Q4 2020 Goldman Sachs BDC Inc Earnings Call
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Yeah.
Good morning. This is Erica and I will be your conference facilitator today, I would like to welcome everyone and to the Goldman Sachs BDC, Inc. Fourth quarter, Andy Here and 2020 earnings Conference call. Please note that all participants will be in a listen only mode until the end of the call. When we will open up the line for questions before.
And we begin today's call I would like to remind our listeners that today's remarks may include forward looking statements. These statements represent the company's belief regarding future events that by their nature are uncertain and outside of the company's control. The companys actual results and financial condition may differ possibly materially from what is indicated.
And these forward looking statements and some.
The result of a number of factors, including those described from time to time and the company's SEC filings. This audiocast is copyrighted material of Goldman Sachs BDC, Inc, and may not be duplicated reproduced or rebroadcast without our consent yesterday. After the market close the company issued and earnings press release and posted a sub.
Mental earnings presentation, both of which can be found on the homepage of our website at www Dot Goldman Sachs BDC Dot com under the Investor Resources section. These documents should be reviewed in conjunction with the company's form 10-K filed yesterday with the SEC.
This conference call is being recorded today Friday February 26, 2021 for replay purposes, I will now turn the call over to Brendan Mcgovern, Chief Executive Officer of Goldman Sachs BDC.
Thank you Erika good morning, everyone and thank you for joining us for our fourth quarter and year end 2020 earnings conference call.
I'm joined on the call today by Jon Yoder, Our Chief operating Officer, and Jonathan Lamm, Our Chief Financial Officer.
I'll begin the call by providing an overview of our fourth quarter results include and commentary on the performance of our portfolio. Following the completion of the company's merger with Goldman Sachs Middle market lending Corp, where NMFC, which was completed on October 12 2020.
In addition, I'll offer some perspectives on the current state of the lending environment and the opportunities that we see before us today.
Jon Yoder will then discuss our portfolio activity and more detail.
Before turning it over to Jonathan Lamm to walk through our financial results.
And finally, I'll conclude with some closing remarks before we open the line for Q&A.
So with that let's get to our fourth quarter results.
Our Q4 net investment income per share was 59 cents, an after tax net investment income of $55 $3 million.
Excluding the impact of asset acquisition accounting and connection with the merger with MLC. Adjusted net investment income per share was 48 cents, reflecting solid income performance to support the company's dividend.
Net asset value per share increased to $15 91 per share as of December 31, and improvement of two 7% from the end of the third quarter.
The increase reflected continued improvement and the underlying portfolio company performance, coupled with ongoing and market spread tightening.
On October 12, we closed our merger with MLC, which resulted in a number of benefits to GSP day, which we have discussed at length and prior conference calls, including first a reduction of our net debt to equity ratio from one point to nine times to one times at year end.
Next the Mercury resulted in an overall improvement and G. S. P D portfolio metrics.
<unk> and increase in portfolio yield at cost.
From seven 7% to eight 4% and an increase and single name diversification.
Finally as discussed we expect the merger to be accretive to G. SPD as net investment income per share Boston and the short and long term due in part to our previously announced variable incentive fee cap through 'twenty and 'twenty, one as well as increased asset capacity, resulting from the deleveraging.
As we announced after the market close yesterday, our board declared a <unk> 45 per share dividend payable to shareholders of record as of March 31, 'twenty and 'twenty one.
Further the first of three installments of our special dividends aggregating to 15 cents per share will be paid on March 15th 2021 to shareholders of record on February 15th 2021.
We will be paying the remaining two additional five cent per share installments to shareholders of record on May 14th 2021, and August 16th 2021, respectively.
Additionally, during the quarter our board of directors approved a new can be five one plan authorizing the repurchase of up to $75 million of G. SPD <unk> shares of common stock.
And just to sort of conditions should the Nab should the shares trade below NAV.
Moving on to the market environment.
During the quarter, the continued rebound and equity and credit markets spurred increased capital markets activities, including mergers and debt refinancings.
This trend accelerated into year and aided by the improved economic sentiment, resulting from the FDA approval and certain COVID-19 vaccines.
Transaction activity increased dramatically from the lows of the Covid crisis as buyers demonstrated confidence and economic growth prospects and increase their bids to meet seller demands on pricing.
Lending opportunities proved to be robust in this environment and as a result, and G. SPD had record origination activity during the quarter of $423 million across and extremely diverse set of opportunities, which John will discuss in more detail.
Repayment activity over $250 million was also up sharply during the quarter and we see this trend continuing and the current environment.
As youre, probably aware the syndicated and investment grade parts of the capital markets were particularly robust in Q4.
As a result, we took the opportunity to actively strengthen our liability structure by issuing additional attractively priced unsecured debt at historically low levels for Bdcs, while also expanding our access to secured borrowings our $500 million unsecured note offering price with a coupon of 287, 5% and we increased.
<unk> capacity under our revolving credit facility from $795 million to $1 69 5 billion in Q4.
We believe this refinancing activity situates, our company well with diverse and deep sources of funding.
Subsequent to quarter and in January and Fitch reaffirmed our investment grade rating and revised our outlook from negative to stable with that let's turn it over to Jon Yoder.
Great. Thanks Brendan.
And as Brendan mentioned, the very strong deal volumes during the quarter led to a record amount of new originations.
All of our new investment commitments were and senior secured loans as we continued to me and our focus maintain our focus on lending to sectors that exhibit strong growth. Despite the macroeconomic headwinds that are being caused by the pandemic.
During the quarter and excluding the names that we inherited as part of the MLC merger. We made 22, new investment commitments 13 of which were to new portfolio companies and nine two existing portfolio companies this totaled $423 million.
Meanwhile, net fundings of previously unfunded commitments were $9 $1 million during the quarter.
Sales and repayment activity totaled $252 7 million driven by the full repayment of investments and six portfolio companies.
We continue to expect strong deal activity going forward, though perhaps not quite at the same pace as what we saw in the fourth quarter.
Regarding portfolio composition as of December 31, total investments and our portfolio or $3.243 billion at fair value comprised.
Comprised of 96, 5% and senior secured loans, including 78% and first lien four 4% and first lien last out Unitranche 14, 1% and second lien debt as well as a negligible amount and unsecured debt and three 5% and preferred common stock and warrants.
We also had $242 9 million of unfunded commitments as of December 31, bringing.
Bringing total investments and commitments to 3 billion and $486 million.
As of quarter and the company had 123 portfolio companies operating across 39 different industries.
The weighted average yield of our investment portfolio at cost at the end of the fourth quarter was eight 4% as compared to seven 7% at the end of the third quarter.
This increase as Brendan mentioned was largely driven by the higher yields on the assets that we obtained as part of the merger with MLC.
The weighted average yield on our total debt and income producing investments at cost also increased to eight 7% at the end of the fourth quarter from eight 3% at the end of the third quarter.
So turning to credit quality, the underlying performance of our portfolio companies overall was stable quarter over quarter.
The weighted average net debt to EBITDA of the companies and our investment portfolio was six times at quarter end versus five seven times at the end of the third quarter.
The weighted average interest coverage of the companies and the portfolio at quarter end was two six times, which was flat from the prior quarter.
As of December 31.
Investments on non accrual status, we're just 0.3% and 0.7% of the total investment portfolio at fair value and amortized cost respectively.
As we discussed last quarter.
And one holding GK, which is call GK holdings.
Has agreed to merge with one of its competitors in conjunction with incremental capital from a stack.
GK holdings had been an underperforming asset and as part of the stack transaction, we expect to receive and nearly full recovery of our first lien claim.
And the recovery on our second lien claim is expected to be in excess of our third quarter quarter.
Quarter end Mark.
We expect the transaction to close and the first half of 'twenty and 'twenty, one subject to shareholder approval. However, since the amount of our recovery is now fixed pursuant to the terms of the transaction, we decided to put the investments on non accrual until the acquisition is completed.
Additionally, another holding called Chace industries, which is a second lien secured debt investments is on non accrual is a non accruing loan that was acquired as part of the merger with MLC.
I will now turn the call to Jonathan to walk through our financial results.
Thanks, John.
We ended 2020 with total portfolio investments at fair value of $3 4 billion.
Outstanding debt of $1 63 billion and net assets of 162 billion.
We entered the fourth quarter and the year with a net debt to equity ratio of one times compared to $1. Two nine times at the end of the third quarter and <unk> 93 times following the close of the merger with <unk>.
As Brendan mentioned earlier $500 million and unsecured notes.
With maturity in January of 2026 were issued during the quarter.
The notes priced at a fixed rate of 2.8, 75%.
Additionally, pursuant to the closing of the merger with MLC <unk> revolving credit facility was upsized to a total capacity of $1 695 billion.
At quarter, and 62% of the company's outstanding borrowings were unsecured and.
And we feel we have ample capacity to pursue new investment opportunities, while being mindful of and appropriate mix of secured and unsecured borrowings.
And.
Before continuing to the discussion of the income statement and expansion on a quarter over quarter change and net assets. It's important that we discuss the merger accounting to provide some context.
Under GAAP the merger was accounted for under the asset acquisition framework, whereby fair value of the consideration paid by <unk> for MMO C was determined to be the GSP day share price at the closing date of the transaction less and adjustment to account for the illiquidity of the shares given the lockup.
And post on MFC shareholders.
Clothes multiplied by the shares issued pursuant to the exchange ratio.
The final consideration yielded a purchase discount for the assets of MLC.
<unk> to their fair value at the closing of the merger of $84 million.
This purchase discount was allocated pro rata based on fair market value to the former fully funded MLC assets.
As a result, <unk> initial cost basis for the assets equaled their fair value at the time of the acquisition less the purchase discount.
Immediately upon the close of the merger <unk> recognized a onetime unrealized gain equal to the total purchase discount of $84 million as GSP day remark the assets back up to fair value.
And this one time gain as a non cash event.
Consistent with other market discounts the purchase discount recognized at the close of the merger will be amortized over the remaining life of the debt investments that were acquired and will be accelerated if those debt investments are repaid early the.
And the purchase discount allocated to common and preferred stock will not be amortized and will be recognized and to earnings upon a realization event of the stock investment.
The ongoing amortization of the purchase discount on debt investments results and an increase to net investment income and a corresponding reversal of part of the onetime unrealized gain and close.
In order to make the Companys post merger financial results easier to understand and compare to pre merger financial results. We have introduced a number of non-GAAP measures to supplement the GAAP financials and these.
And these supplemental financial measures are intended to remove the impacts of the purchase discount.
Before continuing I will briefly introduce each of these metrics.
Adjusted net investment income and adjusted net investment income per share exclude the amortization and acceleration of the purchase discount. These.
These measures will be less and their comparable GAAP measures.
Adjusted net realized and unrealized gain loss and adjusted net realized and unrealized gain loss per share exclude both the onetime unrealized gain resulting from the purchase discount right up.
And the corresponding reversal of this write up.
These measures will be greater than their comparable comparable GAAP measures other than in this initial quarter, where the impact of the onetime unrealized gain causes the GAAP measures to be higher.
Finally, adjusted earnings per share will will reflect earnings per share is calculated using adjusted net investment income per share and adjusted unrealized and realized gain and loss per share.
Before continuing to the discussion and the income statement the final merger impact to consider as the variable incentive fee cap provided by GSM.
Under the cap GSM will waive any accrued incentive fee necessary for <unk> to earn at least 48 cents of GAAP NII per share.
Further as a result of the impact of the purchase discount G. Sambol voluntarily waive any accrued incentive fees necessary to reach 48 of adjusted NII per quarter through December 31, 2021.
Having covered all of the merger transaction impacts we will now turn to results for Q4 2020.
GAAP and adjusted after tax net investment income were 50, 534 million and 40 523 million respectively for the quarter as compared to $18 2 million of GAAP net investment income and the previous quarter.
On a per share basis, GAAP and adjusted net investment income was <unk> 59, and 48 per weighted average share respectively as compared to <unk> 45 of GAAP net investment income per weighted average share and the third quarter of 2020.
GAAP and adjusted earnings per share were $1 83, and 94, respectively.
This yielded a net increase and net asset value per share of 42.
With ending NAV per share of $15 and 91, or two 7% increase quarter over quarter with that I will turn it back to Brendan.
Thank you very much Jonathan.
As most investors who have followed us for a long time now I typically like to and each conference call by thanking you for the privilege of managing your capital.
Today, I'd like to switch things up a little bit to acknowledge the pending departure and Jonathan Lamm, who has been our CFO since our inception back in 2012.
As a founding member of the GSP. The team Johnson has left an indelible Mark and our company and has made significant contributions as a steward of your capital and.
And so on behalf of Goldman Sachs, Our board of directors, and especially the entire GSP the team I'd like to thank Jonathan for his distinguished service and wish him well and his new endeavor.
Jody Maria a longstanding and managing director at Goldman will assume the role as interim CFO and will continue to manage a team of top notch professionals and the <unk> finance function, albeit identify a longterm and placement for Jonathan with that Erica, let's open the line for questions.
Ladies and gentlemen, we will now take a moment to compile the Q&A roster.
Your first question is from Shannon O'shea with Wells Fargo Securities.
Yeah.
Hi, everyone and good morning.
I guess first day.
So brendan's comments and congrats and Mr. Lam on your <unk>.
Notable tenure at Goldman Sachs BDC I'll start with you here.
So I appreciate it.
[laughter].
I appreciate the waiver until the waiver outline you gave and.
And it looks like a part of this waiver.
Was to.
Sure up the stem the would be.
Capital gains.
And from GAAP accounting et cetera.
You could word all despite of the mindset.
But the question is.
With.
And this is a pretty complicated line item and the model.
Roughly where do you stand on your normalized incentive fee are like.
Are you caught up.
In terms of your hurdle rates.
Going forward should we think about that.
As your question on the capital gains side or on the line.
Both the cash on the capital and side, we're not we're not we're not fully caught all that's an annual vesting, but I wouldn't expect that to have any any near term impacts.
With respect to the net investment income incentive fee.
What this waiver does and just to make sure that you're you've got it right.
A capital gain or the unrealized gain that was a result of this merger accounting effectively excel and accelerated or caught up previous losses, which caused us on the net investment income side to be able to to fast incentive fees that previously.
<unk> G sand pad.
We've temporarily waived but because there is this 12 quarter look back. This write up would have caused would have caused it.
<unk> to take a significant amount of those previously passed on incentive fees and the waiver, though effectively comes in and permanently waves and <unk> ability to ever catch up or take any of that net investment income incentive fee.
Hopefully that that resolves it but its the game again caused and.
And NII incentive fees that GSM is waning.
Right and the.
The NII fee had started.
It's a pure spec.
Yes through the cap last quarter modestly.
And then.
So I was assuming it'll be somewhere in between and given the credit performance, but it sounds like a pretty normalized.
And income incentive fee accrual to resume obviously before the waivers and such next quarter.
That's correct.
So for the remainder of the year through the end of 'twenty. One the waiver will stay in place to waive any incentive fees in order to cause <unk> to earn and adjusted net investment income of 48.
So if if GSP dis incentive.
<unk> net investment income on an adjusted basis is above 48 cents, then <unk> will take and incentive fee, but if it's below and they will.
And they will effectively with any of that normalized incentive fee that you're talking about in order to get to that.
48 of adjusted NII.
Okay, well, you're you are as sharp as you work on your first day and congrats again.
John.
And so it's too.
And what one to Brendan and Mr. Yoder.
On the portfolio.
The only thing that the.
The leverage line from $5 76.
Was this more was this like a result of refreshing the portfolio. There was a lot of activity this quarter.
Or is this perhaps.
Some COVID-19 related EBITDA decline.
The debt recaps, just any color on there, mostly first mostly personally and portfolio its pretty high leverage right and.
And now your first comment is in it and I think that's correct is that as we went through it and a lot of detail a lot of portfolio activity. This quarter, both in terms of repayment activity.
And when you think about the nature of of those more seasoned loans the trajectory tends to be loans that decrease from a leverage perspective over over their life as they grow and.
And so that's where the recycling of those those repayments into a higher number of other.
New issues at a higher first dollar attachment point is causing that and that creates the underlying per.
Performance of the portfolio companies and a broad basis continues to be strong as was reflected in our broadband marks within the.
Within the within the within the portfolio and the company as well, yes, and I mean, the only thing that I would add I'm sure. You noticed noted this thin, but the weighted average interest coverage didn't change. So it's not it's not and I think that's another good indicator and it's not.
Performance related it's just really mix shift between newer loans, where when you start as Brendan said, they're generally higher leverage but then the companies if there if you've done your underwriting properly they grow over time their EBITDA and that brings down the debt the debt to EBITDA ratios.
Okay.
That's.
Helpful. That's all for me and ill.
I'll jump back and thank you. Thanks.
Thanks, Dan.
Your next question is from Robert Dodd with Raymond James.
Hi, guys and you say Bob.
And it will be a sad day to see you go Jonathan but I wish you luck and and Yamaha.
Uh huh.
And you're off to day.
Thanks for that.
Thanks Robert.
And that's really it.
And kind of.
Pardon.
Would it more concisely.
And I appreciate all the disclosure about the waiver as well et cetera, but if we look.
Beyond 'twenty one.
Perpetuity. This the discount accretion is not just and unless our whole portfolio turns over this year, it's not going to be just a one or one year, but that will.
Discount accretion, which is obviously non cash.
Accounting treatment will be excluded from the calculation of.
Three investment.
Free incentives and.
Beyond 'twenty, one and will you be taking and income incentive fee.
On the accounting gain beyond 'twenty one.
It's a great question and and and the answer is is that the way the investment management agreement works is that you.
You can't exclude it.
Because it is part of income that being said I would not expect for it to have any impact given the way that we have the limiter set up so for every dollar of income accretion.
And that's going to come in related to this discount theres also going to be a corresponding unrealized loss.
And would which would effectively limit the incentive fee anyways, Robert so it'll it'll be in there, but effectively all of the impacts are really taken this quarter because of that.
Net corresponding up down and that you see and the way that our incentive fees calculated.
Understood and then.
I stood about the impact on the unrealized my only point being of course the debt.
It could be excluded and less.
And let's see.
Management fee agreement as amended or a permanent waiver is put in place.
That's right Jeff.
Yeah, you're hitting on exactly you're hitting on exactly the issue like so in order to change your math your investment management agreement you Gotta go out to shareholders get to vote and all that so.
The calculation we'll.
We'll we'll effectively work and such a way that they won't need to be a waiver, but should there I've ever been a situation. She Sam would have basically would stand and and obviously wave.
And that situation post 'twenty one.
It won't it won't have an impact Robert got it.
I appreciate that.
Moving onto.
Portfolio.
And the originations and in the quarter were obviously value. So I'll, let me and obviously, it's a pick up business now.
So the previous ones and it should be bigger, but even with that and might that day, but the one thing that did kind of leap out to me is is the funded versus unfunded.
Hum funded three quarters.
Commitments, which seems relatively low compared to historic.
Patents is that is that a lot of.
And one of the Volvo's acquisition lines can you give us any color.
The unfunded is and why it was that led CBS highs and proportion of new commitments this quarter.
Yeah. So.
And the way, we sort of go back and take a closer look and give you much more detail about that breakout but.
Yeah.
And our term loans.
<unk> are likely to be.
And to the.
And I'm funded portion based on those those those new commitments.
And so just looking at the nature of the commitments and.
Deals that we did there during this quarter a number of platform acquisitions, where M&A.
As a expected outcome within the sponsor's plan and so providing a delayed draw term loan a.
To enable the that the sponsor are subject to certain conditions to use that capital to pursue those transactions and so not a bigger increase and revolvers.
As a general tool and the and the toolkit, but more around D to T cells, and then I'd say Moreover, when we look at just the total unfunded exposure here I think it's in the debt.
And the $250 million range on a $3 $3 million per $2.3 billion portfolio.
Yes, I think thats.
Probably pretty consistent with where we've been historically overall, so certainly recognized and this particular quarter just looking at the originations it might be EBIT skewed, but overall I.
And I think where were and are pretty similar spots, where it would be prospectively and I pointed out and looking at that amount of capital and we've talked about this a bunch Robert we certainly within our own.
Risk parameters, you know view that money as a as a as committed but it is a source of capital.
Capital, that's being used and and in fact by the by the company that's not being used to generate income and so the future fundings are that are potential future increases and the and the.
Our run rate income per share for that portion of the company as well one thing that I would add Robert is.
If we take a longer term historical view of unfunded commitments I would say that relative to you know maybe five or eight years ago, a lot of the unfunded commitments that you were asked to make or in the form of revolving commitments that were kind of rainy day type of funds and never really expected to get drawn on or.
I think you know as we've as as the sponsor community has kind of developed into a wider use of strategies, where as Brendan mentioned, they're there they're there.
Investing and platforms that they then expect to do a lot of follow on or tuck in acquisitions for.
It means that a lot of the unfunded today is really more specifically for those acquisitions for those sort of delayed draw to make acquisition and so the impact to US is that we now expect that most of our unfunded or many probably the majority of our unfunded commitments will actually be funded and generally speaking what we're seeing is that they get funded realm.
And the Tivoli quickly, it's not the kind of thing where that sits out there for three or four or five years and never gets drawn but again because of the strategy and the sponsors to make tuck in acquisitions for their for their companies. It tends to get drawn reasonably quickly. So it's becoming as Brendan said, it's not the most efficient use of our balance sheet to make those commitments.
But the trends are positive and that we don't keep we don't stay unfunded for terribly long.
Understood and that kind of ties into two follow ups I had to learn and be a covenants right.
You said you expected strong deal activity, but not at Q4 levels and Q4 is obviously very very strong.
So.
And I presume to be that means you expect commitments and new commitments to be yes, and continued to be strong through 2021, which is certainly consistent with what we're having I mean, and then on top of that you expect.
And the unfunded commitments you have to be to be drawn as well.
And so yeah.
I certainly don't think you you haven't.
And rich problem on leasing and de Levered with that and I'll say et cetera, but.
Where is your comfort level in this environment for free.
Our leverage obviously, you've got a target range, but kind of with the comfort level given.
And if there was unfunded.
Sat out there and a little bit, but you would expect them to be drawn.
And whereas the comfort level in the intermediate period.
Yeah, there's a lot embedded in that and that question and then.
Sorry.
And I'll hit on the specificity and and and maybe yeah.
A little bit of a backward looking and we.
And we look at having gone through the Covid crisis as we always do.
From a risk management lens as we've talked about we feel really really confident in the risk management approach with a lot of oversight and decades of experience here here and the firm I think our models and our approach proved to have worked and looking back.
We went through a severe crisis and the balance sheet certainly took a hit we marked down the assets significantly and were never really close to being in violation of any of our covenants or any of the regulatory issues that we had we're obviously quite pleased that our assets have performed.
And so I think through that lens and investors should take comfort, even though we went into the crisis at a higher historical leverage.
And I think things turned out quite quite well certainly and the merger of the MLC was a further deleveraging events and all that being said, obviously in the context that crisis and the context of the industry moving to two to one a lot of discussions with fixed income investors. There's a lot of discussions with the rating agencies.
And I and I would say.
And looking at that through the lens of our risk management.
Models as well.
1.2513 times, our debt to equity is is where I think we are.
And up Theres, a theres a more nuanced discussion as you know based on loss, given default and asset quality and.
And type et cetera, but I think and the interest of just sort of giving a number that you can orient too.
That's what that's where I would describe to you and I would tell you that also.
And we're factoring that and we're including those unfunded and so and so we're not excluding.
And certainly I've seen those are obligations, we've always viewed those as obligations that can get called.
And given point in time, so that's a that's something to be aware of as well and then.
At that point through and.
Robert the only thing I would add to that is you know what.
And specifically on on the comment that I made about where <unk> seen and continue to expect fairly robust deal activity and in this unit.
And this year.
Remember that debt. We also when we see periods of elevated deal activity of new originations it tends to be.
Highly correlated with high levels of repayment activity just like we saw in the fourth quarter.
That's the other side of the coin here that they're kind of tamped down on overall portfolio growth.
Got it thank you.
Is it for my questions I appreciate it and congrats.
Thanks Robert.
Yeah.
At this time there are no further questions. Please continue with any closing remarks.
Great. Thank you Erica and thank you all for your time today, you know, it's been obviously, a pretty brutal winter here in the northeast, but we're finally looking like we're getting a break in the weather here. So you might say February came in like a line whats going out like a lamb.
And that one.
Yes.
And thank everyone.
Yeah.
Ladies and gentlemen, this does conclude the Goldman Sachs BDC, Inc. Fourth quarter 2020 earnings Conference call. Thank you for your participation you may now disconnect.
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