarely within the asked me to ranges that we provided.

We hope that these shareholder communications have helped you better understand your investment and yesterday and we look forward to providing additional communications as warranted.

So with that let's get to our first quarter results.

Q1, net investment income per share was 45 cents on an after tax investment income of $18.2 million.

The company once again fully covered is given during the quarter with net investment income.

As we announced after market close yesterday, our board declared a 45 cent per share dividend payable to shareholders of record as of June Thirtyth 2020.

This equates to an annualized dividend yield of 12.2% based on net asset value per share at the end of Q1.

During the quarter, although one of our 107 portfolio companies made their expected interest payments and the investments on nonaccrual status declined from 1% at fair value as of the end of Q4, 2019% to 0.1% at fair value as of the end of Q1 2020.

We believe that these results are very solid given the economic disruption that escalated over the course for the quarter.

Well, we certainly didn't manage the SPD in anticipation of old pandemic, we do believe that the longstanding focus on risk management imported by going Saks platform has put U.S.P.D. in official shrank in a number of key areas.

First as liquidity.

As the impact of the pandemic came into focus in early March companies around the world begin drawing on Undrawn loan commitments short balance sheets.

And our own portfolio, we were asked to find approximately a quarter of our total unfunded commitments during the quarter.

We had more of them ample liquidity to satisfy those obligations and continue to maintain cash on our balance sheet in them out well in excess of all remaining outstanding unfunded commitments.

Second is balance sheet strength.

Importantly, after quarter end, our funding mix is weighted toward unsecured debt with 56% of our outstanding that an unsecured obligations and 44% in secured obligations.

This mixed provides us with significant excess collateral to satisfy secured lenders.

Equally importantly, none of our debt is scheduled to mature in the near term.

The next scheduled mature maturity is far $155 million of unsecured convertible notes due in twentytwenty too.

We currently have more than sufficient availability, our revolving credit facilities to repay these notes upon maturity.

Third as portfolio positioning.

Our investment philosophy has always been to underwrite each loan based on the assumption that an economic recession recession will occur while alone is outstanding.

This philosophy permeates the construction of our portfolio, which is focused on first lien senior secured loans to U.S. dollar south middle market companies that we believe our less exposed susceptible pressures.

As a result, our portfolio has limited direct exposure to sexist sectors that have been most impacted by the Tobin 19 outbreak such as energy travel restaurants, hospitality and retail.

Instead, the largest exposures archer sectors that we expect to have more resilience, namely health care providers and services software interactive media and services healthcare technology and IP services.

Well, we believe that our liquidity profile balance sheet strength and position and portfolio positioning our significant sources of value in this environment. We're keenly aware that the timing of an economic recovery is uncertain.

Our team is bring extraordinary focused for portfolio and working with the private equity sponsors and owners of these companies and the respective management teams to plan for an extended period of disrupt disruption.

We've been encouraged by the speed at Thoughtfulness and planning process that all parties are brought to bear and this time of uncertainty.

Businesses are demonstrating remarkable creativity as they adapt to meet their customers changing needs and preferences.

While much of a pandemic remains to play out much much has also been dodge prepare into that.

Before turning it over to John provide more detail on the portfolio and the investment environment I want to provide an update our previously announced merger with our affiliated business development Company Goldman Sachs Middle market lending Corp., which we refer to as M.M.L.C.

On prior calls we've described what we believe our the significant benefits the proposed merger of the proposed merger the shareholders of GSP day.

Well the economic environment has changed significantly since the merger wasn't asked most of those benefits remain as compelling today as they were when the merger was announced last December including an expectation that the merger would be accretive to net investment income per share compared with Standalone GSP day.

And overall improvement GSP, these portfolio metrics, including higher portfolio yield and greater single name diversification.

And benefits of increased scale, including improved access to diversified funding sources cost synergy and greater freedom liquidity.

However, due to the volatility of GSP de stock price precipitated by covert 19 as of today, we will be unable to meet a closing condition of the merger that requires MLC shareholders to receive shares of GE SPD that have a market value in excess of MLC is that asset value.

The outstanding the outside the for the merger specified in the merger agreement is December at night Twentytwenty.

We are respected boards for each of GSP d. and have a MLC continued to closely monitor our financial market conditions are maintaining dialogue regarding the transaction.

We will be short provide any update to shareholders regarding the merger as warranted.

In addition to think in close contact with our portfolio companies infectious sponsors. We also continue to look for new investment opportunities.

Nevertheless, we are going to apply our existing disciplined investment approach to all new investments remain prudent with our capital with that let me turn it over to Jon Yoder.

Alright, Thanks, Brendan [noise].

The financial performance of our portfolio companies during the quarter was generally solid.

But of course, the operating environment changed dramatically during the last few weeks of March.

We were very pleased with notwithstanding the significant you're an uncertainty the equipment financial community by the end of the first quarter, all but one of our 107 portfolio companies made their expected interest payments.

This is particularly noteworthy because interest payments argued ended the quarter for a significant majority of our borrowers.

My time with the current doesn't that was well underway in financial markets were really.

[noise] notwithstanding the generally solid fundamental performance of our portfolio companies during the quarter, we mark down the value of the investment portfolio, primarily in recognition of wider credit spreads that we observed comparable asset classes.

This is mark down resulted in a decline net asset value approximately 12% during the quarter.

Well credit spreads have tightened subsequent to quarter end. It is certainly too soon to predict where credit spreads will be but the ended the second quarter or to speculate on any impacts to our Q2 net asset value.

Turning to specific investment activity for the quarter.

During the quarter do investment commitments in fundings were 81.8 million in 95.6 million respectively.

Including net fundings of 20.5 billion in unfunded prior commitments.

The new investment commitments were across four new portfolio companies in three existing portfolio companies.

The new investment commitments were comprised of 99% first lien debt investments.

Now since the outbreak of covert 19, we've seen a significant decline in M&A activity on new deal activity in general.

Small number of transactions that we have completed since mid March have been with companies that we believe are very well positioned to perform in the current environment.

For example, we recently providing financing to accompany that provides a leading software solution allows colleges universities primary school to deliver educational content to students digitally.

[noise] these new investments generally had meaningfully wider spreads.

And tighter term.

We expect these investment opportunities to be relatively rare. So we're not currently anticipating significant portfolio growth in the near term.

During the quarter the company had sales and payments or 46.6 million, primarily driven by the full repayment of investments in three portfolio companies.

Regarding portfolio composition at the end of the quarter total investments in our portfolio were 1 billion 422.7 million that's fair value.

Comprised of 92% in senior secured loans.

Including 75.5% personally.

2.4% unforeseen last though tranche and 14.1% in second lien debt.

As well as 0.5% an unsecured debt and 7.5% can preferred and common stock.

We also had 61 point threemillion unfunded commitments as of March 31st, bringing total investments in commitments to 1.484 billion.

As of quarter end.

Company had 107 portfolio companies operating across 38 different industries.

The weighted average yield can provide investment portfolio at cost at the end of the first quarter was 7.7% that's compared to 8.2% at the end of the fourth quarter.

The weighted average yield of our total debt in income producing investments at cost was 8.5% ended the first quarter as compared to 9% at the end of the fourth quarter.

The decline in yields during the quarter was primarily attributable to the decline in Livewatch.

However, the vast majority of our portfolio has a LIBOR floor of 1% or higher.

Turning to credit quality.

The weighted average net debt to EBITDA of accompanies our investment portfolio was 5.6 times at quarter end versus 5.7 times in the fourth quarter.

The weighted average interest coverage on the companies in our investment portfolio at quarter end was 2.6 times compared to 2.4 times that into the fourth quarter.

Ill now turn the call could Jonathan could walk through our financial results.

Thanks, John.

During the quarter, we took a number of actions to improve our balance sheet profile.

First we favorably amended our senior secured revolving credit facility agreement to reduce the Stephen interest rate.

LIBOR, plus 2% to LIBOR plus 1.875%.

And to extend the final maturity date feed from February 2023 to February 2025.

Second on February 10 to 2020.

We closed a public offering of 360 million.

I get principal amount of unsecured notes through 2025 and bearing interest at a fixed rate of 3.75%.

We use the proceeds from the sale of notes, partially repair senior secured revolving credit facility.

This action left us with no near term maturities until our convert comes due in 2022.

All preserving almost 400 million in availability under our revolving credit facility.

Third we added excess liquidity to our balance sheet with a goal of maintaining cash on our balance sheet.

In excess of our unfunded obligations for the time being.

As a result, we had 86.4 million of cash and cash equivalents on our balance sheet as of the end of Q1 against unfunded investment commitments of approximately 61.3 million.

Turning to our operating results.

Our net investment income per share was 45 cents compared to the prior quarter 48 cents.

Loss per share was $1.58, primarily as a result of the net change in unrealized appreciation of our portfolio compared to earnings per share of 22 cents in the prior quarter.

Our total investment income for the first quarter was 32 million, which was down from $35.5 million last quarter.

The decrease was primarily driven by an early exit fee associated with <unk> repayments in Q4.

We ended with net expenses of 13.4 million for the quarter as compared to 15.6 million in the prior quarter.

Expenses were down quarter over quarter, primarily reflecting the absence of incentive fees for the quarter.

During the quarter ending net debt to equity.

Was 1.4 times versus 1.13 times at the end of Q4.

We ended Q1 with net asset value per share $14.72 as compared to $16.75 from prior quarter.

Driven by unrealized depreciation on investments.

Early as a result of widening credit spreads related to the current environment, Brendan and John discussed earlier.

The company had 46.6 million in taxable accumulated undistributed net investment income at quarter end, resulting from net investment income that has exceeded our dividends historically.

This equates to $1.15 per share on current shares outstanding.

Consistent with prior years, we spilled over all of the undistributed and I into 2020, as we believe the 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 if we had to replace that amount.

With that.

I will turn it back to Brendan.

Thanks, Jonathan.

In closing while the current environment poses unique challenges. We are pleased Carla longstanding focus on risk management puts us in a solid position to withstand the current environment.

We're focused on working with the management teams in the financial sponsors of our portfolio companies to navigate through this challenging time.

The same time, you're keeping capital watch for unique opportunities to create value for our shareholders as always we thank you for the privilege of managing your capital and are always open to hear me, especially as all this work this environment with that as let's open up one for questions.

Ladies and gentlemen, we will now take a moment took a policy acuity.

Is it from the line the Finian O'shea with Wells Fargo Securities. Please go ahead.

Hi, Good morning, I hope everyone's doing well thanks for having me on first question on the pending merger or proposed merger.

Understanding the NAV commissions.

Do you have any color on the respective you know forwards and shareholders interest, perhaps as they understand a market conditions right now have changed things.

And if they do still have interest are there ways that you can I don't want to say work around the the not provisions, but rework the merger.

Somehow to satisfy that.

Yes, and Oh, one Oh, God veterinary I hope, you're doing well and yeah. Let me give you alluded back on contracts and maybe just refresh everybody's memory or memory regarding transaction, we announced this back in December of last year and the way. The deal is a is structured is if theres, a fixed exchange ratio and whereby yes.

Yes, PD one issue 0.99, Threenine shares reach MLC share outstanding and so that's a somewhat unusual a wafer for that company is set to merge usually these these transactions are down on an after an hour basis or you know if I recall thing when the deal was announced just PD was trading at a very significant premium juice underlying and.

Hey, so it was able to do a fixed exchange ratio deal had the transaction be accretive GSP d., but still deliver a very attractive above NAV outcome for for MLC. So obviously a lot has changed in the world since since December you know today, given where GE SPD trades after.

Negotiate exchange ratio the value the market value of the consideration that MLC would get would be blow and I haven't melfi is NAV. So so with that we wouldn't today be able to meet a important condition precedent to close an appeal, which is based on the 40 act concepts around deals you're not being dilutive to shareholders overall so.

So all that being said when you when you step back and look at at the situation in totality all the strategic benefits transaction that we discussed a way back in December and I'm sure with you fan at all times, all that supplies so for GE SPD.

The overall ports portfolio construction.

Metrics would improve the yield on the portfolio would improve the internet per share metrics would better for MLC, a they'll get the benefit of the liquidity events and currently I certainly in this environment.

You'll get an liquidity without for example happened so tough environment.

That said that you know that said that that's a potentially very attractive opportunity I think very importantly, this environment or through the have enough. He lives. When you think about the benefits of being in a bigger.

Larger BDC with more scale more access diversified funding funding sources as we've talked about a lot UGI SPD has certainly very diverse funding sources, which is a big benefit in its current current environment that would also that'd be available to have enough see as well. So yeah as we sit here today, we obviously had a it come through.

Our board meetings, I think our board's recognize all those big picture.

Your benefits to two transaction they continue to maintain a dialogue with that with both GSM in that and with each other and so I think we can leave it that fan you have what will be sort of keep you posted if anything changes regarding transaction or if there's any update as a as warranted here.

Okay Fair enough. Thank you and just a.

A reminder.

On the fee waivers that you proposed for GSP. The you know related to this transaction or are those still.

Independent on schedule or is there any time you have all have multiple all those are all those can or are part of the merger agreement and there's been there's been no change to that merger Minas all those fee waivers or would continue to apply.

Through the course of 2020.

But if the merger doesn't happen do they reverse.

So again looking at that at the at the way the merger documented structure today, a there that theres defeat cancer called the outside the by which you know something has to happen were terminated.

Termination provisions start to kick in that's really not until December of of Twentytwenty I and so we have no expectation were no reason to think that in the short term anything would change you have to to that dynamic which would cause us to change fee waivers.

Okay, Thanks, and just one.

Final question for me can you touch a bit on your investment strategy.

You know I assume you want to keep.

In in <unk>.

<unk> mindful of your investment grade position in their warning on you know total leverage from here.

Are you going to.

Really dial it back on new investments are you going to de leverage or any color yeah, you'd give us on on how you're looking at sure. So yeah look I think you're going forward question fan when you. When you look at the current environment I think it really highlights the benefits of being investment grade rated core.

Rich and a and you're having access to be able to issue unsecured debt gives a lot of financial flexibility to us and yeah. We talked a lot about this both in early press releases during the quarter reminding the market about how were capitalized or when do you think about the benefit of having unsecured debt and capital structure would that thieves is through.

The lens of the of the secured lender.

Secured lenders the ones were to whom you pledged collateral or they're generally there's covenants in those transactions having them being in a very comfortable position is where you want them to be to provide stability in runway church. Your capitalization. So as we sit here today, our secured lenders are covered almost three times over by our collateral. So that's a very good that position today.

In.

Yeah, when we when we endeavor to get a rating and initiate bond we articulated a levered strategy where were now operating at the high end of what we are taking what we articulated by virtue of adding cup last us in the quarter and of course, marking down the the NPV and so yeah. We do think it's small.

To be thoughtful and prudent the bar certainly high.

For any new investments and of course, we want to make sure there's capital available if necessary to support some of our portfolio companies and so in that context, we think we're overall in a very good position.

With the agencies with our capitalization overall and we wouldn't expect just to take up leverage.

Just to take on new opportunistic higher yielding opportunities.

Because they're available our hope is that there'll be more organic de leveraging that would give us that that effort that opportunity here. So it's a balanced approach fan we want to be thoughtful and mindful. We certainly are in a very very unique operating environments and I think in any case, the bar will be quite high for new investments.

Got it that's all for me and thank you so much extra.

And.

At this time there appear to be no further questions you have the bar.

Thank you Dennis I I suppose that means we didn't we did a nice shot for the quarter of of of talking to our shareholders and we certainly did put a priority on that so we do appreciate everybody's time and attention and if you do have any additional questions. Please don't hesitate to reach out directly to the team so with that Dennis we can close call.

Ladies and gentlemen, this does conclude the Goldman Sachs BDC first quarter 2020 earnings conference call. Thank you for your participation you may now disconnect.

[music].