Q1 2021 Golub Capital BDC Inc Earnings Call
Yeah.
Welcome to T. B D. CS December 31st 2020 quarterly earnings Conference call before we begin I'd like to take a moment to remind our listeners that remarks made during this call may contain forward looking statements within the meaning of the private Securities Litigation reform.
Form act of 1995.
Statements other than statements of historical facts made during this call may constitute forward looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties.
Actual results may differ materially from those in the forward looking statements as a result of a number of factors, including those described from time to time in G. B D. C S filings with the SEC.
For materials the company intends to refer to on today's earnings Conference call. Please visit the Investor resources tab on the homepage of the company's website Www Dot Golub capital BDC Dot com and click on the events presentations link G. Bdcs earnings release is also available on the cash.
The website in the Investor resources section.
As a reminder, this call is being recorded for replay purposes, I will now turn the call over to David Golub, Chief Executive Officer of Golub capital BDC.
Thank you Hello, everybody and thanks for joining us today I'm joined by Ross <unk>, Our Chief Financial Officer, Gregory Robbins, Senior managing director and Jon Simmons, managing director of Golub capital, we and the rest of the golf capital team Hope that your 'twenty 'twenty one is off to a good start.
Yesterday, we issued our earnings press release for the quarter ended December 31st and we posted an earnings presentation on our website will be referring to this presentation throughout the call today for the.
Those of you who are new to G. B D. C. Our investment strategy is and since inception has been to focus on providing first lien senior secured loans to healthy resilient middle market companies that are backed by strong partnership oriented private equity sponsors.
Let me start by giving the headline for the quarter ended December 31st and that headline is the GBT sees the results were strong and they were in line with the preliminary estimates that we filed on January 20th.
<unk> performance for the quarter exhibited solid net investment income and continued strong credit performance, we will discuss both of these topics in more detail as we go through todays presentation.
Gregory is going to start by providing a brief overview of <unk> performance for the 12 31 quarter and then he's going to hand, it off to John and Ross for a more detailed review of the results. I'll then provide some closing commentary reviewing our post Covid performance and then we'll open the line for questions.
With that let's take a closer look at GBT sees the results for the quarter and the key drivers of those results Gregory.
Thank you David.
I'm going to begin on slide four.
For the quarter ended December 31st G. P. D. CS adjusted NII per share was 29 cents adjusted EPS was <unk> 56 cents.
And ending NAV per share was $14.60 all within the ranges we published previously.
What were the key drivers of those results.
At the risk of repeating ourselves the key drivers besides good underwriting with the same trends we've discussed for the last two quarters.
These trends, which are summarized on slide six our first our portfolio of companies generally continue to perform well despite an economy the remains impacted by Covid and.
And second private equity sponsors of generally continue to step up to support their portfolio of companies.
And just like in prior quarters. These themes of reflected in the four positive credit trends listed on the right hand side of the slide, namely improved internal performance ratings.
Declining non accruals.
Low net realized losses and continued solid net unrealized gains.
Let's take a closer look at each of these trends starting first with our internal performance ratings.
Slide seven summarizes the positive trends in the internal performance ratings of G. P. D CS portfolio during the Covid period.
Specifically since March 31st we've seen a steady increase in categories four and five those are loans performing at or better than our expectations at underwriting.
And a decrease in category three loans that are performing are expected to perform below expectations.
The percentage of the portfolio of performing materially below expectations in categories. One and two also has decreased steadily.
In the quarter ended December 31 categories, four and five increased from 78, 9% of the portfolio as of 930 to 81 per cent of the portfolio as of 12 31.
Category three decreased from 19, 7% to 17, 9% over the same period.
Categories of wanting to also declined quarter over quarter from 1.4% to one 1%.
The very small and declining proportion of the portfolio of weighted in categories. One of two is important because of the indicates that significant credit impairment remains of rare and idiosyncratic.
The proportion of the portfolio rate of three is still higher than what we typically saw pre COVID-19, but meaningfully improved from 331 is.
The second key indicator of the continued credit improvement is the fact that non accruals also declined quarter over quarter from 1.7% from 1.2% as a percentage of investments at fair value at 12 31.
We'll come back to this point in our usual discussion of G. P. D. CS financial results Slide eight shows our other two key indicators of improving credit quality low.
Low net realized losses and solid net unrealized gains.
This slide provides a bridge from G. P D CS $14.33 NAV per share as of 932, it's increased $14 60 snap per share as of 12 31.
Let's walk through the bridge.
As you can see adjusted NII per share was 29 cents in line with our quarterly dividend.
Net realized losses remain low at a penny per share.
And net unrealized gains were 34 cents per share these.
These unrealized gains reflect the continued reversal of unrealized losses incurred in the March 2020 quarter.
Taking a step back these indicators of strong credit performance answer part of a broader question.
How did G. P D C fair and navigating the challenges of Covid.
That question will be the subject of David is closing remarks today.
Let's now take a closer look at our results for the quarter ended December 31.
Of that let me hand, the call over to John Simmons to walk you through the results in more detail.
Non.
Thanks Gregory.
First as a reminder, please note that in addition to the GAAP financial measures in the Investor presentation. We've also provided certain non-GAAP measures.
These non-GAAP or adjusted measures as we refer to them seek the strip out the impact of the G. C. IC merger purchase premium write off and amortization. These adjusted measures are further described in the appendix of our earnings presentation, and we'll refer to them throughout today's call.
With that context, let's turn to slide 10 to look at GBT sees the results for the quarter in more detail the.
Adjusted net investment income per share or as we call. It income before credit losses for the quarter ended December 31 was 29.
This is up from the 28 of adjusted NII per share we earned in each of the last two quarters adjusted.
Adjusted net realized and unrealized gain per share was 27 cents.
This compares to adjusted net realized and unrealized gain per share of 29 cents for the September quarter.
The adjusted net realized and unrealized gain this quarter was primarily driven by the continued reversal of unrealized losses recorded in the March 2020 quarter.
Adjusted earnings per share for the December quarter was 56 cents. This compares to adjusted earnings per share from the prior quarter of 57 cents.
Our net asset value per share at December 31, 2020 increased to $14.60 from $14.33 as of September 30th.
Finally on February 5th 2000 in 'twenty one of.
Our board declared a quarterly distribution of 29 cents per share.
On March 30th 2021 to stockholders of record as of March 5th 2021.
This distribution is consistent with our goal of having quarterly cash distributions approximate 8% of net asset value on an annualized basis.
With that I'll hand, the call over to Ross to go through the quarterly results in more detail Ross great. Thanks, Jon turning to slide 11, New investment commitments were a record for the quarter ended December 31st totaling $526 8 million.
After factoring in total exits and sales of investments of $278 7 million as well as unrealized depreciation and other portfolio activity total investments at fair value increased by six 3% or 269 million during the quarter ended December 31st.
As of December 31, we had $43 5 million of Undrawn revolver commitments and $126 2 million of Undrawn commitments on delayed draw term loans. These unfunded commitments are relatively small in the context of our balance sheet and liquidity position.
As shown on the bottom of the table the weighted average rate of 7.1% of new investments and the weighted average spread over LIBOR, a new floating rate investments of $6, 1%. Both decrease from the prior quarter as market conditions continued to rebound since the onset of Covid.
Just as a reminder of the weighted average interest rate of new investments is based on the contractual interest rate at the time of funding for variable rate loans. The contractual rate would be calculated using current LIBOR the spread over LIBOR and the impact of any LIBOR floor. The.
The top of slide 12 shows that our portfolio remained highly diversified by obligor with an average investment size of less than 40 basis points. The bottom of the slide shows that our overall portfolio of mixed by investment type has remained consistent quarter over quarter with one stop loans continuing to represent our largest investment category at 81 per cent.
Turning to slide 13, 97% of our investment portfolio remained in the first lien senior secured floating rate loans and defensively positioned in what we believe to be resilient industries that are insulated from COVID-19.
Turn to slide 14 of this graph summarizes portfolio yields the net investment spreads for the quarter focusing first on the light Blue line. This line represents the income yield or the actual amount earned on the investments, including interest and fee income, but excluding the amortization of upfront origination fees and purchase price premium the income yield remained stable at seven.
Four per cent for the quarter ended December 31st.
The investment income yield or the dark Blue line, which includes the amortization of fees and discounts increased by 10 basis points, 7.9% during the quarter due to increased fee amortization caused by portfolio repayments from them.
Due to the impact of the 400 million unsecured fixed rate bond offering that closed early in the quarter, our weighted average cost of debt. The Aqua Blue line increased slightly by 20 basis points to two 9%.
Net investment spread or the Green line, which is the difference between the investment income yield and the weighted average cost of debt decreased by 10 basis points to five per cent, but remains close to its highest level in the last two years. Despite the significant drop in LIBOR.
The flip into the next two slides non accrual investments as a percentage of total debt investments at cost and fair value remained low.
The decrease to 1.6% and 1.2% respectively as of December 31.
During the quarter the number of non accrual investments decreased to seven portfolio company investments from nine portfolio company investments is two portfolio company investments returned to accrual status.
As Gregory discussed in his opening commentary as a result of stronger portfolio company performance. The percentage of investments rated three on our internal performance rating scale decreased to 17.9% of the portfolio at fair value as of December 31st.
As a reminder, independent valuation firms value of at least 25% of our investments each quarter.
Slide 17, and 18 provide further details of our balance sheet and income statement as of and for the three months ended December 31st.
Turning to slide 19, the graph at the top summarizes our quarterly returns on equity over the past five years and the graph on the bottom summarizes our regular quarterly distributions as well as our special distributions over the same timeframe.
Turn to slide 20, the scrap illustrates our long history of strong shareholder returns since our IPO.
Slide 21 summarizes our liquidity and investment capacity as of December 31st and highlights our recent debt financing amendments.
On December 21st we amended the G. C. I see 2018 debt securitization, which included among other things a reduction in the interest rate on the $38 5 million of class a two notes from 4.665% to 2.4 98 per cent.
After the end of the quarter, we also amended our revolving credit facility with Morgan Stanley on January 29th that included among other things an extension of the reinvestment period through April 30th 'twenty 'twenty, one and a decrease in the maximum borrowing capacity from 325 million to $250 million.
Slide 22 summarizes the terms of our debt capital as of December 31st which reflects our continued focus on optimizing of the right hand side of the balance sheet.
Lastly, slide 23 summarizes our recent distributions to stockholders.
Most recently our board declared a distribution of 29 cents per share payable on March 30 to stockholders of record as of March 1st with that I'll turn it back to David for some closing remarks David.
Thanks, Ross so to sum up G. BDC had a strong quarter adjusted net investment income rose to match, our dividend realized credit losses were very low and unrealized gains were substantial continuing the reversal of unrealized losses that we incurred in the March quarter I want to end, our prepared remarks with a bit of what I'm going to call post Covid hindsight.
I think now is a good time to start to reflect on Covid and what we've learned from Covid, but I recognize it's still early is good but it's not over yet having said this I think in ups happen for us to look back at the post Covid period and begin to assess how we performed.
On slide 24, we outlined three key goals that we established back in March 2020 for navigating Covid.
First proactive management of the T Bdcs investment portfolio.
Second optimization of the Bdc's balance sheet and third when market conditions improved capitalizing on attractive new investment opportunities.
We now have nine months of data on how we performed against these three key goals, let's take a closer look.
Our first key goal as I mentioned was to proactively manage D V. D. CS highly diversified first lien senior secured investment portfolio.
In calendar Q1 of 2020, we had backed our whole industry had significant unrealized losses from marking our portfolio to fair value as a consequence of the market dislocation bread of Covid.
We've said consistently since then that we'd be laser focused on preventing those unrealized losses from becoming permanent or realized credit losses, and we've said consistently that we expect to see a lot of those unrealized losses reverse over time, if we succeeded so how are we doing.
Too early to give a definitive answer but the data. So far is quite encouraging let's look back at our four key credit metrics, but with a longer term horizon first internal performance ratings. These readings of improved as Gregory discussed in his remarks, because D V. D. Six portfolio companies of generally continued to perform well since.
At March 31st we've seen a meaningful upward migration in risk ratings to reading categories, four and five those are the rating categories corresponding to loans performing at or better than expectations at origination and the they've migrated there from category three category three loans are loans performing are expected to perform a bit below expectations.
Category three loans have declined from 26.5 per cent of the portfolio as of 331% to 17.9% of the portfolio as of 12 31.
So the 17.9 still a bit elevated relative to pre COVID-19 levels, but it's much closer to our long term trend of around 10%.
Importantly throughout this COVID-19 impacted period, the proportion of the portfolio of redid, one and two those are the loans that are at material risk of impairment stayed very low the state of about 1% to 2% and in fact of declined in overall number. This means we've had relatively few really problematic borrowers.
Second non accruals are back to where our low pre COVID-19 levels about 1.2 per cent of the portfolio at fair value as of 12 31.
Third and this is not unrelated to number two realized losses. If remained low in total G. Bdcs had realized losses of about 50 basis points on its investments at cost since Covid began with the bulk of those losses being attributable of companies that were underperforming before COVID-19 began.
And fourth and finally unrealized losses of reverse significantly in fact, we've recovered about 75 per cent of the fair value markdowns from the March 2020 quarter as a consequence of very solid portfolio of company performance. These four key metrics suggest that our underwriting was strong and that our proactive portfolio management strategy has been working.
Let's move to the second key goal for navigating COVID-19 optimizing the balance sheet. How are we doing on that one I'd make three key points first in the period since March 31st two BDC has received investment grade ratings, it's issued attractively priced and flexible unsecured debt capital its issued a new low cost CLO and it's reduced use of.
Of its secured bank facilities.
Second GAAP leverages right within our target leverage range at slightly less than one to one debt to equity.
And finally third liquid vs abundant with over $350 million of cash and borrowing capacity.
Finally, our third key goal to position G. P. D C to capitalize on what we anticipated would be a period of unusually attractive new investment opportunities how do we do there.
I think our record setting over $525 million of new originations in the 12 31 quarter speaks for itself.
So to sum up our post Covid hindsight, we think we set out the right goals and that we've made good progress against those goals shortly to be definitive, particularly on credit and we havent been perfect. Our works the ever over but the signs so far are encouraging.
Let me talk about what comes next our game plan for calendar year 'twenty 'twenty, one is going to sound very familiar.
Focus on the scene three key goals stick to our proven strategy of backing resilient companies in resilient industries sponsored by relationship oriented private equity firms and lean on our competitive advantages.
Thank you operator could you. Please open the line for questions.
Thank you in order to ask a question you will need to press star one on your telephone.
To withdraw your question you May press the pound key.
And your first question comes from the line of Robert Dodd from Raymond James Your line is open.
Oh, Hi, guys first of all on the <unk> T.
To your point, David the types of post Covid hindsight the market certainly seems to have moved on from some of the Covid point can you give us any color on I mean spreads right. Now you held and you knew deployment spreads were wider than they were of a year ago said, there still seems to be some widening at least in the fourth calendar quarter on spread.
Vs versus pre Covid.
Is that still true as we go into January and can you give us any color on you know I mean the.
The market spread seems to have compressed at HIMSS holding up any color you can give us on that front of me appreciate it.
Sure Hello, Robert Good to hear your voice.
Put it in context.
The calendar Q4 was a record quarter for Golub capital unusual quarter in the sense that there was a surge in M&A activity market wide. So it wasn't just the good origination quarter for Golub capital. It was the strong origination quarter four for most of the barge.
Private debt managers, who were open for business I would say if you looked at calendar Q4 are quite as you said Robert spreads were bit better than pre COVID-19 documentation terms were a bit better leverage was a bit better and importantly, we were able to focus on companies that.
Had proven post COVID-19 performance the bulk of the activity that we saw in calendar Q4 was with sponsors we've worked with multiple times over 90% of our of our Q4 originations were with repeat sponsors are I believe over 40% of our originations in calendar Q4.
We're actually add ons. So so we were able to focus on credits that we know very well with with sponsors that we know very well I think that's.
Makes makes for a attractive investment opportunities because of because we're able to make decisions with lots of information as.
As we crossed 12 31 moved into calendar 'twenty 'twenty one of.
The first quarters tend to be slower in general than than than Q4 quarters, there's a bit of seasonality. That's typical in the sponsor finance business and I think that's that's we're seeing that in in the first quarter of this year.
We're also seeing that there's a burst of competitiveness and spread compression in the broadly syndicated market. I think you were alluding to that Robert we've seen that in the form of a lot of of of flex is a lot of us spread tightening on on loans that are that are being syndicated during the syndicate.
Asian process. So my my expectation is that you know the the.
The middle market.
<unk> is as impacted by what happens in the high yield market and and then the the broadly syndicated market, usually theres, a lagging and it it's not a one for one relationship but my expectation is that we're going to see pressure on spreads.
And in in the private markets over the course of the coming months of unless there's a change in dynamics and what's happening in the broadly syndicated market.
For now it continues to be attractive, where we're I think I would characterize Q1 as is as a good solid quarter right now from an origination pipeline standpoint.
But you know I think its reasonable to anticipate that we're going to see the same kinds of patterns in in the private market that we're seeing right now in the broadly syndicated market.
I appreciate that Oh, if I can next next question.
Not related to market well I mean, the you have the overall credit quality of the book looks to be improving.
Pretty good the only thing that kind of sticks out to me is picking come obviously of minutes. It's AAA. It was a year ago you didn't you generally run.
Income so you're still below the industry average even that the only thing that stands out low bids up fairly meaningfully from last from the.
Third calendar quarter to the fourth calendar quarter.
Leaps out in the portfolio of that I've seen I mean, there's no single big pick assets or anything like that but what's the line of trended amendment or something else that the glue that take a little bit.
In in the fourth quarter again, this is not a horribly high number so overly concerning but it did tick up of I think I.
I think you're right to put it in context of Pik income is relatively small the call up capital by industry standards. It has it has increased some and I think the the.
The two areas that we've seen where it's grown one relates to our activities in our late stage lending. So the this is this is with.
Companies that are in the suffers the service business, where where they are in some cases preferred of have pick as a portion of the way in which they compensate us and and our our portfolio of L. S of loans has grown over the last number of years. The second is a.
Point that you alluded to which is in negotiations on amendments to our existing credit facilities through Covid. We have in some circumstances used incremental interest in the form is in the form of Pik as as part of the mix of of of different components of amendments and so there is some some inc.
Kris and Pik income associated with that I I don't think this is going to be a continuing trend I think youre going to see picking them stabilize and perhaps even go down and in coming quarters in and I don't think that you're going to see what.
Ah I suspect you're you're afraid of which is the a repetition of of pattern that we've seen with other bdcs, where we're picking gum is has never been received the that that's that's I'm not I'm not terribly concerned about about credit risk associated with our Pik accruals at this point.
Yeah, I could be transparent about what I was really asking about but I. Appreciate the answer thanks, a lot of and congrats on the quarter.
Okay.
And your next question comes from a line of Finian O'shea from Wells Fargo Securities. Your line is open.
Hi, good afternoon, everyone.
David first question.
Appreciating the commentary at the end on the underperforming.
Underperformance or Covid impacted names can you.
Can you provide any.
The additional color on.
How well the the EBITDA or profitability levels of this category.
Our improving as as the economy.
Generally, although slowly perhaps recovers and opens up and so forth.
So we've been a very candid over the course of the last several quarters about how pleased we bid and with the performance of our companies in the industry categories that we.
Mentioned in the the the week of the March 31 quarters being the industry categories, you're most concerned about so so if you recall going back to the April timeframe, we talked about dental care restaurants, retail I, Karen and fitness franchises and while we don't disclose EBITDA performance a proxy for <unk>.
EBITDA performance is is fair value marks and if you look at the fair value marks in our in those industry sectors of mean, a typical a typical one of those industry sectors has gone from per value marks averaging in the high eighty's to fair value marks averaging in the now high nineties.
The one sector that I would say we continue to monitor really carefully that I continue to have some concerns about is its fitness franchises.
The risk of stating the obvious.
With the way in which the the Covid vaccination.
Campaign has been going E G slowly, but I think there's a general view that that the recovery in fitness franchises is gonna be also slow.
Good news for US here is it's a small portion of the portfolio of its diversified amongst a half dozen different companies were focused on the low cost high value segment, which I think will will will recover well and recover fast when when people feel comfortable.
Boeing going back into Jim's, So I'm I'm I don't meet the sound alarmist I'm cautiously optimistic about our fitness franchise exposure, but but of those.
Covid industries Covid impacted industries that we identified early the others of really recovered quite well.
A couple of thank you and then just the follow on on.
Originations style, obviously you.
You know for at least a long time then.
Focus mainly on unit tranche and theirs.
There are some.
Is there some of them active.
Activity firstly, none of this quarter.
For example.
But with the shift on the right side of the balance sheets, we know of unsecured and it.
It sounds like that number will grow.
Do you anticipate any style.
Style drift into.
You know any element of added risk whether it be.
Second lien other financials and so forth.
Short answer no, we're not anticipating any meaningful change in strategy.
Our our focus is to continue the.
Achieve our mission, which is the best in sponsor finance with the strong focus on enabling sponsors to finance their businesses a number of different ways, depending on what's right for the deal and I anticipate that the mix with the N. G. P. D. CS no unlikely to shift much of you go back and look at.
You know the the charts that we present every quarter about the proportion of the portfolio that's.
In in one stops currently about 81% of it really hasnt moved much in many many quarters and if you look at the the.
The statistics about degree of diversification and granularity in the portfolio again, it really hasn't moved in in many many quarters. So some of those core elements of our strategy of our I would say unlikely to change.
Very well Thats helpful and thank you that's all from me.
Yeah.
Your next question comes from the line of Ryan Lynch from K B W. Your line is open.
Good afternoon, and thanks for taking my questions.
David you provided some commentary around your reflections on the kind of how your portfolio has performed.
During this COVID-19 period as you kind of reflect back one of the questions that I have with the broader question. It feels like term structures and yields are quickly returning if not already returned Terry kind of pre COVID-19 levels are the my question is is a little bit larger than that.
Do you see any lasting changes are lacking of facts on the direct lending industry, you know post COVID-19, whether it's <unk> or <unk>.
Players whether it's.
How players are funding themselves.
Sure.
Or where companies that are aware of direct lenders investors I'd love to hear your commentary on any potential lasting changes you think could come out of the direct mining industry kind of post COVID-19.
I, it's a great question, Ryan and when I've been thinking about a lot recently.
We'll see if I'm right, but but one of my hypotheses right now is that are.
Coming out of Covid.
We're going to see a continuation of a trend the that we saw during COVID-19, which is the big got bigger and we saw that trend to be honest before COVID-19 began the largest of the private debt players have been growing at a pace faster than the industry has been growing.
So.
Why do I think Covid may have contributed.
Contributed to this trend may be crystallized and acceleration of this trend.
It goes goes back to some comments that I made last quarter.
If you think about the challenges of establishing new relationships over zoom are the challenges of managing multiple relationships without in person meetings.
It stands to reason that a leading private equity firms are going to be inclined to reduce the number of relationships that they have and to focus more on strategically important credit partners.
What I think we will see further exacerbate that trend is that we're seeing a degree of of of the same phenomenon in the private equity industry. The larger private equity complexes are growing more quickly than private equity is growing and they're developing.
Multiple product lines multiple industries multiple size companies that they're working on so so if you think about the future direction of the private equity industry, where youre going to have a smaller number of larger companies comprising.
The the.
The the biggest the biggest customer pool.
They're going to want to work with a smaller number of large scale private debt managers, who in turn can offer a variety of different solutions. So I think that's where we're headed.
I think that's good for Gollop capital I think it's probably also good for the industry because it it it will it will lead to a more stable smarter industry with with a fewer outlier players who are.
In and out and to your point earlier messing up the terms are offering offering solutions that don't make any sense.
Gotcha.
And certainly if those trends.
What percentage that it certainly wouldn't be a big beneficiary of that typical of an engine and your broader platform given your scale and reach and relationships.
This might be an easy one but.
If I look at the liquidity on your balance sheet today.
Right now.
On the 7 million of of.
Unrestricted cash.
The 45 million of Morgan Stanley facility, but that's just been downsized by $75 million So nothing really.
Available on that and then $25 million on your walls facility, but that reinvestment period ends in March and so you know as I look at your your.
Liability structure of.
Available capacity as well as the cash on the balance sheet wanted to get your thoughts on you guys had $270 million of growth. This quarter, you know where would the next 270 million of growth be funded.
Sure. So two two good question two comments on this first if you look at year end. The picture is somewhat distorted because we have a very large amount of restricted cash and the C. O Lowe's as a consequence of of.
Year end are almost year and paid payoffs.
So imagine in the period post year end of significant number of assets removed from bank facilities into securitization is using up that restricted cash and creating more availability in the bank lines. So we have we have very ample liquidity right now having said that you you make your questions and.
Important one which is where do we want to go with the balance sheet from here and our intention is to do two things going forward. The first is we plan to pursue our corporate revolver and one of the things that we're trying to manage and dealing with the bilateral bank facilities.
Is to have the right mix between a new corporate revolver and and existing bank facilities.
So I I expect we will we'll have more information to share with you in the coming period as as as as those discussions continue the.
The second piece.
<unk> is we do want to grow the unsecured component of the balance sheet. When we did our first unsecured issuance we were very clear in saying, we anticipate being of serial issuer. We don't anticipate this being this being our last issuance by any stretch and and I can't remember Ryan whether it was you were.
But I think it was you who asked you know what's the ideal percentage of of unsecured is a mix within our liability structure and my answer at the time was something north of 35% again, we're not in a rush to do that we want to make sure that we are are are accessing that market at a time that is opportune.
From a from an execution standpoint.
But I anticipate that we're going to want to add to the the unsecured component of our liability structure over the course of this year.
Okay. That's helpful.
And then you gave some some really good commentary on how your portfolio has really performed.
Through Covid and ex performed really well, but one of the statistics that you mention why 75% of your unrealized losses.
From the March 2020 quarter have reversed so.
That means 25% have not reversed.
Are still out there so I think theres a couple of different ways to think about that but how would you encourage investors to think about that remaining 25% of unrealized losses not reverse from the March 'twenty 'twenty quarter.
Well I think I think it's opportunity right, we've seen a significant increase.
The increase in net income over the course of calendar Q2, Q3, and Q4 of 2020 in connection with reversals of unrealized losses, if you'd asked me after the March quarter over how many quarters will we see reversals I I would've probably told you to expect it to occur over two years.
In fact 75 per cent of it occurred in three quarters. So it's been faster than than I would have anticipated I don't think.
One should have anticipated that all of it would you know all of that which is going to reverse would.
Would have reversed by 12 31, Oh, it's it's it's a reasonable assume that we've got some loans.
Loans that are marked at a discount to any of the not necessarily a big disk I'm, sorry, you just kind of par.
Not necessarily a big discount to par that will pay off and when those loans pay off we will see a a a reversal we may see a reversal sooner than that if our if our fair value marks go up back to par. So so I I I don't think there's a negative to conclusion to draw.
From from the the the fact that we've got 25% that has not yet reversed.
I think the fact that we've only got a very small proportion of the portfolio in performance ratings, one and two is a good indicator that we don't have a lot in the portfolio, that's really seriously impaired right now.
Things can change we can get surprised we were surprised last March by Covid, I, certainly wasn't expecting a global pandemic.
So so I am not arguing there isn't there isn't risk here, where we're we're in a business of managing risk, but I feel pretty good about where the portfolio is right now.
Mhm.
Certainly.
Great.
Those are all my questions.
Afternoon, I really appreciate the time.
And your next question comes from the line of David Miyazaki from Confluences investments. Your line is open.
Hi, Hello, Thank you for taking my questions I, just feel a little bit of and yet the forgive me for not knowing this or not remembering this properly but the.
The question regarding the amortization of action of G. C. I see is that premium allocated specifically to individual credits and that's the principal driver of the recognition or as part of its straight lined in some manner or just kind of trying to get my arms around.
How how quickly this dissipates over time.
So it is attached to specific credits are and so it will dissipate as the credits the.
C. B D C acquired from D. C I see as those as those credits are repaid.
And I would strongly encourage you to speak to our resident experts, John Simmons and Russ Junior about this because it gets complicated in a hurry.
Okay. Okay.
I will take you up on that.
The in Calvert the.
Distantly related manner can you talk a little bit about.
Of.
Other G C I T like concepts that might be happening at the external manager of what are you. What are some of the activities that are taking the place. They are you raising other funds are there longer term strategic plans for for more of G. C. I see like a combination.
So publicly available information on an on on this week, we have a private BDC, that's very creatively called the Golub capital BDC three.
Which we are in the process of of ramping up.
And when it is ramped we will look at a variety of different options for G. B D. C. Three as we did for D. C. I see one of those options will be a potential merger with G. P. D. C. If we can figure out of way that the that's good for everybody to affect that in all of.
The respective words, and and and and and appropriate shareholder votes.
Go go go the right way that might be one of the paths that we look at but no decision has been made at this point David that the that's the the path that we're going to go down.
As you know we also at Golub capital Hubbub of of barge family of of private funds are very creatively called the the Golub capital partners funds and and we are in the process of fundraising for Golub capital partners 14 at the moment.
Okay is there.
Have you disclosed the size of what.
Called capital B.
BDC of three is for what what your targeted fundraisings either just the.
The public filer.
It's a public filer you can you can see both of the the size of its a a fair value of assets and its commitments in the in the SEC filings.
Okay. Okay. Thank you.
And then just the to shift gears a little bit.
You know one of the things that we heard from a lot of the successful bdcs in the industry with.
The credit focus prior to Covid on companies that we're a cyclical or had a measure of recession of resistance because of their size are there the margin protections are theirs.
Just whether they're situated in specific industries.
And you know what I'm beginning to hear is that origination is now focused on COVID-19 resistant industries of the companies and it seems to me that there's probably a pretty sizable overlap between the two of them given how well your your portfolios.
The managed through the pandemic.
And against the backdrop of the ones that have had problems. When you said you thought it would be a couple of years before he had the spectra recovery in unrealized losses.
What is sort of the difference between COVID-19 resistant and recession resistant and.
Now I don't think Covid is going to go away anytime soon but.
It is as we look forward as Covid resisted underwriting the.
The best of it that's the way to go.
Well I think there are two timeframes here in the near term because of the degree of uncertainty about how long vaccination process is going to take a whether we're going to get a a mutant strain that's resistant to vaccines I think it's prudent as a lender to be focused on.
Covid resistant companies Covid resistant borrowers right now.
There are some.
The hedge fund players in distressed debt, who disagree with me and our loading up on movie theaters and amusement parks and cruise ships and the old variety of similar credits, but that's not that's not what we're doing.
In the longer term assuming that the vaccines are effective and we get back to something that the that we can call normal I think there is there's an element of underwriting that's going to be forever changed I don't think you know I'm ever going to forget what this global pandemic has looked like in.
The idea of of people Congregating in close proximity being a a risk factor that we need to think about in an underwriting context site I think that's going to be around for a long time.
Does that mean that all such companies are going to be ruled out probably not.
But does it mean that the that we're going to need to factor in potential new pandemic says as as the us as a downside case I I think I think that would be prudent. So so it's it's going to be interesting to see how that dynamic plays out David I I.
I think we're likely to see different players approach your question in different ways.
Okay, great well I appreciate your insight and the congratulations on a nice quarter.
Thank you David.
Well, thanks, everyone for joining us today as always if you have any further questions. Please feel free to reach out to a member of the Golub capital team and I look forward to having the opportunity to talk again next quarter.
This concludes today's conference call you may now disconnect.
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