Q3 2021 Goldman Sachs BDC Inc Earnings Call

Yeah.

Good morning, this is Erica and I will be your conference facilitator today.

I'd like to welcome everyone to the Goldman Sachs BDC, Inc. Third quarter 2021 earnings Conference call. Please note that all participants will be in a listen only mode until the end of the call window 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 company's belief regarding future events that by their nature are uncertain and outside of the company's control the company's actual results and financial conditions may differ possibly materially from what is indicated in those forward looking statements as a result of a number of factors including that.

As 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 close 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 November 5th 2021 for replay purposes, I will now turn the call over to Brendan Mcgovern, Chief Executive Officer of Goldman Sachs BDC.

Thank you Erica.

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

With me on the call today is Jon Yoder, our Chief operating officer, and Jody Maria our interim Chief Financial Officer.

Also joining us is carmine or as Eddie will be replacing Joe as our permanent CFO on November 8th.

We want to thank Joe for his interim duties. These past few quarters and welcome Carmine back to the Goldman team.

I'll begin the call by providing a brief overview of our third quarter results before discussing the current market environment for private credit.

I'll, then turn the call over to John to describe our portfolio activity in more detail and finally, Joe will take us through our financial results before we open the line for Q&A.

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

We're pleased to report another quarter of solid income generation for the portfolio.

Net investment income per share was <unk> 63.

Excluding the impact of asset acquisition accounting in connection with the merger with MLC Q3, adjusted net investment income was <unk> 48 per share.

Net asset value per share decreased slightly to $15 92 per share as of September 30, a decrease of approximately 80 basis points from the end of the second quarter.

Excluding the impact of the <unk> special dividend, we paid in September the net asset value decline would have been 50 basis points.

The September special dividend is the last of the three five per cent per share special dividends that we paid in connection with the company's close of the merger with MLC in Q4 of 2020.

As we announced after the market close yesterday, our board declared a <unk> 45 per share dividend payable to shareholders of record as of December 31, 2021.

Peeling back the layers a bit further on the quarter. There are a few noteworthy dynamics worth highlighting are discussing.

First and at the risk of sounding a bit like a broken record elevated repayments continued unabated at this quarter at.

At $672 million repayments equal to 21% of the fair value of investments at the beginning of the quarter and were two four times greater than last quarter, which itself was the previous high watermark free payments and the company is really 10 year history.

The repayments were diversified across the book with the single largest repayment only amounting to less than 10% of the total.

This is somewhat remarkable level of portfolio turnover in a single quarter. There are few takeaways I'd offer from this unusual activity.

First I believe this repayment activity is a reflection of our focus on sectors and companies that continue to grow and perform well and are therefore increasingly investor favor.

In an environment, where M&A activity is high and equity valuations are rising it's not surprising that high quality companies, either being sold or graduating to a lower cost of capital.

Next I would note that relative.

That relative to the beginning quarter portfolio composition, the repayments were skewed towards junior capital, which helped improve the seniority of the book at quarter end first lien investments represented 84% of the portfolio compared to 80% at the end of last quarter.

Finally, I would note that despite the retained that payment activity the quarter end leverage ratio stayed roughly flat at <unk> 91 times debt to equity.

This was a noteworthy seed and a testament to the strength of the team and origination platform.

Given the competitive environment in which we're currently operating the team did an excellent job maintaining the portfolio size without sacrifice of sacrificing investment quality.

While origination yields were below repayment yields the overall impact of the portfolio was muted as the yield at amortized cost this quarter. It was eight 3% compared to eight 4% at the end of Q2.

Next we know that investors are keenly focused on the supply chain disruptions and inflationary pressures that are currently impacting the economy broadly and performance of companies in certain sectors specifically.

Thus far we've observed modest overall impacts of our portfolio as we have generally avoided lending to businesses in sectors, such as manufacturing or retail, which we believe are most susceptible to part shortages and rising cost of commodities and shipping for example.

As you are aware the main themes of our portfolio continued to be software health care health care services and professional services.

We're mindful that companies in these sectors can see margin pressure from labor inflation, which tends to be sticky as opposed to transitory.

That said strong companies in these sectors can also benefit from pricing power and the ability to pass on price increases, resulting from the mission critical nature of the value proposition they provide to customers in the case of technology companies and inelastic demand characteristics of non discretionary health care services.

We continue to monitor the impacts of the current environment on our book and we'll keep you updated on any developments.

Given the current environment, we are pleased that overall credit quality of the portfolio remained strong.

Non accrual investments amount to just <unk>, 7% of the portfolio at cost and 1% at fair value with that let me turn the call over to Jon Yoder. Thanks Brendan.

As Brendan mentioned the continued strong capital markets environment during the quarter enabled the team to again be active on the new origination front.

Our new investment commitments remain focused on first lien senior secured loans.

During the quarter, we made 27, new investment commitments amounting to $670 million, we originated $312 million in loans to 210, new portfolio companies and the $358 million a follow on investments to existing portfolio companies, primarily to finance M&A activity.

As Brendan mentioned sales and repayment activity totaled 672 million driven by the full repayment of investments in 16 portfolio companies.

We continue to see a strong pipeline of new opportunities and we're optimistic that we will achieve portfolio growth in the coming quarter, assuming the pace of repayments moderate to more normalized levels.

Turning to portfolio composition as of September 32021, total investments in our portfolio were $3 1 billion at fair value comprised of 98, 3% in senior secured loans, including 84, 3% in first lien five 2% in first.

Lean last out Unitranche and eight 8% in second lien debt.

We also had one 6% in preferred and common stock.

We have $402 million of unfunded commitments as of the end of the quarter, which brings total investments and commitments to just over $3 5 billion.

As of quarter end the company held investments in 111 portfolio companies operating across 37 different industries.

The weighted average yield of our investment portfolio at cost at the end of the third quarter was eight 3% as compared to eight 4% at the end of the second quarter.

The weighted average yield of our total debt and income producing investments at cost decreased to eight 6% at the end of the third quarter from eight 7% at the end of the second 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 our investment portfolio was six times at quarter end as compared to five nine times from the prior quarter.

The weighted average interest coverage of the companies in our investment portfolio at quarter end was two five times as compared to two six times at the prior quarter.

As of September 32021 investments on nonaccrual status increased slightly to 0.1% and 0.7% of the total investment portfolio at fair value and amortized cost respectively.

From 0.0% and 0.3% at the end of the second quarter.

This modest increase is due to putting chase holdings on nonaccrual.

Finally during the quarter, we exited our equity position in Hunter Defense technologies.

Hunter Defense is a provider of shelters and ancillary products used primarily by the U S military in mobile troop deployments.

The sale of the position generated a realized gain of $36 million, which resulted in a 154 times return on our investments since inception.

Upon booking the realized gains and unrealized.

<unk> gain was reversed as a result, the net impact of <unk> was not material in the current quarter.

Let me now turn the call over to Joe to walk through our financial results.

Thank you John.

We ended the third quarter of 2021 with total portfolio investments at fair value of $3 1 billion.

Outstanding debt of $1 63 billion and net assets of 162 billion.

We also ended the third quarter with a net debt to equity ratio of <unk> 90.

<unk> 91 times, which is consistent with the end of the second quarter.

At quarter end, 62% of the Companys outstanding borrowings were unsecured debt and nearly $1 1 billion of capacity was available under gst's secured revolving credit facility.

As noted during last quarter's earnings call. We have engaged our lender group to discuss an extension of the maturity on the revolving credit facility. We're pleased to announce the maturity has been extended by 18 months to August 2026.

Given the Companys current debt position available borrowings and cash of 172 million, which resulted from repayments in the last two weeks of the quarter. We continue to feel we have ample capacity to fund new investment opportunities.

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's financial results easier to compare to results prior to our August 2020 merger with MLC. These.

These non-GAAP measures remove the amortization impact from our financial results.

For Q3, 2021, GAAP and adjusted after tax net investment income for $64 3 million and $48 8 million, respectively, as compared to $58 2 million and $48 8 million respectively in the prior quarter.

The increase in quarter over quarter GAAP net investment income was primarily due to an increase in accelerated accretion related to repayments on.

On a per share basis GAAP net investment income was 63.

Third to <unk> 57 in the second quarter.

Adjusted net investment income was <unk> 48 in both Q3 and Q2.

Distributions during the quarter totaled 50, consisting of the 45 regular distribution declared in August and paid on October 27.

As well as the last of our three five special distributions, which was paid on September 15.

As Brendan noted net asset value per share at September 32021 decreased to $15 92.

From $16 five as of June 32021.

Q3, NAV reflects the impact of the <unk> special dividend mentioned earlier.

With that I'll turn it back to Brendan for closing remarks.

Thanks, Joe and thank you all for joining us for our call now.

Notwithstanding the current competitive market backdrop, the platform delivered solid results this quarter and we believe we have the portfolio primarily positioned in segments of the economy that are less vulnerable to volatility associated with the current economic backdrop.

We appreciate your time and attention today and as always I'd like to thank you for the privilege of managing your capital with that let's open the line for questions.

And ladies and gentlemen, we will now take a moment to compile the Q&A roster.

First question comes from the line of Finian O'shea with Wells Fargo.

Hey, Thanks, good morning, everyone.

Hey, good morning.

First question on the on the portfolio yield it sounds like you're.

And able to keep those at a pretty good level I think.

Only download.

A few basis points, I think $8 seven to eight 6%.

With all this activity in our <unk>.

Obviously competitive market can.

Can you talk about how you know what.

Are you kind of.

Migrating do are picking your spots if if any were different.

Or just a color on what.

There's a lot of the maturing stuff goes out through M&A or graduating what what the newer stuff looks like.

Yes look.

I think it's well.

I appreciate it.

Current market backdrop is.

No more competitive than most market backdrops that we've experienced.

Yeah in a decade, we're running this business, yes, our general observation is that there is ebbs and flows of that some which are market driven and some of them, which are capital formation, driven some which are a function of the sectors in which youre focused so I think the headline yeah definitely some unusual activity in this quarter in terms of the pace of repayments.

Safe to say the yields on new originations, we are below that of the deals that came out of the portfolio.

That was also a function of.

The mix as I mentioned in the remarks upfront. We did have some second liens that we prepay as well and so obviously the goal and the focus is to as we're putting out new capital one ensure that we're focusing on quality opportunities.

Not really.

We're trying to get to a overall portfolio composition of our leverage ratio in the short term for the person who was just I was just mentioning any specific quarter and I think this quarter really showed that the platform has tremendous capabilities access to different opportunities.

When you look at the originations across this quarter I think John gave the stats.

It was 10, new platforms 10, 10, new investments plus some existing follow investments those fault lines in <unk>.

We're much greater I think it was <unk> 17 versus <unk> 10 in a bit bigger in terms of in terms of.

Just the total.

Aggregate amount of capital that we.

This quarter. So I think so I think we do benefit this quarter from from that follow on amount really being a function of deals that were structured negotiated.

In previous quarters, so those follow ons generally coming out the.

The new issue spreads that were in place at the point in time, when we did those deals.

Even just looking at new platforms I think we did a really nice job this quarter continuing to focus on areas that are our strengths.

There's no one or two deals that dominated the activity. This quarter. If you look across the schedule Youll see our biggest deal was I think about $43 million.

<unk> had another deal for $65 million, which was really a replacement.

The deal that was.

We paid in the quarter as well.

The sectors continue to be the ones that you know us to be focused on historically, we're not leaning into any of the more damage sectors of the economy, where there could be some opportunistic opportunities.

In a dislocation what you see is a lot more of the same which is a lot of software a lot of health care services.

Health care and things that you've come to <unk> over the last several years.

Sure that's helpful and then.

I guess kind of building up that.

There is still a bit more yield.

Yield compression it sounds like.

Yes.

Obviously this quarter had a big.

Tailwind.

Repay.

Accelerated fees and so forth.

How do you.

With all this you.

You earn the dividend pretty much even without.

The fee waiver.

But there were a real tailwind so how are you thinking about it.

Going into 2022.

What sort of you know.

Leverage and yield profile.

Do you envision.

Got you.

Sure. Thank you.

Yes, yes, yes for sure.

I think we first and foremost need to continue to focus on finding attractive investment opportunities that are going to generate attractive risk reward for the platform. I think this quarter continues to show that we've got that capability.

Even in this unusual environment.

As you know, we still have room to move the the total balance sheet up from where we are we've been we've been really for four quarters running pretty hard to stand still here.

With the pace of repayments coming coming coming out as they have here as well and from sitting here today, we just have more capacity on the balance sheet to move up higher into our target leverage ratio I think as I mentioned on the call. We do anticipate that would would be the case in Q4, obviously certainly two thirds of the quarter left to go but in any more.

Normalized environment, I think that I think that should be the case here.

You also heard yet we talked a little bit about for example, Hunter defense, which was a previously non.

Income producing asset that's been able to be.

Monetize recycled back into into income producing assets and I think theres also tremendous.

<unk> on the liability side of the balance sheet for the company here as well I'm sure. Many of the investors in the space are following what's going on in the financing markets for these assets. There is typically generally a high correlation between if there's pressure on asset yields is also an opportunity on the liability side for.

For example, we've got our convertible bond, which has a four 5% coupon coming due early next year that will be recycled that our current plan would be there.

Refinance that with our existing capacity under our revolving credit facility, which of course comes with a much lower cost of capital I think there'll be ongoing opportunities over the course of the next year to do that as well.

So I think those are just a few things that I'd point to that yes.

Some.

Optimism that there is still really good opportunities there.

Perform here.

Okay. That's all for me. Thanks, so much thank you.

Your next question comes from the line of Matt Tjaden with Raymond James.

Hey, all morning, and I appreciate you taking my questions first one for me maybe more so on the general overall market environment.

Beyond spreads any any high level color you can give on how terms and covenants are holding up.

Yeah, Hey, Matt good good good good to connect.

Yes.

I don't know that our commentary is going to be tremendously different than probably what you've heard from other managers.

I think there as I said, a combination of things going on in the market right now in the context of the economic environments, all the fiscal stimulus coming out of the of the Covid crisis.

That makes it makes it makes us a bit of an unusual time in the market is new capital being formed in the space et cetera.

So I would characterize this as one of those portions of the cycle in the market that you go through where things are a bit more competitive than they might be at a different parts.

As I mentioned I think that generally ebbs and flows over the course of time I think for sure the relative opportunity set.

In this in this world that we're operating and continues to be with a really really attractive overall in.

In terms of specificity.

Changes in terms et cetera, I think a few things I'd note. One is and again you look at the originations and the cadence. This quarter. We continue to be focused on what we think is the core of the middle market. If you look at the size of the companies in our book It Hasnt changed dramatically over the years I think that the median EBITDA of the company and the book is somewhere around 35% to four.

<unk> million dollars.

That's a part of the market that we like those are companies that are.

Scale dinner in their own right have really good opportunities.

To continue to grow.

Our focus is on those sectors with the secular tailwind, but theyre not so big that there really bumped.

Bumping up against the more efficient part of the capital markets in the syndicated parts of the market, but when there are things going on in that part of the market. There does tend to be a little bit about <unk>.

Bleed down into our part of the market and so an example would be I think there is a.

A little bit of pressure on LIBOR floors. For example, a couple of deals this quarter came with 75 basis point floors.

I think this quarter.

The average for in our booklet was 90 basis points, so nothing incredibly dramatic but on the margin, we do see a bit of those types of pressures.

The same in the spread world as well, but as you heard.

In terms of how we're navigating continuing to focus in sectors, where we think there's better opportunities and a platform that Scott access those opportunities I think really proved to be the case this quarter.

Got it maybe just following up on the convert so it sounded like the initial plan is to run the repay through the revolver. Maybe in 2022 would you expect that to be to be a permit shifted in kind of run secured mix a little hotter or do you expect them to visit the unsecured market again in 2022.

We are constantly dynamically looking at that I think there is a few tenants that are really important to us and I think that really came through during the Covid crisis I think I think I think when you are investing in this in this part of the market at a a permanent capital vehicle that <unk> got to build your balance sheet to withstand any in all environments that might come.

You're way, we've historically been been thoughtful about leaning into what has been a higher cost of debt in the unsecured part of the market, but a much more flexible.

Overall balance sheet, where obviously youre not pledging all of your collateral to lenders and are somewhat flexible solutions, we're really really mindful of making sure we're maintaining that rate focus overall an appropriate mix.

Yes, I think there's also been some dynamics in the unsecured part of the market that are really really quite helpful to the beauty space PDC space in general and I think I think our platform, specifically, which is an extension of tenor we've had seven year deals even a 10 year deal getting done in this space. So the opportunity to ladder maturities is one that I think is just really emerging.

And I think would be a really good reason to continue to look at the unsecured part of the market and two to not just manage that mix of secured versus unsecured but also matter.

The latter.

<unk> maturities, so we'll keep an eye on all of that over the course of 2022.

Got it that's it for me I appreciate the time.

Okay.

Yes.

At this time there are no further questions. Please continue with any closing remarks.

Well, thank you Erika and of course, thank all of you for for dialing in and of course as always if you have any questions. Please feel free to reach out directly to the team I Hope you all have a great weekend.

Yes.

Ladies and gentlemen, this does conclude the Goldman Sachs BDC, Inc. Third quarter 2021 earnings Conference call. Thank you for your participation you may now disconnect.

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