Q4 2021 Goldman Sachs BDC Inc Earnings Call
Yeah.
Good morning, the fishing Maria and I will be your conference facilitator today.
Like to welcome everyone to the Goldman Sachs BDC incorporated fourth quarter and year end 2021 earnings conference call. Please note that all participants will be in listen only mode until the end of the call. When we will open the lineup 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.
<unk> 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 condition may differ possibly materially from what is indicated in those forward looking statements. As a result of a number of factors, including those described from time to time in the company's SEC filings.
Cash is copyrighted material of Goldman Sachs, BDC incorporated 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 gold.
MS Sachs BDC Dot com under the Investor Resources section and which includes reconciliations of non-GAAP measures to the most directly comparable GAAP measures. These documents should be reviewed in conjunction with the company's annual report on Form 10-K filed yesterday with the SEC. This conference call is being recorded today Friday February 25th 20.
<unk> 22 for replay purposes, I'll now turn the call over to Brendan Mcgovern, Chief Executive Officer of Goldman Sachs BDC.
Thank you Tamara.
Good morning, everyone and thank you for joining us for our fourth quarter earnings Conference call.
I'm here today with Jon Yoder, our Chief operating officer, and Carmine Reeves Eddy, our Chief Financial Officer.
I'll begin the call by providing a brief overview of our fourth quarter results before discussing the current market environment in more detail.
I'll, then turn the call over to John to describe our portfolio activity before we hand, it to Carmine take us through our financial results and finally, we'll open the line for Q&A.
So with that let's get to our fourth quarter results. Overall, we are pleased to report another quarter of solid income generation for the portfolio.
Net investment income per share was <unk> 56 <unk>.
Excluding the impact of asset acquisition accounting in connection with the merger with MLC Q4, adjusted net investment income was <unk> 48 per share.
Net asset value per share decreased slightly to $15 86 per share as of December 31.
A decrease of approximately 38 basis points from the end of the third quarter.
As we announced after the market close yesterday, our board declared a <unk> 45 per share dividend payable to shareholders of record as of March 31 2022.
Looking back 2021 was a remarkable year in many respects the private credit space broadly and G. SPD, specifically as the loose monetary policy environment fueled a strong economic recovery and a record investment activity.
As we discussed extensively over the past several quarters last year was marked by record repayment activity as the company saw more than 45% of its portfolio through 2020 year and turnover in 2021.
Despite this unusual repayment activity the team managed to grow the company's investments at fair value by over 7% year over year, which is a testament to the platform's outstanding origination capabilities and hustle over the past year.
In addition, our investment activity was highly focused on the top of the capital structure and as a result of our first lien exposure increased by about 700 basis points from year end 2020, ending at about 85% of the total portfolio at the end of 2021.
With this improvement in lean type, we believe it's prudent to target a funded debt to equity ratio of about 1.25 times.
For much of the year 2020, our leverage ratio hovered well below this target at about one times as we balanced the waiver repayments with sensible investment activity in the overall competitive environment.
We were pleased to see the leverage ratio ticked higher in Q4 with ending and average debt to equity of $1, one six times and one four times respectively.
In this environment of elevated repayment investing activity our focus has been on maintaining a high quality book with attractive credit characteristics, which we believe will serve the company well in the long term.
We maintain our historical focus on middle market origination as the median EBITDA of the companies of our book stayed relatively constant at just under $40 million.
Our focus on smaller companies allow us to maintain strong document standards.
As we made only one covenant light loan during the year, which was a follow on investment to a company that has performed well and has seasoned within our portfolio.
That said the combination of high portfolio turnover and the current competitive market environment, coupled with a higher mix of first lien assets did put pressure on yields during the year Q.
Q4 origination yields were seven 5%, which compares to seven 7% over the course of 2021, reflecting continued competition for high quality assets.
In addition, the weighted average net debt to EBITDA ratio of our portfolio companies with higher to six four times at year end 2021, compared to six times at the end of 2020, reflecting a trend toward lower leveraged portfolio company exposures being refinanced its new deals during the quarter.
Okay.
On last quarters call, we discussed the inflationary trends that continue to mark the current environment.
Thus far in inflationary pressures have not caused significant strengths of our portfolio companies, which we believe is a reflection of our focus on high quality companies with value added products and services that provide a modicum of pricing power in the current environment.
We are observing however that macroeconomic inflationary pressures are creating pronounced insert interest rate volatility.
The yield on the 10 year note currently stands at almost 2% versus one 5% at the beginning of the year.
At the same time three month LIBOR has more than doubled to 50 basis points from the 21 basis points. We saw at the beginning of the year and the forward curve is projecting three month LIBOR at one 9% by the end of the year.
Most economists are predicting seven to nine interest rate hikes by the fed over the coming year.
In light of the changing environment, we want to highlight a few points.
First 99, 4% of our portfolio was in floating rate assets as of the end of the year typically with LIBOR floors of around 1%.
Next we have been actively managing our debt stack and at year end more than half of our liability structure was in fixed rate notes.
As a result of this asset liability profile, we would initially expect some pressure on net interest margins as the front end of the curve kicks higher what's contractual LIBOR floors on our assets causes yields remained stable.
However, once LIBOR exceeds those floors, all other things being equal the rising rate environment should be a tailwind to net interest margins as asset yields move higher while the majority of our liability costs remain fixed.
And finally, turning to asset quality non accrual investments increased to two 5% and one 8% of the portfolio cost and fair value respectively.
The increase was a result of the addition of one of our investments of our investment in convene to the nonaccrual list.
As we have discussed previously convene has been impacted by the reduction in demand for shared meeting space in the Covid environment, but has benefited from capital support from its owners.
We are placing investments on non accrual this quarter as we expect to monetize this position this quarter at a discount to our clean value.
We don't expect this monetization to have a meaningful impact to NAV and we will seek to recycle the proceeds back into other income producing loan assets.
With that let me turn it over to Jon Yoder.
Great. Thanks Brendan.
The continued strong capital markets environment during the quarter enabled the team to again be active on the new origination front.
New investment commitments remained Lv, we remain focused on first lien senior secured loans.
During the quarter, we made 32, new investment commitments amounting to $723 million.
We originated $461 million in loans to 13, new portfolio companies and made $262 million of follow on investments to existing portfolio companies, primarily to finance M&A activity.
As Brendan mentioned sales and repayment activity, while below last quarter's record.
Remained elevated totaling $296 million driven by the full repayment of investments in seven portfolio companies.
Turning to portfolio composition as of December 31, 2021, total investments in our portfolio or $3 billion $478 million at fair value comprised of 97, 5% in senior secured loans, including 84, 7% in first lien four 7% in the first lien.
Last out unit tranche and eight 1% in second lien debt as.
As well as a negligible amount in unsecured debt and two 5% and a combination of preferred and common stock and warrants.
We also had $442 million of unfunded commitments as of December 31, bringing total investments and commitments to $3 92 zero billion.
As of quarter end the company held investments in 121 portfolio companies operating across 38 different industries.
The weighted average yield of our investment portfolio at cost at the end of Q4 was seven 9% as compared to eight 3% as of the end of the third quarter.
The weighted average yield of our total debt.
Income producing investments at cost decreased to eight 4% at the end of Q4 from eight 6% at the end of Q3.
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 four times at quarter end as compared to six times from the prior quarter.
The weighted average interest coverage of the companies in our investment portfolio at quarter end was two five times, which is flat with the prior quarter.
As of December 31, 2021 investments on nonaccrual status increased to one 8% and two 5% of the total investment portfolio at fair value and amortized cost respectively.
From 0.1% and <unk>, 7% as of the end of the third quarter.
Again as Brian mentioned this is due to putting convene on non accrual status.
I will now turn the call over to Carmine to walk through our financial results.
Thank you John .
We ended the fourth quarter of 2021 with total portfolio investments at fair value of $3 5 billion outstanding debt of $1 87 billion and net assets of $1 six 1 billion.
We also ended the fourth quarter with a net debt to equity ratio of 114 times, which is an increase from <unk> 91 times at the end of Q3 as investment fundings exceeded repayments for the first time in several quarters.
At quarter end, 54% of the company's outstanding borrowings were in unsecured debt and $837 million of capacity was available under our secured revolving credit facility.
On April one 2022, the company has $155 million of four 5% convertible notes will come due.
Our current expectation is to use the capacity under our secured revolving credit facility to fund the maturity, we continue to assess market conditions for other alternatives to term out our debt.
I'd note that at four 5% convertible notes are our most expensive liability and we look forward to optimizing our liability structure with the maturity of these notes.
Before continuing to the income statement as a reminder, in addition to GAAP financial measure measures. We will also reference certain non-GAAP or adjusted measures.
This is intended to make the company's financial results easier to compare to results prior to our October 2020 merger with NMFC.
These non-GAAP measures remove the impact of the purchase discount from our financial results.
For Q4, GAAP and adjusted after tax net.
Investment income were $57 3 million and $48 9 million, respectively, as compared to $64 3 million and $48 8 million respectively in the prior quarter.
The decrease in quarter over quarter GAAP net investment income was primarily due to a reduction in accelerated accretion as a result of more normalized repayment levels this quarter as compared to historically high repayments last quarter.
On a per share basis GAAP net investment income was 56.
Compared to <unk> 63 in the third quarter adjust.
Adjusted net investment income was <unk> 48 in both Q4 and Q3.
Distributions during the quarter totaled 45 as compared to 50 last quarter, which included the last of three five special distributions that were implemented following the merger with MLC one in Q4 2020.
Net asset value per share on December 31, 2021 was $15 86 per share as compared to $15 92 per share as of September 32021.
With that I'll turn it back to Brendan for closing remarks.
Thanks Carmine.
As many of you are aware I recently announced that I'm retiring from Goldman Sachs effective mid March.
In addition, we announced last night that Jon Yoder is giving up his duties as chief operating officer of our BDC vehicles.
Going forward, John will be focusing exclusively on the Goldman Sachs renewable power platform, which he has led with great success since its inception.
John and I are delighted to be given over the reins to the very capable hands with Alex Chi and David Miller.
<unk> will become co Ceos of G. SPD effective March 7th and <unk> will become the COO of GSP D or other BDC vehicles effective March 7th.
As new co Ceos, Alex and David bring a wealth of experience and leadership to the platform having collectively serve approximately 40 years with with Goldman Sachs in investment banking and middle market lending leadership positions respectively.
Together with Gabriele, Alex and David will bring to bear all of the capabilities of the firm and will no doubt improve upon the store stewardship of Goldman Sachs BDC.
And our decade at the helm G SPD, John I've been blessed with the opportunity to work with each and every day with an amazing and talented team there are far too many people to call out individually, but suffice to say John and I are index that many men and women across Goldman Sachs. We have consistently and persistently delivered top notch topnotch results for all the stakeholders.
A G SPD.
Over the years I've enjoyed ending each of these conference calls by thanking you the shareholders of <unk>.
On behalf of John and the rest of the team there has been a privilege to manage the capital B as many years and we wish you all the best with that let's turn the call back to Jim area and open line for Q&A.
Ladies and gentlemen, we will now take a moment to compile the Q&A roster.
Yes.
Tim will come from Robert.
Dodd with Raymond James.
Hi, guys.
Good luck in future endeavors Brendan.
It might seem a little odd asking you. This question since youre, leaving but once once you got just to clarify I mean in terms of forward strategy right.
I presume I mean, that's going to be no changes, but I just want to put.
We'd like to get on that.
Oh.
Cool, but.
Therefore, what strategy type of asset et cetera.
Maintenance segment.
Yes look Robert.
Your rights Ah I think Alex and David at the right time, we'll be speaking with all of you and you and other shareholders specifically.
That those go forward plans I can tell you that in the context of this transition.
I've been spending a lot of time with Alex and David Gabriele.
And the broader team and I don't think Robert you should be bracing for anything dramatically dramatically different than what we've been doing over the years just for a little bit of context.
Yes.
In our press release that we put out when we announced my departure in December there was a lot of biographical information.
And Alex and David both had been with Goldman Sachs for a long long time as partners of the firm.
David has been leading an investment platform for the balance sheet that has been focus on middle market lending and origination that's been the core of what he's been doing.
We're a very very long time in his career, including prior to Goldman Sachs.
Hey.
Alex has been here with the firm since 1994 within investment banking and as you know Goldman has the preeminent investment banking franchise in the World analysis had leadership positions in both leveraged finance as well as sponsor coverage.
And over the course of the past two years he's worked within what we historically called our merchant banking Division, which is now part of the combined asset management vision focused on on bigger cap originations in sponsored transactions you are benefiting from is very long.
And deep relationships within it within the sponsor community. So I think broadly speaking what you can expect and certainly I as a shareholder will hope to expect will be real.
Continued excellence where.
Leadership can bring to bear the full capabilities of Goldman Sachs.
To originate transactions for the regular vehicles in the BDC that we manage.
So I think we can leave it at that for now and I'm sure you'll have lots of opportunities to engage with that with David and Alex specifically go forward basis.
I appreciate that thank you.
Is it possible to address your question to me.
Debt to EBITDA I mean, as you said there was some went.
Went up to six four.
Some lower leverage loans paid off.
What.
Is that six for the same LTV I E.
Enterprise value businesses, as well or has there been any shift.
And the loan to value and then.
Apps.
Has there been any.
When we look at how about the buckets going right now in terms of the public equity markets somewhat more techie names the enterprise values of compressing that doesn't mean, the private equity multiples off so can you give us any color around that yes.
Yeah look I think I think firstly, just not just on the math, specifically because I think I think it's worth just a bit more detail as we highlighted and I know Robert unite had a detailed conversation on this last quarter. The repayment environment for that market has been a significant I think for <unk>, specifically, it's been really really unusually high as I have.
<unk> said in the remarks, 45% of the book that we came in to January 1st with repaid over the course of 2021, which which which is a really significant amount and so when you think about the normal cadence of alone you make alone it tends to deleverage over the course with lifetime.
We've been focused on like we talked about good documents standards. There is forced deleveraging in those structures. So when you see that repayment activity naturally that's going to be your lowered levered deals coming out of the book that are getting replaced by a new market origination so that math this quarter I think was.
A little bit Stark I would tell you. We also had a lot of follow on investing activity, which typically means you are re leveraging the business back to the original underwrite and so so I think that the numbers you see are sort of reflective of the current market environment to your LTV question I would tell you at underwrite when you're measuring the app.
<unk> invested capital in those companies will put aside the mark to market for a moment ltvs have been trending down despite that leverage multiple moving moving up and higher as you know our focus in orientation has tended to be away from companies and industries that don't attract high multiples cyclical industries.
Heavy manufacturing industries very capital intensive industries, not a big part of our book.
Yes.
The historical context, there we've tended to focus on technology, and software and health care and health care services and it services.
Which.
Yes stable recurring revenues and therefore tend to generate higher enterprise value multiples as well so again looking at underwrites.
Notwithstanding the tick up in that in that other leverage metric ltvs have been coming down.
I think it is fair to say in that if you were to mark to market those private equities just looking at what's going on in the tech space over the course of the past several months that probably is down but when you're starting out at a.
25% loan to value range, there is significant and tremendous junior capital beneath us to cushion that last before it before you see exposure within that within our loan portfolio.
Got it. Thank you last one for me if I can't Miss this quarter, if I remember right.
As the last quarter of committed.
Wave is to get to 40 agents on adjusted NII, obviously, you've already declared the dividend of 45.
But should.
Should we get.
Should we be expecting any any more waivers.
None would disclose so presumably not.
And what's the comfort level.
Reaching that 45.
Obviously with the rate curve, where it is pretty good in the second half.
Yes.
Yes, yes, yes, let me let me let me hit that so look as we talked about in the script. If you. If you think about the current environment. The changes over the last year or two you purely theres been overall pressure on yields.
Yes, I think when you look at this quarter, specifically compare to the rest of 2021, we also have dynamic of a reduction.
In those early repayments therefore, the acceleration of the of the OID.
And so I think fair to say those continue to be headwinds I think on the on the yield portion of the cashless.
Things have stabilized.
It has been our experience you see that kind of kind of running through the numbers, but I think safe to say over over the past couple of years, it's been a lower yield.
Building environment.
As I also talked about on the in the prepared remarks, if you look at last year leverage was basically stuck at one times.
For most of the year and so you start to think about the earnings power of the company going forward you've got those headwinds.
On the on the rate side, we'll see what happens in repayment environment as well, but I think it was a couple of other other other tools them toolkit are within the company, which is moving back up into the target leverage range.
Which I think you'll see that happen probably not getting all the way there this quarter.
I think that that's a possibility for the firm we got to you've got yields that are normalizing.
<unk> got.
This quarter.
As we talked about convene being a non accrual that's a couple of million Bucks of income we do expect that that will be monetized to put back into earning assets for the quarter on a go forward basis. I think you take all of that all that together in the absence of the fee waiver.
We're still below that 45%, that's <unk> 45 per share number.
But I think when you look at you know when you look at the total dollar amount of the waiver as you know we've actually been waiting to incentive <unk> 48 per share and so I think the delta the delta between the dividend 45 versus that waiver keep that mind as well.
I think the big wildcard for the company going forward it becomes that that rate environments, and so I talked about again and we've got a lot of disclosure in the Q around this mathematically I think the question will be what happens.
To the to the front end of the curve here.
And given the given the profile of the business, which is virtually 100% floating rate loans with a one floor.
As we talked about initially there'll be a headwind and I think youll, probably see that running through in Q1, as we start to move up.
And rates, but once you get to a LIBOR floor it becomes significant.
It benefits the company and we've also been active on the liability management front, we fixed more than half of our of our liabilities into termed out fixed rate notes. So.
So I think not appropriate for me in the context of my departure to talk about fee waivers going forward, but I think you've certainly seen over the years Goldman Sachs be really thoughtful.
About about it.
Its approach from a fiduciary perspective, and I think I think there's a lot of different levers to pull and we will see how things develop over the course of next year.
But but I think generally when you look at the book when you look at the company the asset quality is good.
Billing structures in a really good spot all of which bodes well for a really good foundation for Alex and David and got relative to take the business forward from here.
Okay I appreciate that thank you again.
Good luck in the future.
I appreciate it.
Or your comments over the years. So thanks, a lot sure. Thanks Robert.
Again as a reminder, if you would like to ask a question that is star then the number one on your telephone keypad.
And at this time there appears to be no further questions in queue. Please continue with any closing remarks actually we do have a question in the queue from Finian O'shea with Wells Fargo. Please proceed.
Hey, Phil.
Hey, Hey, everyone. Good morning.
Congratulations Brendan Johnny.
Everyone else.
Coming in as well.
Hi, its actually to that matter I want to follow on Robert's question on platform changes.
With the.
The new leadership coming from the.
I L G.
Banking group.
Yogurt moving elsewhere so.
It does feel like there's a lot of writing on the wall that.
Things will be a bit different.
Weather and origination style or her management style and you know.
That doesn't have to be static and it can obviously be good.
But.
Just I would say at a high level, if things are going to be.
Completely the same then why or why are the moving pieces.
So different than any comment you can provide on how.
The folks at <unk>.
We're thinking about the the architecture here.
In the wake of your departure Brendan.
Yes look I wouldn't read too much into the changes.
That that youre, describing in the context of the broader strategy and structure.
As you and I have talked about offline for for me.
Personally.
This just felt like a good natural time for me to move.
Move on to pursue some different different endeavors and that was for me a personal decision based on how I see this the next leg of my career here I don't think there are broader implications beyond that John as you know who was a key architect of this business since inception has been really.
<unk> successfully reason that renewable power business, so while it feels like all of this might be coming together.
At this point in time these are actually things that had been kind of behind the scenes taking place.
Some time.
And I think there continues to be good stability overall with it within the group and the firm. Obviously, you know David you quite well who's been here with the with the company for a long time and it continues to be.
Focused on the group in the business and I think when you look at the forward for the business just like I talked about.
Having spent a lot of time.
With Alex and David and their respective teams.
What I can tell you is there's a lot of commonality of approach in terms of having a really good credit culture in terms of having a really good disciplined focus.
On client service and all the things that we think have contributed to the success of G. S. BD over the years. So I don't think youre going to see tremendously significant wholesale changes day, one strategically or otherwise I think if anything there is like I said new resources.
That brought to bear to the benefit of the company over time, and so I think as you start to engage and spent some time and meet with that without some David and team, you'll you'll see that coming through in spades.
So I can tell you I've got a lot of confidence in the go forward of the company and the team.
The form and I'm sure, you'll you'll come to the same conclusion.
Absolutely very helpful.
And.
Unrelated follow up on on the capital raising side.
The strategy you've been.
A pretty successful with.
Private retail the public.
With you now and then I'll see and such.
<unk>.
Seems that style seems to be being.
Being the emphasized by a lot of your peers.
And in the way, but by the way of the newer non traded perpetual private retail strategy.
Which you know are unrelated to bdcs, but they are.
Debatably cannibalizing a a fundraising channel.
And.
Obviously, there are others there are public.
Public offerings Atms.
Institutional public so forth I would just add.
Any high level thoughts on that.
If if you sorry go ahead.
Yes, so you sorry, here's I would say staying in and I think I speak confidently for Allison, David and Goldman on the topic. When you look at the private credit space more broadly.
Certainly relative to 10 years, when we launched this platform.
Being a scaled participants.
<unk> is just table stakes with in space, having the ability to bring to bear our different pools of capital to compete in the market for assets that could be whether those are larger cap unitranche opportunities or more bespoke middle market lending opportunities scale is the key.
And so as an asset manager.
The approach that <unk> had on behalf of Goldman and I think it's shared by buyouts and David is.
Our approach is to be agnostic as to how investors want access to our core capabilities, which is the ability to source and underwrite and risk manage a portfolio of proprietary loans.
And there can be certain investors, who might be institutions, who might want a separately managed accounts or a single investor fund there might be other investors that prefer the liquidity associated with a.
Public BDC there might be other investors.
Our insurance clients they have regulatory issues that they're trying to accomplish with how they access this asset class our job as an asset manager is to create an ramps where all of those different clients and so I think that means that yes.
I think the observation that we have is there continues to be a really attractive opportunity for investors, who want to invest privately into a BDC that might go public later on.
The investors on this platform have had really good success and really good returns in doing that.
I think there are other investors, who prefer the simplicity and the liquidity profile of the fund that is continuously offered where you can invest all of your account all grew capital day one.
And I suspect that that'll be a tool in the toolkit that the firm has going forward as well and so but I don't think that really changes anything strategically for the platform in any way shape or form like I said the goal is to create as many on ramps for clients, who want to access the very significant capabilities of Goldman Sachs.
And I think if we do that that will be quite successful.
Awesome hopeful thank you and congratulations again and best of luck on your next endeavor.
Thanks, Dan.
And at this time there are no further questions. Please continue with any closing remarks.
Okay well. Thank you Maria Thank you all as always for listening in.
Do you have any questions. Please don't hesitate to reach out to us directly and we hope you have a great day and great weekend.
Bye bye.
Ladies and gentlemen, this does conclude the Goldman Sachs BDC incorporated fourth quarter and year end 2021 earnings conference call. Thank you for your participation you may now disconnect.
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