Q2 2021 Goldman Sachs BDC Inc Earnings Call
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Good morning. This is Erica and I will be your conference facilitator today I would like to welcome everyone to the Goldman Sachs BDC, Inc. Second quarter 2021 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 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 companys belief regarding future events that by their nature are uncertain and outside of the company's control. The companys actual results and financial conditions may differ possibly materially for.
What is indicated in these forward looking statements as a result of a number of factors, including those described from time to time in 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 closed the company issued an earnings press release and posted a supplemental 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 and which include reconciliations of non-GAAP.
Measures to the most directly comparable GAAP measures. These documents should be reviewed in conjunction with the company's form 10-Q filed yesterday with the SEC. This conference call is being recorded today Friday August 6.2021 for replay purposes, I will now turn the call over to Brendan Mcgovern Chi.
<unk> Executive officer of Goldman Sachs BDC.
Thank you Erika good morning, everyone and thank you for joining us for our second quarter earnings Conference call.
With me on the call today is Jon Yoder, our Chief operating Officer, and Joe G. Maria our interim Chief Financial Officer.
I'll begin the call by providing a brief overview of our second quarter results.
Got it from platform highlights to give you a sense of how the team is navigating the current market environment.
I will then turn the call over to John to describe our portfolio activity in more detail and finally, Joel will take us through our financial results before we open the line for Q&A.
So with that let's get to our second quarter results.
Net investment income per share was <unk> 57.
Excluding the impact of asset acquisition accounting in connection with the merger with MLC Q2, adjusted net investment income was <unk> 48 per share, reflecting a continuation of strong operating trends in the business.
Net asset value per share increased to $16.5 per share as of June 30th an improvement of approximately 30 basis points from the end of the first quarter.
Against the accommodative overall market backdrop, the NAV increase resulted from ongoing stable to improving performance our portfolio companies offset slightly by the impact of the <unk> <unk> per share special dividend paid during the quarter.
As we announced after the market closed yesterday, our board declared a <unk> 45 per share dividend payable to shareholders of record as of September 32021.
The last of the 3.5 per share special dividends. We declared in November of 2020 will be paid on September 15th 2021 to shareholders of record as of August 16th 2021.
On our last earnings conference call in May we described are healthy and overall active market environment that is characterized by strong capital markets activity as the economy continued to rebound from the depths of the COVID-19 health crisis.
Notably, we anticipated a continuation of elevated prepayment activity in our portfolio as our favorite sector exposures, such as software health care technology and health care services have demonstrated resilience throughout the pandemic.
And as a result means of our portfolio our rate targets and an active M&A and refinancing environment.
Indeed, this repayment trend did continue in Q2.
For the third consecutive quarter <unk> experienced a new high watermark for repayment activity, which amounted to $277 million of market value across 12 different portfolio companies this quarter.
Fortunately our powerful origination engine has largely kept pace during this active repayment environment.
Gross originations for the first half of the year represented record levels for the company.
And notably as we look at our for pipeline, we expect to resume balance sheet growth in the back half of the year moving closer to more normalized net debt to equity ratios.
From this quarter and level of 0.91 times.
In this competitive environment, we are extremely focused on maintaining investment discipline.
For example, and consistent with our history, none of our investment activity. This quarter was the so called Covenant light structures. Furthermore, in certain positions, where we were the incumbent lender, we opted not to roll into new deals that did not meet our standards for risk reward characteristics, sometimes based on rate and other times based on structure and document integrity.
From time to time companies in our portfolio grow to a size and scale that allows us to access access to lower cost of capital and looser terms often associated with the syndicated markets.
In these scenarios, we've generally assets to recycle the capital back into our platform trusting that our market presence and reach will enable us to originate new loans to middle market businesses that do meet our credit criteria.
As evidence of our disciplined yields on new originations this quarter of 8.1%, we're roughly equivalent for repayment yields of 8.2%.
Furthermore, and despite the significant growth of our platforms overall capital base over the last several years, we have maintained our focus on direct originations to middle market businesses.
We have generally avoided competition was indications.
I would note that the median EBITDA of our company our portfolio. This quarter was $38 million evidence of our continued focus on the part of the market that we currently have offers the best value proposition for our stakeholders.
We believe this discipline has and will continue to bear fruit.
Asset quality at <unk> remains strong there.
There were no new non accruals in the quarter and overall non accruals represented 0.0% and <unk>, 3% of the total investment portfolio at fair value and amortized cost respectively.
Suffice to say, we are keeping our eye on long term prospects for the business and off net to focus on high quality businesses with capital structures and stewardship that we believe can withstand a variety of market environments.
Switching gears and moving to the personnel front, we disclosed in our form 10.8-K on July 19th that Carmine Rosetta will become the company's Chief Financial Officer effective November 2021.
Carmine previously served as <unk> principal accounting officer for May 2017 to March 2020, and we're extremely excited to welcome him back to the organization.
I'd like to thank Jodi Maria for his focus and diligence as the interim CFO over the past several several months clearly the business has not skipped a beat and we as we await chromite start date, which is a testament to Joe and his capabilities with that let me turn it over to Jon Yoder Alright, Thanks, Brendan as Brendan mentioned, the continued strong capital markets <unk>.
<unk> during the quarter enabled the team to again be active on the new origination front.
Our new investment commitments remained focused on first lien senior secured loans and covenant structures.
During the quarter, we made 16, new investment commitments amounting to $369 million.
6 of which were to new portfolio companies and 10 that were to existing portfolio companies.
As Brendan mentioned sales and repayment activity totaled 277 million driven by the full repayment of investments in 12 portfolio companies.
Turning to portfolio composition at the end of the quarter total investments in our portfolio were just under $3.2 billion at fair value.
Price of 96, 8% in senior secured loans. This included 81% in first lien for 4% in first lien last out unit tranche.
12, 4% in second lien debt as well as a negligible amount in unsecured debt and 3.1% in preferred and common stock.
We also had $377 million of unfunded commitments as of the end of the quarter, which brought total investments and commitments to just over $3.5 billion.
As of quarter end the company had 114 portfolio companies operating across 37 different industries and the weighted average yield of our investment portfolio at cost at the end of the quarter was 8.4%, which was the same as at the end of the first 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 in the portfolio was 5.9 times at quarter end, which is a slight improvement from 6 times at the end of the last quarter.
The weighted average interest coverage of the companies in our investment portfolio was 2.6 times again, a slight improvement from the 2.5 times at the end of the prior quarter.
As of June 30th investments on non accrual status decreased to 0.0% and <unk>, 3% of the total investment portfolio at fair value and amortized cost respectively down from 0.3, and 0.7% as of the end of Q1.
This decline in non accruals is primarily a result of the repayment of our investment in GK holdings.
On June 11th GK Holdings consummated, our merger with competitor in conjunction with incremental capital from a stack.
As a result, <unk> received partial repayments on both first lien and second lien positions and receive past due interest on the first lien position.
In addition, <unk> rolled rolled a portion of the existing loan into a new loan to the combined company, which is called Skillsoft and a deleveraged structure.
Subsequent to quarter end Skillsoft refinanced its capital structure and repaid debt remaining loan.
So as a result of these transactions we have fully exited our investment.
And while we are never pleased with placement investment on non accrual. We do think that this transaction is a demonstration of the care and effort that we put into our underperforming physicians.
In this case our recovery on this investment allowed us to earn an IRR of approximately 6% since inception on our investment to GK holdings, which began in 2015.
I'll now turn the call to Joe to walk through our financial results.
Thank you John we.
We ended the second quarter of 2021 with total portfolio investments at fair value of nearly $3.2 billion outstanding debt of $1.5 8 billion and net assets of 163 billion. We also ended the second quarter with a net debt to equity ratio of <unk> 91 times down from 96 at the <unk>.
End of the first quarter.
At quarter end, 63% of the company's outstanding borrowings were unsecured debt and $1.1 billion of capacity was available under <unk> secured revolving credit facility.
Following the close of the quarter the company engaged its lender group to discuss an extension of the maturity on our revolving credit facility, which is currently set for February 2025.
Given the Companys current debt position and available borrowing capacity, we continue to feel we have ample ability to fund new investment opportunities with borrowings under our credit facility.
Before continuing to the income statement as a reminder, in addition to GAAP financial measures. We will also reference certain non-GAAP or adjusted measures. This is intended to make GSP. These financial results easier to compare to the results prior to our October 2020 merger with MLC.
In connection with the merger purchase discount was written off and has subsequently amortized. These non-GAAP measures remove the amortization impact from our financial results.
For Q2, 2021, GAAP and adjusted after tax net investment income were $58.2 million and $48.8 million, respectively, as compared to $57.6 million and $48.4 million respectively in the prior quarter.
The increase quarter over quarter was primarily due to an increase in accelerated accretion related to repayments.
On a per share basis, GAAP and adjusted net investment income were 57.
And <unk> 48 per weighted average share respectively, both consistent with the first quarter of 2021.
Distributions during the quarter totaled 50, consisting of the 45 regular distribution declared in May and paid on July 27, as well as the second of 3.5 special distributions, which was paid on June 15.
As Brendan noted we will be paying the final special dividend on September 15th to eligible holders of record.
Earnings per share were <unk> 54 for the quarter fully covering both the regular and special distributions mentioned earlier. This contributed to a net increase in net asset value per share of <unk> with ending NAV per share of $16.5.
Representing a 31 basis point increase quarter over quarter.
And with that I'll turn it back to Brendan for closing remarks. Thanks.
Thanks, Joe and conclusion. Thank you all for joining us for our call. We believe the current market environment is an attractive 1 for our company.
The strengthening domestic economy provides a stable backdrop for growth and opportunity of our portfolio companies and we remain confident that our platform will continue to compete well for new lending opportunities owing to our targeted approach in attractive segments for the middle market as always I'd like to thank all of you for the privilege of managing your capital and with that Erica, Let's open the line for questions.
Sure.
Ladies and gentlemen, we will now take our momentum.
Yes.
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Okay.
Yeah.
And there are currently no questions at this time.
Okay.
Okay.
Why don't we give it a second Erica.
Okay.
And again that is star 1 if you would like to ask a question at this time.
You do have a question in queue from Erin <unk> with Citi.
Thanks.
Just talk a little bit about the <unk>.
Competitive environment, a little bit more I know you had mentioned it in your prepared remarks from me.
Yes.
What youre seeing from a quarter to quarter standpoint is there any growing intensity.
And.
There's still a lot of dry powder out there.
Is there essentially too much capital chasing too few.
The opportunities.
Yeah look back pattern for I. Appreciate the question I think it's probably the most.
A common question, we get I think it was on top of investors' minds.
Investing in the private credit space as a general matter looking at this is always a competitive business.
I don't think Theres been a point in time in the Companys lifecycle, where that wasn't a topic that we were well focus on and I think our job here is to make sure. We're leveraging the power of our platform our origination capabilities to find the best opportunities.
Maintaining discipline as is appropriate in this space and that and finding those niche areas that continue to be.
<unk>.
I think suffice to say the current environment I would say it is more competitive.
Then most environments have been.
And different in different points in time, and I think that that does ebb in flow.
Flow over it over different periods of time.
Coming into the Covid crisis back in <unk>.
Back half of 2019, we probably would've said that said the same thing and I think there was.
Certainly hope that there'll be a little bit of a washout over the course from 2020.
Where credit differentiation and platform performance Mike.
Might win the day with more disciplined allocation of capital, but I think there has been just such a general reflation of the capital markets debt.
That more natural organic.
Cash at frankly, just didn't really take place as we would've hoped.
Were expected.
And I do think in certain parts of the market. There is probably a bit more capital than there has been historically I think that's most notable in the upper segments of the middle market.
Then certain platforms that have been able to grow and scale their business and I think when you find yourself with a bit more capital than opportunity. The general playbook is try to be a bit more efficient lending to bigger businesses, where he can write bigger checks sizes.
It's going to be a heck a lot more efficient than that then planning orders, where we tend to fish, which is really the heart of the middle market as we talked about on the call.
The focus for the platform continues to be that hard of the middle market.
That business that does maybe up to 50.
Of EBITDA, focusing on sectors, where could there could be bigger capital structures in parts of for example, the technology and software space, but the nature of the underwrite the nature of the gross trajectory of those businesses requires a little bit of a more structured credit investment and we've been doing that for quite a long period of time even.
In those bigger cap opportunities our history our hour.
Our position that market allows us to continue to be quite successful there and so I think again I think when you when you.
<unk> tried to quantitatively look at what's going on in the book I think investors should be encouraged by by what they see our disciplined certainly is coming true in the form of very very strong credit quality as we have described.
Non accruals very low.
Frankly and market values zero non accruals.
In the business.
When you look at it.
Environment, where we are seeing significant repayments.
The fact that we're able to effectively keep pace with those repayments and do so at yields that are consistent with what's coming out of the book, which of course is those are those are 2017.2018 vintage deals that are now coming out of the book, we are able to maintain the overall profile of the book in a way that I think should give investors.
Yes.
Feelings notwithstanding a lot of commentary around the more competitive parts of the market.
We continue to scale the platform, we continue to have access to a lot of capital, but we've scaled the platform thoughtfully.
And then in a way that allows us to continue to execute in the part of the market, where we've been quite successful for a long period of time.
Thanks.
And I know this is.
A little bit different than what we've been seeing with rates recently and it looks like they're a bit higher today on the long end.
Howard.
How are you positioned for for whenever rates rise a lot of.
<unk>.
Yes.
The loans have floors.
Price tonnage of your of your portfolio has floors.
Do you have any of that or.
Under 1%.
Yes.
If you look across the portfolio the average floor on the portfolio is 98 basis points.
I think something like 96% of our of our book has.
<unk> has a floor of 1 so yes.
I think that's a good thing.
Obviously reflects the ability to achieve a better economic outcome in an environment, where rates are quite quite low in sort of a bit of nationally depressed and.
And at the same time as you know are and we've been we've been active on the financing side.
There's been a significant I'll say opening up of the unsecured debt capital markets available to companies in this space and we've always been quite prudent about balancing and having diversified source of capital in our business today, 2 thirds of our liability structure is in fixed rate unsecured debt.
And so that puts us in a good spot in a rising rate environment and.
Aaron.
In our Ks and Qs, we do give sensitivity tables. So when you think about our exposure today with.
With LIBOR, where it is the initial move up in LIBOR is actually a little bit of a headwind.
Where because we do have floors on the vast majority of our loans are assets won't re rate higher in terms of overall yield but about a third of our financing structure.
Would go higher but it does become an inflection point, where there is a significant and substantial benefit.
Based on the current structure that we have today, where should there continue to be.
March upward in the rate environment, and Thats, probably what most people would be predicting.
There would be a substantial benefits net investment income to the company.
Got it okay. Thank you.
Yes.
Yeah.
Your next question is from Finian O'shea with Wells Fargo Securities.
Yes.
Hi, everyone. Good morning.
Brendan I think you partially answered my question there.
Erin.
On your <unk>.
New origination.
Roughly matching the.
The roll off of the 20.
For 2017, 2018, vintages, which is great.
Okay.
I guess can you comment on how.
I think repays will remain pretty strong maybe not as strong as they have in the past few quarters as you said, but strong.
Is this something new.
So you can kind of keep going in the current environment say for the.
On your guidance for the rest of the year in terms of new origination repays.
Yes look when we look at the as I mentioned in the prepared remarks has been 3 consecutive quarters of increasing highs.
Repayments that said that's a good thing when you're when you're making loans you'd like to see that that capital come back to you. That's obviously a sign of.
Good discipline and good underwriting, but I think in the environment that you're in air and the other is our focus on certainly does create a challenge that we have to rise up and meet here. So our focus has been on maintaining that discipline not just growing the balance sheet.
For the sake of growing the balance sheet, while we have capacity in this.
In this environment and I think yes, we've been we've been able to maintain basically the overall balance sheet composition.
Of course.
Run rate income has been positive.
As we sit here today.
Look at the pipelines I do think that we will start to see a bit of a moderation at least from the short term of some of that repayment activity relative to our pipeline of investment activity and that should give rise for some some some portfolio growth 1 thing I would note when you look at our numbers.
This quarter, you will see probably a little bit of an unusually high amount of unfunded commitments.
Compared to funding commitments in the portfolio, that's just a little bit of a quirk of timing, where we had a couple of deals at quarter end, where we had committed but the funding side didn't take place to it to a couple of weeks later, so we do have visibility into that trend. So I do think we'll be able to grow the portfolio a bit deeper into our target leverage side this quarter and again without really I think.
Having to change our discipline and where we're focused on an overall basis.
So that should be a positive long term of course, it gets a little bit more challenging to predict those sorts of things.
But I think in addition to the overall capital markets environment, which is quite busy as people know coupled with as I mentioned our portfolio exposure today.
It happened to be in sectors that are performing well and therefore, our targets for <unk> for new M&A.
I do think there is also a little bit of a platform vintage element, where a lot of our new private capital formation and new growth took place in that 2016, 2017, 2018 time time period. So there is a significant uptick in overall platform originations during that period and we're naturally starting to see.
That roll off which is probably.
It was probably makes us a bit over indexed than maybe the broader market to the current repayment environment. So I think thats.
That vintage element I think things should start to moderate as well.
And I think that should again.
Bit more confidence in the overall portfolio of growth opportunities.
Yeah.
Great. Thank you and then just a follow on I guess, a 2 part question on.
On plural site.
First is it looks like a pretty good good sized bite for you guys, but.
About 60 million.
Maybe my frame of reference is off with the with the MLC merger, but is that is that sort of a big hold.
Or is that sort of the new.
Start doing doing <unk> and <unk> with the new capital base and then.
The second part of the question is this is.
This was a very big enterprise value I'm not I'm not sure has EBITDA. So it doesn't throw off your your $38 million average.
Okay.
Yes, I guess would you like does this.
Does this indicate you're going more up market, even though you are you're still able to advertise the sort of middle market EBITDA.
<unk> thresholds.
Yes, no. Good good good question clarified certainly debt.
And interesting and really attractive opportunity. This is a LIBOR plus 800 piece of paper for for a transaction that was a take private of a public company with this as a as a sponsor here. So I think that take private and public company create a pretty interesting and unique dynamic in terms of how.
The sponsor here sort of finance this business.
And quite a large recurring revenue structure, where I think when you.
I think about the uniqueness of debt structure I think the appropriate approach on the part of the sponsor here was a probably a broader syndicate of investors that might other be the case in a smaller type of type of IRR deal ensuring that they have the adequate capacity.
And they certainly need to debt.
Financing to get the transaction done and so in this case across our platform.
The the total exposure was a multiple of the other 60 that we see in the BDC I think we are the third largest lender in the syndicate.
Of lenders in this setting in this particular transaction. So I think it speaks to the range of opportunities that we're able to originate on the platform.
<unk> been early and focused on attractive themes within enterprise software for quite a long time.
And I've gained a significant amount of market share with within that space and so from time to time.
Yes, I think notwithstanding a general focus on smaller businesses.
We will see.
The opportunities that are large, but large and also quite attractive I think in this case, the LIBOR plus 800 for what is public.
Public marker of value here, good ratio loan to value here in.
And around the 25% to 8% range really attractive risk reward opportunity and I think as a platform.
Lot of capabilities with it within the space, So I wouldn't I wouldn't Finn.
Take this to mean that there is any shift in our approach to a bigger business is bigger capital structures. I think this is a unique way to sourcing opportunity where given the private the public to private nature of the take private of a public company.
A pretty unique lending opportunity.
Very well Thats all for me thanks, so much.
Thanks, Ed.
And as a reminder, if you would like to ask a question at this time simply press Star then the number 1 on your telephone keypad.
Yeah.
At this time there are no further questions. Please continue with any closing remarks.
Thanks, Erica and of course, thank you all for joining us on a summer Friday as always we appreciate your time attention and questions and if you have any additional questions. Please don't hesitate to reach out directly to the management team hope everybody enjoys a happy and healthy safe rest of your summer and look forward to catching up soon.
Ladies and gentlemen, this does conclude the Goldman Sachs BDC, Inc. Second quarter 2021 earnings Conference call. Thank you for your participation you may now disconnect.
Yeah.
Okay.
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