Q3 2020 Goldman Sachs BDC Inc Earnings Call
Furthermore, weighted average interest coverage a measure of cash flow coverage of debt service remains very healthy at 2.6 times.
We know that investors are keenly focus on loan amendment activity as an indicator of any portfolio stress.
We did observe that loan a minute net amendment activity was elevated in Q3 compared to historical levels that said. However, the majority of amendments were granted the companies that are performing well, we're seeking technical relief in many cases to pursue the accretive M&A transactions I described earlier.
This dynamic has given rise to growth in our pipeline of attractive investment opportunities, which we are well positioned to pursue.
In those instances where companies are seeking covenant relief to manage the business impact from the healthcare health crisis, we have generally been successful in negotiating for junior equity capital to come into the businesses to support both liquidity and debt service.
In Q3, seven of our portfolio companies receive commitments of new junior capital evidenced thing the confidence that business owners have in the enterprise value and future prospects of these businesses as well as the safety and stability of the more senior portion of the capital structures, where we invest.
Presently among the 110 companies in our portfolio just one company is out of compliance with covenants.
In addition, we continue to observe that our portfolio companies have the wherewithal to remain current on their cash obligations to us and as result payment in kind or Pik income represented just 5.3% of total income during the quarter.
We believe the demonstrated ability for our portfolio companies to meet their interest obligations and cash is a testament to the underwrite to that to their underlying health and durability and bodes well for credit performance.
During the quarter no new investments were placed on nonaccrual and total non accruals were de minimis at 0.1% of fair value and 0.9% at cost at quarter end.
Next I'm delighted to announce that on October 12, 2020, and GE SPD completed its previously announced merger with MLC.
We believe the transaction delivered significant benefits all stakeholders.
For example, the transaction increased gsvs portfolio yield at cost while at the same time, reducing the percentage of nonaccrual assets.
With 3.5 billion of assets. The company has significant scale, which we which we believe delivers benefits to all stakeholders, including enhanced access to diversified sources of funding to further strengthen our balance sheet position.
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To that end, perhaps the greatest benefit the merger was a substantial deleveraging that occurred.
As of the closing date of the transaction GSP is net debt to equity ratio was just 0.93 times down from 1.29 times at the end of the third quarter.
As a result of this deleveraging the company is now well positioned patiently deploy incremental capital and increased net investment income in the current environment.
Finally in connection with the completion of the merger our board of directors has reauthorized and amended and and amended the company's Tenbfive one plan.
This is the amended plan increases the buyback authorization to $75 million from $25 million previously subject to certain conditions with that let me turn it over to Jon Yoder great.
Great. Thanks, Brendan so to pick up on some of the comments you made we are certainly pleased with the EBITDA with the stability and resilience demonstrated by our portfolio under adverse economic conditions over the past several months in.
In part this strong performance can be attributed to a notable and deliberate shift in our asset composition towards more senior first lien loans over the past several years.
To recap our portfolio statistics at quarter end total.
Total investments in our portfolio were 1 billion $431.2 million at fair value, which is comprised of 93.2% in senior secured loans, including 75.5% in first lien 2.4% in first lien last out unit tranche and 15.3% in second lien debt as well.
0.5% in unsecured debt and 6.3% in preferred common stock and warrants we.
We also had just under $60 million of unfunded commitments as of September Thirtyth, bringing total investments and commitments to 1 billion 490.4 million.
As of quarter end the company had 110 portfolio companies operating across 38 different industries.
The weighted average yield on our investment portfolio at cost at the end of the third quarter was 7.7% as compared to 7.5% at the end of the second quarter.
The weighted average yield of our total debt and income producing investments at cost remained at 8.3% at the end of the quarter.
During the quarter, we made five new investment commitments four of which were to new portfolio companies and one of which was to an existing portfolio company.
Totaling $11.6 million.
In addition, we received $24.7 million in repayments, which was driven primarily by the full repayment of investments in two portfolio companies.
Overall, both sales and repayment activity was relatively muted this quarter.
As previously discussed new asset origination was constrained during the quarter as we were operating at the high end of our target leverage ratio going into the merger with MLC.
As we look forward, we see significant incremental operating flexibility afforded by the deleveraging.
That resulted from that merger transaction.
And as Burton mentioned, we expect to be patient and thoughtful going forward as we deploy new at new capital into new investments.
Similarly, while repayment activity slowed significantly during the depths of the crisis, we do anticipate an increase in repayments consistent with a general uptick of transaction activity that we've experienced in private markets in recent months.
Already in the fourth quarter, we received full repayments of two portfolio companies.
And a third portfolio company called GK Holdings has agreed to merge with one of its competitors in conjunction with the sale of the combined company to a spec.
GK had been GK holdings had been an underperforming asset and as part of this spac transaction, we're going to we expect to receive a nearly full recovery of our first lien claim.
In the recovery.
On our second lien claim we expect to be significantly in excess of our mark as of the third quarter.
As a result, we market the investment value prior to the closing of our merger on October 9th.
And we expect this transaction to close in early Q1 of 2021.
I will now turn the call over to Jonathan to walk through our financial results.
Thanks, John.
We ended the third quarter of 2020 with total portfolio investments at fair value of 1.43 billion outside.
Outstanding debt of 920 million and net assets of $626 million.
Our net investment income per share was 45 cents, which was unchanged from the prior quarter.
Earnings per share were 80 cents as compared to 86 cents in the prior quarter.
We ended the third quarter with a net debt to equity ratio of 1.29 times versus 1.33 times at the end of Q2.
Importantly, as Brendan mentioned subsequent to the closing of the merger the net debt to equity ratio came down to <unk> 0.93 times, thus, providing the company with incremental capacity to deploy capital into new investment opportunities.
During the crisis. The company maintains a significant amount of cash and cash equivalents directly on the balance sheet as evidenced by a large difference between our gross and net debt to equity ratios.
Subsequent to the closing of the merger produced a significant portion of that cash to pay down our secured revolving credit facility.
In addition, pro forma for the completion of the merger at the end of Q3, the company had approximately $690 million of liquidity.
I would also add that as of Q2 2020, our unsecured debt percentage was 56%, but pro forma for the merger. It is approximately 30% due to the high percentage of secured financing ported over from MLC.
I would reiterate comments made on previous calls, but we are keenly focused on ensuring a healthy balance of unsecured debt in our capital stack as it provides the company with significant financial flexibility, especially as evidenced on our own balance sheet during the crisis.
Turning to the income statement.
Our total investment income for the third quarter was 31.5 million, which was up from $30.6 million last quarter.
The increase was primarily driven by an increase in prepayment related income and amendment fees.
Net expenses were $12.9 million for the quarter as compared to $12 million in the prior quarter mix.
Net expenses were up quarter over quarter, primarily driven by the lower management fee waiver in Q3.
NAV was $15.49 per share up 2.3% from the prior quarter driven by net gains in our investment portfolio. As a result of continued improvement in portfolio company performance as well as from further tightening of credit spreads.
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 dividend historically.
Pro forma for the completion of the merger at the end of Q3. This equates to 46 cents per share.
As discussed on prior calls we believe that the cost of spilling over this income in the form of excise tax is a small price to pay relative to the much higher cost of issuing new equity.
With that I will turn it back to Brendan.
Thanks, Jonathan in.
In closing we are pleased with the performance of the company under these challenging operating conditions.
During the quarter asset values continue to improve nonaccrual investments remained low and we de leverage the company's balance sheet, which which gives us great flexibility to navigate the current environment.
As a result, we believe the company is on a strong footing to continue to deliver attractive results for all of our stakeholders as always we thank you for the privilege of managing our capital and please don't hesitate to reach out if you have any questions.
Next we'll turn it back.
Off line for questions.
Ladies and gentlemen, we will now take a moment to compile the kuni roster.
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And your first question is from the line of Finian O'shea with Wells Fargo Securities. Please go ahead.
Hello.
Hi, guys. Good morning, Thanks for me on.
First is rare.
Thank you my last one was on the special dividends.
Were those related to.
Also related to the waivers or.
The spillover in general or something else.
Yes, yes, Ben good afternoon, yeah, you'll you'll recall when we initially.
Announced the merger back in December of last year, we put in place the fee waiver thought we had that since we're putting in this place the fee waiver, there's incremental earnings that that would enter that it would be better to actually put that back in shareholders' hands directly in the form of these specials. So back in December we announced these these.
This 15% aggregate dividend and so thats the background. There. This is something we've we've talked about going back since since December.
No broader change in our in our in our dividend policy or chair, but but we did think guy in the in connection with the merger and given those fee waivers better to put it back that cash back into shareholders hands.
Uhhuh.
Okay. Thanks, and then just the art.
On G.K.
So obviously good outcome.
Also for for.
For modeling I think those at least on partial non accrual will you have like a.
We're store a.
The amount of income next quarter any.
Any color there and then I suppose just on the Mark you had that.
Mark down to you know Uh huh.
I think.
Seven years or so or below.
As for sort of context like it did improve the didnt like recently.
Have any duress or or or was any color on how go ahead, yes.
Yeah, Thanks, and I'll give you a little bit of background here on the on the goings on with the with GK. So yes. This is a business that does.
IP educational training types of services and that has had bid process of its IPO frankly, a lot of it in classroom books on that online as well and.
And so had been underperforming so you know for effort for quite some time and our marks coming into.
Yes at the end of Q2, we have a position in both the first and the second lien. The first lien I think we have marked somewhere around the 50 cents on the dollar context and 52 cents in the second was on non accrual we had that marked a lower at around 25 cents.
And so what's happened in the context of Kobe. The company has made some strides in moving their offerings to the online domain, but thats going to that but thats been a a process there but.
But the real value proposition here was a merging with their with with with one of their big competitors and the stat capital is coming into two two to effectuate that merger here and so on a combined basis Im thinking of the synergies that are near to the company the value that was offered to the.
See you in this case to the to the debt holders of GK.
Those are effectively getting a full recovery on the first lien.
And a significant recovery back to the second lien.
So weve a in the context of that of that announcement, which was after September thirtyth, but before the October 9th closing of the merger post the quarter, we did mark up those positions in conjunction with that merger that deal will close in the first quarter of next year. So that the character of our investment will be a cash take back.
As well as some some some take back paper, which will be performing debt. So very very good outcome.
I think got really indicative of a I would say one year conservatism on not on a on thinking through thick and remarks and also just the value creation opportunities in the environment here, where there's a lot of capital looking for good opportunities and so you have very good to be the beneficiary of that.
Well.
Okay. That's helpful. And then just one I am just doing.
Really quick math here I could be wrong, but I think it's something like 6 million.
And that helps and that brings your NAV up you know around 10 cents. Even after the closing costs is is there anything else going on or is it.
Yeah, Yeah. So so so yeah, let me let me take you through a little bit liver the bridge going South Atlantic and ER can chime in as well if I, if I guess I'm wrong here, but again going back the timing of the merger. We we closed the merger on that we was October 12.
And if you think about that process there in a NAV for NAV deal. What we did was a full bring down of the Navy's evolved the SPD and MLC at the time that merger, which was effectively.
Silver knife, the Friday before that we book before that weekend and so what we did was look across the portfolio look for any incremental news. The GK news is obviously significant which engendered that that mark up but in addition in both Dsps and MLC is NAV we included the.
The income that had been generated in that sub period into the NPV is of course that will end up getting good at getting distributed in dividends, but when you look at that at the at the ending 15 57 NAV as of October night that we that we this describes a lot of that is the GK holdings and part of that is the that.
Sub period of income.
Okay.
Thanks, Brendan that's all from me.
Thanks Brent.
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Your next question is from the line of Robert Dodd with Raymond James. Please go ahead.
Hi, guys. Good morning, congratulations on closing the merger.
But if I can go back to your comments on on loan amendments I mean, most of them you know and it sounds like with the technical that's your points are that you may begin to add on acquisitions, but there was some of.
There were no.
Can you give us some or all of them that would.
Well those homes.
I want to say comes can you say what.
How many of those were in kind of days is more legacy.
But it's a much more difficult positions at GE SPD versus where any of them in the more traditional assets at all so overlap with mm all see I would.
What do they in positions that now obviously shrunk as a PC at the pool.
Yes give us any color there.
Yeah no. Good question. So I'll just reiterate some of the comments I made a upfront. So so like I said loan amendment activity was what was elevated the majority of that like I said was really a company's going on offense looking for a incrementals looking for flexibility to pursue those acquisition opportunities and to encourage that.
And like I said, which is we think a a positive event and so so I don't want to leave you with the impression rather that there was a lot of those other companies that were seeking incremental capital and I think I I noted that in those cases, where we were offering a flexibility are really pleased that it was in partnership with the sponsors and the owners who are willing to.
To provide junior capital and Thats consideration forgive if we give them flexibility and it really speaks to the evidence of the value there as I sort of catalog in the in my head you know those themes I don't think theres any significant.
A lack of overlap I think those are those are names that are really across both but both of those vehicles as weve been co investing those vehicles for for that for those who have asked many years.
A lot of.
And then just on the other one I mean, obviously now now leverage is down right capital you've got liquidity I'm right. You know what what are you seeing out there not just in opportunities, obviously M&A activity et cetera. The private equity activity is all will lead to more repayments as well potentially right, but in terms of terms.
You've seen that in terms of the type of industries, obviously do you want the more tech offensive.
<unk> expenses did you Oh revenue in a recession.
So are you seeing the like kind the industries and what are the terms that are available in the market.
On the industry, the absolutely and I think you know as we look at the at the prospective environment, we're going to continue to focus on those industries were having had the ability to observe how they performed in a very stressful economic environment and seeing the resilience yeah.
Yeah, we're very pleased with that with the sectors, where we have been active in the sectors that we've avoided yeah, yeah think of oil and gas retail and other other other troubled areas. We've done a nice job of missing those so we will definitely continue to focus.
On those areas of of technology and business services and healthcare that you are definitely feel more and more resilient and yet the good news is by virtue of having been quite quite active there over many years, we feel like we've got excellent access those opportunities both on new deals as well as those add ons that I talked about in the context of a.
Hey on terms, you'll look to it's a dynamic environment for sure.
<unk> I see we've all observed what's going on in the broader public markets and there's typically a lag with private markets, but yes things have have definitely tightened.
I wouldn't say, we're back at pre cobot levels by any stretch of the imagination, but.
But rio relative to you know call it the summertime or September as as Weve been getting more active certainly new opportunities have tightened, but we think there is there are still opportunities to do transactions that are in the part of the capital structure that we prefer that are in our names industries that we prefer that can be a key.
Better to the overall portfolio yield and that's where our focus is.
Got it got it and just on I mean, obviously now.
In many cases the opportunities that do come up you have to battle with how they performed to your point you you know how these companies now right.
Does that mean, you're going to have have more appetite pool.
But you do it doing him some junior deals and by Judy I mean, like secondly, I think Matt.
Matt its but.
You know what what can you say, yes.
Yes, no we haven't changed our orientation, we've not gotten we're active in the capital I think you can certainly envision an environment that look we've talked about this you know since the early days of the small business credit credit availability availability Act markets are dynamic there certainly can be points in time.
When the supply of meeting that the lenders that are willing to offer that junior capital diminishes relative to demand, which could give rise to that you know outsized opportunities and so we're always mindful that I don't think were quite there yet in terms of seeing that flipped to being quite quite obvious, but it's something that we'll be we'll certainly consider yes.
If and when those opportunities do arise and as you know Robert there's there's a relationship between you know the ultimate balance sheet leverage and your and your asset mix as well and so as we sit here today I think our focus will continue to be you know on the margin on first lien deals as well and we're and we're using.
The incremental debt capacity, we have in the company to finance the those those assets could that change out absolutely a I don't think I'm sitting here today signaling any any any change in that profile, but we're certainly eyes wide open to the possibilities.
Got it thank you.
My questions Okay.
Thank you Robert.
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[noise] [noise] [noise] and at this time there appear to be no. Further questions. Please continue with any closing remarks.
Great. Thanks, Dennis and thank you all of you of course for joining us for the <unk> earnings Conference call today, obviously, a lot going on in the World would.
It would be always eager and happy to answer any questions feel free to reach out directly and we look forward to chatting soon have a great weekend.
Ladies and gentlemen, this does conclude the Goldman Sachs BDC Inc. third quarter 2020 earnings Conference call. Thank you for your participation you may now disconnect.