Q2 2022 Goldman Sachs BDC Inc Earnings Call

Good morning. This is Austin theory, a member of the IR team for Goldman Sachs BDC, Inc, and I would like to welcome everyone to the Goldman Sachs BDC, Inc. Second quarter 2022 earnings Conference call.

Please note that all participants will be in listen only mode until the end of the call and 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.

<unk> 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.

Oh cast 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 Relations section and which include reconciliations of non-GAAP measures to the most directly comparable.

<unk> GAAP measures.

These documents should be viewed in conjunction with the company's quarterly report on Form 10-Q filed yesterday with the SEC. This.

This conference call is being recorded today Friday August 5th 2022 for replay purposes, I will now I'll turn the call over to Alex Chi Co Chief Executive Officer of Goldman Sachs BDC. Thank you Austin and good morning, everyone and thank you for joining us for our second quarter earnings Conference call.

I'm here today with my co Chief Executive Officer, David Miller, Gabriel is screening, our chief operating officer, and Carmen I always Eddie our Chief Financial Officer.

I'll begin the call by providing a brief overview of our second quarter results before discussing the current market environment in more detail.

I'll, then turn the call over to David to describe our portfolio activity beforehand to declare my take us through our financial results and finally, we'll open the line for Q&A.

So with that lets get through our second quarter results.

Net investment income per share was 49 cents.

Excluding the impact of asset acquisition accounting in connection with the merger with and then they'll see adjusted net investment income for the quarter was 45 cents per share.

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 30th 2022.

Net asset value per share decreased slightly to $15 53 per share as of June 30th a decrease of approximately one 7% from the end of the first quarter.

This decrease was primarily attributable to overall credit spread widening that reflects the current market dislocation and more volatile investment environment and not any significant credit events within the portfolio.

With respect to the market environment in the second quarter.

You need to navigate market volatility highlighted by higher rates as a result of dramatic tightening by the federal reserve in response to inflationary forces.

The less car portfolio hasn't defining characteristics that helped insulate us against the impact of these macroeconomic forces.

G. S. P. D is characterized by high school activity, resulting from a stringent due diligence process that is biased towards investing in non cyclical businesses that have strong pricing power, coupled with imagine capabilities and expertise to navigate an economic slowdown.

While mark to market changes are reflected in our failure of out of the calculation. This quarter, we want to remind investors that our portfolio is predominantly floating rate in nature. In contrast to the broadly syndicated loan market. The vast majority of our book is financial maintenance Covenant protections.

In addition, the pressures are significant food and gas price inflation had been especially pronounced for individual consumers.

We are focused on lending to more non cyclical business the business sectors.

Its now been nearly five months since the BDC platform is integrated into the broader direct lending business and the asset management Division of Goldman Sachs.

The benefits of this integrated private platform, where especially highlighted this quarter at a time when general M&A volume and capital markets activity faced headwinds.

Access to a larger funnel of potential transactions well being viewed as a natural capital solutions provider is especially important at a time when financing exits are limited in the broadly syndicated loan market has largely shut.

We had a few deals this quarter that we sourced through our contacts and the Goldman Sachs investment banking franchise, including enterprise D B and rubric.

To highlight one of those transactions rubric as a software company that had no debt on the balance sheet. It was contemplating an IPO until a public equity market conditions led to the deferral of those plants.

And tax investment banking team, which has a close relationship with the company referred management to US and we were able to provide alone that provided additional liquidity for growth at an exceptionally low loan to value.

This example, not only speaks to the power of our platform, but the broader theme of volatile macro conditions, making ipos and exit difficult, which is driving borrowers to direct lenders like us to help fund growth.

Fidelity payment is another transaction that we sourced the BARDA Goldman Sachs private credit platform and demonstrated the breadth of relationships. We have built over time with both the sponsor and the company.

Additionally, the long standing relationship with Fidelity is sell side advisor was instrumental in getting our team initially involved in the transaction.

The sponsor and the company agreed quickly to use this as a financing partner due to our team's knowledge of the business in the payments industry.

We were able to deliver a tailored financing solutions at a low loan to value in order to support the acquisition of the company and help fund future growth during the volatile market conditions.

This example of points, the platform's ability to leverage industry expertise and relationships across the border team in order to execute on a transaction within a short timeframe.

We again supported our shareholders through this period of volatility by waving a portion of our investment advisory fees.

Previously stated, while we intend to voluntarily waive income based incentive fees through and including the fourth quarter and then the amount necessary to achieve at least 45 cents a quarterly adjusted net investment income per share. We believe that in the second half of this year, we may be able to achieve this level of earnings without additional waivers.

With that let me turn it over to my co CEO David another.

Thanks, Alex during the quarter, we originated $366 million in new investment commitments of 197 million in new investments to six new portfolio companies and $169 million a follow on investments to 12 existing portfolio companies.

Primarily to finance M&A activity.

New investment commitments remain mainly focused on the most senior parts of the capital structure with 358 million under the $366 million in first lien senior secured loans.

Sales and repayment activity totaled 106 million driven by the full repayment of investments by two portfolio companies.

Sales and repayment activity was more muted this quarter as the overall capital markets activity slowed in line with the increased volatility we've seen in the capital markets.

Turning to portfolio composition.

As of June 32022, total investments in our portfolio were 3.6 billion at fair value.

Comprised of 97, 4% in senior secured loans, including 88% in first lien, 2.8% first lien last out Unitranche and 6.7 and secured second lien.

As well as a negligible amount of unsecured debt and two 4% and a combination of preferred and common stock and warrants.

We also had three out.

I'm, sorry, 569 million of unfunded commitments as of June 30th, bringing total investments and commitments to $4 2 billion.

As of quarter end the company held investments in 129 portfolio companies up.

Operating across 38 different industries.

Weighted average yield of our investment portfolio at cost at the end of Q2 was eight 6% as compared to seven 9% in the prior quarter.

The weighted average yield of our total debt and income producing investments at amortized cost increased to 9% at the end of Q2 from eight 5% at the end of Q1.

Turning to credit quality, the weighted average net debt to EBITDA of the companies that aren't investment portfolio decreased to 6.0 times at quarter end as compared to six two times from the prior quarter.

The weighted average interest coverage of the companies in our investment portfolio at quarter end was two one times versus 2.5 times in the prior quarter.

Nonetheless, we continue to see both healthy quarterly sequential growth in LTM revenue and EBITDA.

And finally, turning to asset quality.

Two investments were moved out of non accrual during the quarter due to repayments and as June and as of June 32022 investments on nonaccrual status amounted to 0.4, 0.9% of the total investment portfolio at fair value and amortized cost respectively.

I will now turn the call over to the car mine to our through our financial results.

Thank you David.

We ended the second quarter of 2022 with total portfolio investments at fair value of $3 6 billion outstanding debt of 2 billion and net assets of $1 6 billion.

Our ending net debt to equity ratio increased to 1.25 times from 1.15 times last quarter squarely in line with our target leverage ratio.

Average net debt to equity for the quarter was 1.18 times as compared to 1.16 times in the prior quarter.

At quarter end, 42% of the company's total bolt total principal amount of debt outstanding was in unsecured debt and $527 million of capacity was available under our secured revolving credit facility.

During the second quarter, we closed an amendment to our secured revolving credit facility, which extended the maturity date from August 2026 to May 2027.

Certain financial covenants and replace the LIBOR benchmark with the sofa benchmark.

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 the company's financial results easier to compare to two results prior to our October 2020 merger with MLC.

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

For Q2, GAAP and adjusted after tax net investment income or $49 6 million and $45 9 million, respectively, as compared to $50 2 million and $45 9 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 and prepayment fees as a result of lower repayment levels as well as an increase in interest expense.

On a per share basis GAAP net investment income was 49 cents and adjusted net investment income was 45, both unchanged from the prior quarter.

On May 26th we announced the launch of an aftermarket or ATM equity offering program, whereby the company may from time to time issue and sell common shares having an aggregate offering price up to $200 million.

During the quarter ended June 32022, we issued approximately 124000 shares at an average price of $18 17 per share, resulting in proceeds net of underwriting and offering expenses of $1 8 million.

Distributions during the quarter totaled 45 cents and net asset value per share on June 30 of 2022 was $15 53.

Compared to $15 80 as of March 31, 2022.

With that I'll turn it back to Alex for closing remarks, Thanks Carmen is.

Maybe now we regretfully announce during the quarter that Carmine was resigning from his position as CFO effective August 10th to pursue another professional opportunity.

We wish Com I know a lot of success in his next career pursuit and thank him for his service to <unk> over the years at.

At the same time, we're delighted to welcome David peso to the position of CFO . After spending the past 12 years here at Goldman Sachs. Most recently as the company's principal accounting officer responsible for oversight of fund accounting financial reporting and internal controls for <unk>.

In conclusion. Thank you all for joining us on our call. While we think the environment ahead and exhibit further volatility we're confident in our unique and differentiated private credit platform at Goldman Sachs to provide many exciting investment opportunities with E. S. P. D in the quarters ahead.

We appreciate your time and attention today.

Let's open the line for Q&A.

Thank you, ladies and gentlemen, we will now take a moment.

The Q&A roster.

We will take our first question from Finian O'shea with Wells Fargo Securities.

Hi, everyone. Thanks, and good morning can you touch on the cross platform co invest.

Not sure if you gave that number but the.

Percent or or quantum of price.

Cross platform deals this quarter in terms of your origination and also remind us are there certain parameters that you'll look at.

Outside of risk adjusted yields.

Such as absolute yields.

Maybe pick covenants that kind of thing.

That you most desire in the BDC.

Thank you for the question.

This quarter we.

Did not have any cross allocated deals across the platform. We did have one in the first quarter.

Carl.

But what I would say that we did have a number of cross originated deal.

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Which is that we are able now to.

B E.

The full sourcing engine.

In a way that you know.

Uh huh.

Sure.

The funnel of deal.

They are available to the company.

We did see a number of crude or would you need a deal.

You know we were RMB, two we're happy to be able to allocate.

At the meeting.

Did you feel like they are going to be.

Quite accretive to the portfolio and company.

Yes.

Good morning, I would further say you asked about the investment appetite I mean look what we're looking for in the BDC complex are squarely middle market companies. They typically have maintenance covenants.

We'd like to Orient around defensive industries that have protected cash flows and so that's kind of how we think about what's appropriate for <unk>.

Versus something or other drawdown funds or various other vehicles.

Sure. That's helpful. Thank you and just a follow up on.

Software.

Recurring revenue software, specifically a lot of those.

What we see in the public sphere the stock market.

The unprofitable tech has sold off a bit.

I think you have a pretty good lens into this Ah <unk>.

<unk> will focus on the BDC are you.

Are you seeing any.

Sort of crack or decay and in.

And the underwriting trajectory is there.

Stuff like higher acquisition costs retention biz.

Business spend any of any of the above that sort of.

And emerging challenge for for that category.

Yeah look we eat.

Great question. Thank you.

We as you know have been very selective about the loans that we look at it on a recurring revenue basis. In fact, if you look at our portfolio as I understand Youre My portfolio has actually declined in the quarter just given the length that we have into the overall landscape in so.

You remember it.

Yes.

These businesses also have highly variable cost structures.

In some cases, we've seen these companies pivoted a bit but again just given us selectively then about the types of recurring revenue company that remind you we have not seen any issues in that portfolio.

Thanks, that's helpful actually one one final bonus question if I may can you touch on your your.

Your plans how you view.

The aftermarket offering program I think you commenced this quarter.

Yes, we started the at the market offering this past quarter, we expect anywhere from 10 to 20 million in any given open trading window, when it's accretive to the BDC.

Okay. That's helpful. Thanks, so much.

At this time there are no additional questions in queue I'd like to turn the call back over to our speakers for any additional or closing remarks.

Thank you very much for your time and for your support and we look forward to reporting in future quarters. Thanks very much. Thank you.

That will conclude today's call. We appreciate your participation.

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