Q2 2023 Goldman Sachs BDC Inc Earnings Call

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Good morning, This is Austin Erie and member of the Investor Relations team for Goldman Sachs BDC, Inc, and I would like to welcome everyone to the Goldman Sachs BDC, Inc. Second quarter 2023 earnings Conference call.

Please note that all participants will be in 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 company's actual results and financial condition may differ possibly materially from what is indicated in these results and.

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. They 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 there, 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 quarterly report on Form 10-Q filed yes.

Thirdly with the SEC.

Conference call is being recorded today Friday August 4th 2023 for replay purposes, I will now turn the call over to Alex Chi Co Chief Executive Officer of Goldman Sachs BDC, Inc. Thank.

Thank you Austin good morning.

Everyone and thank you for joining us for our second quarter 2023 earnings conference call I'm.

I'm here today with David Miller, My co Chief Executive Officer, Tucker Green, our Chief operating Officer, and David Purser, 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 will then turn the call over to David Miller described by portfolio activity before we hand, it off to David Purser that take us through our financial results and then finally, we'll open the line for Q&A.

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

Net investment income per share for the quarter was 59 cents, an increase of 28, 3% from the prior quarter.

Excluding the impact of asset acquisition accounting in connection with the merger with it and then I'll see adjusted net investment income for the quarter was 58 cents per share equating to an annualized net interest income yield on book values at 15, 9%.

The increase in returns is largely a reflection of the increase in base rates during the quarter.

As we announced after the market closed yesterday, our board declared a <unk> 45 cents per share dividend payable to shareholders of record as of September 32023.

This marks the company's 34th consecutive quarter of a 45 cents per share dividend totaling $15 30 per share since our IPO, excluding the special dividends, we paid in 2021 post the merger with LLC.

Net asset value per share increased to $14 59 per share as of June 32023, an increase of approximately 1% from the end of the first quarter.

This increase was primarily attributable to the increase of net investment income as well as a modest increase in unrealized gains for the quarter.

On a fair value basis first lien loans are 92, 6% as the investment.

Just one quick follow as of June 32023.

Which speaks to our continued focus on maintaining a high quality portfolio.

This quarter, we continued to invest only in directly originated first lien senior secured debt with no participation in the secondary market for broadly syndicated loans.

In the first quarter, we express confidence that we will see increased deal volumes as the year progresses with visible green shoots in M&A markets.

Surgeons have take privates and refinancings as sponsors re engage private markets to address upcoming maturities.

During the second quarter some of those expectations came to fruition as we saw increased deal activity.

Only towards the tail end of the quarter and a higher level of activity has continued into the second half of the year to date.

Of note G. S. P. D participated in the refinancing and recapitalization at full steam and existing G. S. P D borrower.

The Goldman Sachs private credit platform has been involved with the company since 2019.

Is that in 'twenty, one our initial investment was repaid as part of a broader the capitalization of the company in which J S. P. D participated.

G SPD participated again and the Companys most recent $1 billion recapitalization that is expected to close this quarter.

This serves as an example of our incumbency, allowing us to reset economics in terms to match the current market environment.

<unk> is a holding company a vertical like software businesses that provide core business management software and payment capabilities to small and medium sized customers.

Superior Environmental solutions is another example of a new origination in the second quarter with a Goldman Sachs private credit platform had an existing incumbent position and G. S. P. D was able to participate in financing the buyout of the business by a new financial sponsor.

In general we're pleased that we're able to take advantage of the additional investment capacity that was created through our equity offering this past March and higher repayment activity during the second quarter.

We're more confident now that despite overall economic uncertainties that continue to persist deal volumes will continue to grow as companies seek more strategic opportunities and sponsors look to deploy what has grown to more than one trillion dollars of dry powder.

So with that let me turn it over to my co CEO David Miller.

Thanks, Alex.

In the quarter, we originated 86.0 million in new investment commitments to four new and five existing portfolio companies, our new investment commitments were 100% in first lien senior secured loans.

Sales and repayment activity totaled $24 9 million, primarily driven by the full repayment of investments in two portfolio companies.

We are particularly pleased with the double do we have to date of additional anticipated repayments in the second half of the year across a handful of portfolio companies.

Two of these will further reduce our junior lien positions currently in the portfolio and more importantly allow us to redeploy capital in a new first lien oriented opportunities, while remaining well within our leverage targets.

Turning to portfolio composition.

As of June 32023, total investments in our portfolio were $3 6 billion at fair value.

Comprised of 97, 5% senior secured loans, including 89, 3% first lien three 3% in first lien last out Unitranche and four 9% in second lien debt as well as a negligible amount of unsecured debt and two 3% and a combination of prefer.

<unk> and common stock and warrants.

We also had $366 1 million of unfunded commitments as of June 32023, bringing total investments at fair value and commitments to $3 9 billion.

As of quarter end the company held investments in 135 portfolio companies operating across 36 different industries.

The weighted average yield of our investment portfolio at cost at the end of Q2 was 11, 9% as compared to 11, 6% from the prior quarter.

The weighted average yield of our total debt and income producing assets at amortized cost increased to 12, 6% at the end of Q2 from 12, 2% at the end of Q1.

Turning to credit quality.

Weighted average net debt to EBITDA of the companies in our investment portfolio declined slightly quarter over quarter to five nine times compared to 6.0 times in the first quarter.

Given the level of existing base rates, we would anticipate that future originations and transactions should reflect lower leverage metrics Jeff.

Just as importantly in response to your questions. Some of you have had in regard to macro headwinds over the past few quarters, our portfolio of companies had both topline and EBITDA growth year over year and quarter over quarter on a weighted average basis.

We remained selective from a credit and risk adjusted return perspective, and maintain a long term strategic view on capital deployment that is insulated by our orientation to first lien credit risk.

The weighted average interest coverage of the companies in our investment portfolio at quarter end was one six times.

Which was flat yet again as compared to Q1, 'twenty three and Q4 'twenty two despite an increase in the overall silver yield curves.

It is important to note that we calculate our coverage ratios based on current quarter metrics, rather than a trailing or LTM basis.

Where we need to use the LTM calculation than our interest coverage of the companies in our investment portfolio would be one nine times.

And finally, turning to asset quality as of June 32023, Despite two positions that were designated as grade three last quarter being placed on nonaccrual during Q2 investments on non accrual status amounted to <unk>, 8% and one 8% of the total investment portfolio at fair value and <unk>.

<unk> cost, respectively versus <unk>, 6%, and one 6% at fair value and amortized cost respectively as of March 31 2023.

I'll now turn the call over to David pass them to walk through our financial results. Thank.

Thank you David we ended the second quarter of 2023 with total portfolio investments at fair value of $3 6 billion outstanding debt, just under 2 billion and net assets of $1 6 billion, our ending net debt to equity ratio at the end of Q2 remained at the same level of one two times.

<unk>.

Which continues to be below our target leverage range of 1.25 times.

At quarter end, approximately 44% of the company's total principal amount of debt outstanding was in unsecured debt and had $595 million of capacity available under our secured revolving credit facility.

With our leverage ratios remaining below our targeted range dry powder in our credit facility and the aforementioned repayments. This will allow us to deploy capital into attractive risk adjusted opportunities in the current market.

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 companys financial results easier to compare to results to our October 2020 merger with MLC. These non-GAAP measures remove the purchase disk.

Amortization impact from our financial results.

For Q2.

GAAP and adjusted after tax net investment income were $64 5 million and.

And $63 1 million, respectively, as compared to $48 million and $47 1 million respectively in the prior quarter.

The increase in quarter over quarter top line investment income was primarily due to the increase in base rates.

On a per share basis GAAP net investment income was 59 and adjusted net investment income was 58.

As compared to 46, and 45, respectively last quarter.

As a reminder, our incentive fee last quarter was elevated due to results from Q1 2020 being removed from the calculation. Those results included the initial impact of COVID-19, and meaningfully limited the amount of incentive fees that could be earned during the trailing 12 quarter period.

For the current quarter, we saw the inverse effect, which removed the results from Q2 2020, which included the rebound from the impact of COVID-19 during the trailing 12 quarter period.

Distributions during the quarter remained consistent at 45.

Our spillover taxable income is approximately $106 million or <unk> 92 on a per share basis, which we believe provides continuous stability on a consistent dividend since inception.

Net asset value per share on June 30, 2023 was $14 59.

As compared to $14 44 last quarter with that I'll turn it back to Alex for closing remarks. Thanks, David.

<unk>. Thank you all for joining us on our call.

As mentioned, we are encouraged that new deal activity, along with increased repayments will allow us to continue capturing attractive investment opportunities.

Take your time and attention today.

Let's open the lines for Q&A.

Thank you if you'd like to ask a question. Please signal by pressing star one on your telephone keypad.

Speaker phone. Please make sure your mute function is turned off.

No.

Again press Star one to ask a question.

Hello, everyone and opportunity.

Yeah.

And we will go first.

With bank of America.

Good morning, everyone and congrats on the good quarter.

Maybe my first question is could you remind me about the dividend policy because the core dividend has been flat for quite some time now when most peers have increased the dividend and to some degree given given the rise in rates and especially it just looking at earnings you factor in the first half earnings run rate.

Plus the additional tailwind that you described earlier.

Earlier in terms of.

Accelerating.

Originations it would suggest that this year could be at or near kind of record core earnings.

Yeah.

Good morning, and thanks for the question as.

As we think about our policy, we like to maintain stability in terms of what our fixed dividend and so we remain remained at 45 since inception.

We want to maintain that level of certainty in terms of how our dividend policy does work in terms of the special we're taking a long term view of how to manage our balance sheet accordingly.

Looking at what our spillover is with future run rates and we will be opportunistic to the extent that it makes sense from a shareholder perspective to potentially issue with special down the road, but something that we're evaluating and we'll we'll continuously assess and what makes the best sense for the balance sheet and shareholders.

Okay, and then I'm looking at slide seven it looked like there was a significant.

Somewhat of a sizable move from risk to risk category three.

At least on a quarter over quarter basis could you talk about that migration edge.

The prospect of potential further migration to that risk weighted level four category.

Sure sure. Thanks for the question. So that migration is it really driven by a couple of names that were facing some liquidity pressures during the quarter.

And we are in active discussions with the sponsors during the quarter, we expect to them to support these companies.

But because it was unresolved we thought it was prudent to downgrade those investments for meeting category to iterate and category three.

Nonetheless, we were quite conservative with respect to how we look at our ratings categories.

So as soon as those.

So the situations are hopefully resolve shortly reflect them appropriately.

Okay and then my last question is just in terms of the pipeline how would you describe it and just in terms of the yield.

And leverage turns.

Yeah relative to the existing portfolio.

It seems like the terms are even more attractive today than what you currently have in your legacy book.

Yes, certainly compared to the legacy book at terms that we're seeing today are very attractive in comparison.

The average spreads that we're seeing right now in the private credit markets still are in the six hundreds.

We have seen some spread compression quarter to quarter, just given the supply demand.

<unk> and the private credit market, but having said that leverage levels are still lower versus the legacy book as you saw the leverage levels continue to tick down and Thats really driven by the higher borrowing costs that sponsors face with their portfolio of companies and so having said that the overall yields are quite attractive, whereas the legacy book, which is.

We're very excited about our position right now where we created capacity to make new investments in the current environment. As you saw we saw an increased level of repayment activity in the quarter and we have visibility into a significant amount of repayments that are coming already due to the announced activity.

I see that in the increased number of companies that we put in debating category. One so we're gonna be able to repay those legacy investments and reinvest them into much more attractive yielding opportunities and.

On top of that I would just add that we're seeing the pipeline pick up pretty dramatically when you, particularly at the end of the second quarter going into the third quarter. Our pipeline has picked up activity is picking up so we're seeing a very a number of very attractive new investment opportunities to reinvest that capital into as we look forward over the quarter.

Okay. Thank you.

Thank you.

We'll go next to Maxwell furniture with Truest Securities.

Good morning, I'm, calling in today for Mark Hughes.

I had a broad question about the credit facility I was wondering what your experience has been recently with lenders and.

If you've noticed any banks have.

Kris or maintain their appetite towards lifting two bdcs.

Yes.

Thank you for the question as it relates to our facility, we kind of and how we think about it we have a wide wide wide underlying book in terms of who is involved and our credit facilities, we had across our platform for different launch corporate revolvers, all leading with the same bank and then repeat syndicate banks at all.

Our associated with it so we've been fostering a long term relationship across the board and continue to have the active dialogue and relationships with them to allow us to have.

Active and continued dialogue with our finance it providers and feel pretty comfortable with who are using it who is involved with our platform.

Thank you and for the weighted average interest coverage ratio that you mentioned it was.

For the portfolio companies of one six times.

I was wondering if you could provide the percentage of the companies that were under one times interest.

Interest coverage ratio.

Yes.

For weighted average it was it was.

Roughly 3%.

Okay. Thank you that's all I'll ask.

We'll go next to Sean Paul Adams with Raymond James.

Hey, guys good morning.

Joseph This is already said.

On the call little bit late but can you guys shed a little bit of light on.

The percentage of your portfolio.

The total number of companies that have an interest coverage trading below.

Onex and general your views on.

Interest coverage as the rate environment continues to trend higher.

Yes, so for your first part of the question.

Under under one is roughly around 3%.

Yeah on the second part is the interest coverage has remained stable at one six times, which was flat with the prior quarter and part of that is driven by the way, we calculate it which is current quarter.

When do you expect much change on a going forward basis from an interest coverage perspective.

Also in conjunction with and you take a look at the underlying portfolio of companies. They continue to grow both topline and EBITDA on a quarter over quarter basis to support.

Increased borrowing costs.

Got it thank you I appreciate it.

Yes.

And at this time there are no further questions.

Thank you everyone for joining our call and have a great weekend. Thank.

Thank you everyone.

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