Q2 2024 Golub Capital BDC Inc Earnings Call
Hello, everyone and welcome to G. Bdcs earnings call for the fiscal quarter ended March 31, 'twenty 'twenty four before we begin I'd like to take a moment to remind our listeners that remarks made during this call may contain forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Unknown Executive: Hello everyone, and welcome to GBDC's earnings call for the fiscal quarter ended March 31, 2024. Before we begin, I'd like to take a moment to remind our listeners that remarks made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties.
Unknown Executive: Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in GBDC's FCC filings. For materials we intend to refer to on today's earnings call, please visit the Investor Resources tab on the homepage of our website, which is www.golubcapitalbdc.com, and click on the Events Presentations link. Our earnings release is also available on our website in the Investor Resources section. As a reminder, this call is being recorded. With that said, I'm pleased to turn the call over to David Golub, Chief Executive Officer of GBDC.
David B. Golub: Statements other than statements of historical facts made during this call may constitute forward looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties actual results may differ materially from those in the forward looking statements as a result of a number of factors, including those described from time to time in GBT fees SEC.
Speaker Change: Billings for.
Unknown Executive: For materials, we intend to refer to on today's earnings call. Please visit the Investor resources tab on the homepage of our website, which is www dot Golub capital BDC Dot com and click on the events presentations like our earnings release is also available on our website in the Investor Resources section as a reminder, this call is being recorded with that I am.
Unknown Executive: Please to turn the call over to David Golub, Chief Executive Officer of G. P. D C.
David B. Golub: Hello, everybody, and thanks for joining us today. I'm joined by Chris Ericson, our CFO, and Matt Benton, our Chief Operating Officer. For those of you who are new to GBDC, our investment strategies focus on providing first lien senior secured loans to healthy, resilient middle market companies that are backed by strong private equity firms with a partnership orientation. This is the same strategy we've had since our IPO 14 years ago. Yesterday, we issued our earnings press release for the quarter ended March 31st, and we posted an earnings presentation on our website.
David B. Golub: Hello, everybody and thanks for joining us today I'm joined by Chris Eric <unk>, Our CFO and Matt <unk>, our Chief operating officer.
David B. Golub: For those of you who are new to <unk>. Our investment strategy is focused on providing first lien senior secured loans to healthy resilient middle market companies that are backed by strong private equity firms with a partnership orientation.
David B. Golub: At the same strategy, we've had since our IPO 14 years ago yesterday, we issued our earnings press release for the quarter ended March 31, and we posted an earnings presentation on our website will be referring to this presentation during the call today.
David B. Golub: We'll be referring to this presentation during the call today. I'm going to start, as usual, with the headlines and with a summary of performance for the quarter. Then Matt and Chris are going to go through the financial results for the quarter in more detail. And finally, I'll wrap up with our outlook for the coming period and with some questions and answers.
David B. Golub: I'm going to start as usual with headlines and with a summary of performance for the quarter, then Matt and Chris are going to go through financial results for the quarter in more detail and finally, I'll wrap up with our outlook for the coming period and with some questions and answers.
David B. Golub: The headline is that GBDC had an excellent quarter. GBDC's results were right in line with the preliminary results that the company filed on April 22. Adjusted net investment income per share was $0.51. That was the company's highest ever quarterly adjusted NII per share. It corresponds to an adjusted NII ROE of 13.5% on an annualized basis. Adjusted earnings per share came to $0.55. This corresponds to an adjusted ROE of 14.6% on an annualized basis. Overall, credit results were strong. We had a small net realized and unrealized gain of four cents per share. We saw no new defaults.
David B. Golub: The headline is that <unk> had an excellent quarter <unk> results were right in line with the preliminary results of the company filed on April 22nd.
David B. Golub: Adjusted net investment income per share was 51 cents.
David B. Golub: That's the companys highest ever quarterly adjusted NII per share.
David B. Golub: Response to an adjusted NII ROE of 13, 5% on an annualized basis.
David B. Golub: Adjusted earnings per share came to <unk> 55.
David B. Golub: This corresponds to an adjusted ROE of 14, 6% on an annualized basis.
David B. Golub: Overall credit results were strong we had a small net realized and unrealized gain for the quarter <unk> per share. We saw no new defaults. We saw a decrease in an already low percentage of non accruals and we saw stable internal performance ratings.
David B. Golub: We saw a decrease in an already low percentage of non-accruals, and we saw a stable internal performance rating. NAV per share increased by $0.09, quarter over quarter, to $15.12 as of March 31. While we're really proud of GBDC's results for the quarter, we're even more excited about two strategic announcements that GBDC made in January. To refresh your memory on these two announcements, first, GBDC announced that it entered into a definitive merger agreement with Golub Capital BDC3. We sometimes call that GBDC3.
David B. Golub: NAV per share increased by nine <unk> quarter over quarter to $15.12 as of March 31.
David B. Golub: While we're really proud of Gbt's results for the quarter, we're even more excited about two strategic announcements that <unk> made in January to refresh your recollection on these two announcements first Jimmy D. C announced that it entered into a definitive merger agreement with Golub capital BDC, three we sometimes call that <unk> III.
David B. Golub: With GBDC as the surviving company, subject to certain shareholder approvals and customary closing conditions. Second, GBDC's investment advisor agreed to reduce GBDC's income incentive fee and capital gain incentive fee from 20% to 15% in connection with and in support of the proposed merger. The reduction in incentive fees was made effective by waiver as of January 1, 2024, and it's going to continue to be effective during the pendency of the proposed merger.
David B. Golub: With GBT is the surviving company subject to certain shareholder approvals and customary closing conditions.
David B. Golub: Second <unk> investment advisor agreed to reduce <unk> income incentive fee and capital gain incentive fee from 20% to 15% in connection with and in support of the proposed merger the.
David B. Golub: It will become permanent upon the closing of the merger. We recently distributed proxy materials related to the merger, and we anticipate that the merger will close in the second calendar quarter of 2024. You'll recall GBDC's investment advisor previously announced the permanent reduction of the company's base management fee from 1.375% to 1% per annum effective July 1, 2023. With a 1% management fee, a 15% incentive fee, an 8% hurdle rate, and a cumulative since inception incentive fee cap, GBDC has set a new gold standard for shareholder alignment among publicly traded BDCs.
David B. Golub: The reduction in incentive fees was made effective by waiver as of January one 2024, and it's going to continue to be affect during the pendency of the proposed merger it will become permanent upon closing of the merger.
David B. Golub: We recently distributed proxy materials related to the merger and we anticipate that the merger will close in the second calendar quarter of 2024.
David B. Golub: You will recall <unk> investment advisor previously announced the permanent reduction of the company's base management fee from $1, 375% to 1% per annum effective July one 2023.
David B. Golub: With a 1% management fee of 15% incentive fees, and 8% hurdle rate and accumulative since inception incentive fee cap <unk> has set a new gold standard for shareholder alignment among publicly traded bdcs.
David B. Golub: I'd encourage you to review the proxy statement and the investor presentation on GBDC's website to learn more about why we think these two announcements are so exciting and so important. And with that, I will hand the floor to Matt to walk through our results in more detail. Thanks.
David B. Golub: I'd encourage you to review the proxy and the Investor presentation on <unk> website to learn more about why we think these two announcements are so exciting and so important.
David B. Golub: And with that let me hand, the Florida, Matt to walk through our results in more detail.
Matthew W. Benton: Thanks, David. I'm going to start on slide four.
Matt: Thanks, David I'm going to start on slide four.
Matthew W. Benton: As David just previewed, GBDT's earnings for the 3-31-24 quarter were excellent. Adjusted NII per share was 51 cents, corresponding to an adjusted NII ROA of 13 and a half. Adjusted NII per share this quarter outpaced the 9.30 and 12.31.23 quarters as GVDC's highest ever. And compared to fiscal Q2 of 2023, GVDC's adjusted NII per share increased by 9 cents year over year for about 21%. Adjusted earnings per share was $0.55, corresponding to an adjusted ROAE of 14.7%. GBDC's strong profitability was driven by three key factors. First and foremost, strong credit performance. I'll go into more detail in a moment.
Matt: As Dave previewed <unk> earnings for the 331 'twenty four quarter were excellent adjusted NII per share was <unk> 51 cents corresponding to an adjusted NII ROI of 13, 5%.
Matthew W. Benton: Adjusted NII per share this quarter outpaced the 930 and $12 31, 23 quarters as GTT is highest ever.
Matthew W. Benton: Compared to fiscal Q2 of 2023, <unk> adjusted NII per share increased by nine cents year over year or about 21%.
Matthew W. Benton: Adjusted earnings per share was 35 tests corresponding to an adjusted ROA of 14, 7%.
Matthew W. Benton: GBT see strong profitability was driven by three key factors first and foremost strong credit performance I will go into more detail in a moment second high base rates consistent with recent quarters and third sustainably lower expenses due to the reduction in <unk> base management fee, which took effect in July of 2023.
Matthew W. Benton: Second, high base rates consistent with recent quarters, and third, sustainably lower expenses due to the reduction in GBDC's base management fee, which took effect in July of 2023, and the reduction in the incentive fee that David highlighted earlier, from 20% to 15%, which took effect for the first time this quarter. Let me briefly summarize the portfolio and balance sheet. Net funds declined by $48.7 million sequentially. This was intentional.
Matthew W. Benton: And the reduction of incentive fee that David highlighted earlier from 20% to 15%, which took effect for the first time this quarter.
Matthew W. Benton: Let me briefly summarize portfolio on balance sheet changes.
Matthew W. Benton: Net bonds declined by $48 $7 million sequentially. This was intentional we constrained G bdc's pace of new investments to bring down GBP six leverage.
Matthew W. Benton: We constrain GBDC's pace of new investments to bring down GBDC's leverage. GBDC ended the quarter with a gap debt to equity ratio net of unrestricted cash of one spot one five times, right in line with our targeted rate. The overall credit performance of GBDC's investment portfolio remains strong. First, we saw a reduction in non-accruals. As a percentage of total debt investments at fair value, non-accruals decreased to 0.9 percent on March 31st, 2024, from 1.1 percent on December 31st, 2023.
Matthew W. Benton: <unk> ended the quarter with a GAAP debt to equity ratio net of unrestricted cash of one's about one five times right in line with our targeted range.
Matthew W. Benton: The overall credit performance of <unk> investment portfolio remained strong first we saw a reduction in non accruals as a percentage of total debt investments at fair value non accruals decreased to 0.9% at March 31, 2024 from one 1% at December 31 2023.
Matthew W. Benton: Second internal performance ratings remained strong investments in rating categories, one and two represented just 50 basis points of the total portfolio at fair value.
Matthew W. Benton: Second, internal performance ratings remain strong. Investments in rating categories one and two represented just 50 basis points of the total portfolio at Fairfax, and now per share increased by $0.09 on a sequential basis to $15 and 12. Now per share is now 265 basis points higher than the prior year, even as GBDC delivered higher distributions to shareholders during this period. Let's turn to distributions.
Matthew W. Benton: Now per share increased by nine sets on a sequential basis to $15 <unk> NAV per share is now 265 basis points higher than the prior year, even as TBD see delivered higher distributions to shareholders. During this period.
Matthew W. Benton: Let's turn to distributions now.
Matthew W. Benton: The board approved 45 cents per share of distributions, a regular quarterly distribution of 39 cents per share, and a fiscal Q2 supplemental distribution of 6 cents per share. Taken together, these distributions correspond to an annualized dividend yield of 11.9% based on GBDC's NAV per share as of March 31st, 2024. As a reminder, we previously announced that the board increased the company's regular quarterly distribution from $0.37 per share to $0.39 per share in conjunction with the proposed merger announcement and corresponding reduction in incentives.
Matthew W. Benton: <unk> 45 per share of distributions a regular quarterly distribution of 39 per share in our fiscal Q2 supplemental distribution of <unk> <unk> per share taking.
Matthew W. Benton: Taken together these distributions correspond to an annualized dividend yield of 11, 9% based on <unk> NAV per share as of March 31 2024.
Matthew W. Benton: As a reminder, we previously announced that the board increased the company's regular quarterly distribution from 37 per share to 39 per share in conjunction with the proposed merger announcement and corresponding reduction in incentive fee.
Matthew W. Benton: Adjusted NII per share significantly exceeded the company's regular quarterly distribution, resulting in a distribution coverage ratio of 131% on the increased regular quarterly distribution of 39 cents per share. The board also authorized a supplemental distribution of six cents per share based on the company's variable supplemental distribution framework. You'll recall that this framework was introduced in 2023 to help shareholders understand how we plan to balance the likelihood that GBDC will continue to generate excess income, all else equal on the one hand, with our focus on NAV growth and resilience on the other.
Matthew W. Benton: Adjusted NII per share significantly exceeded the company's regular quarterly distributions.
Matthew W. Benton: Salting and a distribution coverage ratio of 131% on the increased regular quarterly distribution of <unk> 39 per share.
Matthew W. Benton: The board also authorized a supplemental distribution of <unk> <unk> per share based on the company's variable supplemental distribution of framework.
Matthew W. Benton: Youll recall that this framework was introduced in 2023 to help shareholders understand how we plan to balance the likelihood that <unk> will continue to generate excess income all else equal on the one hand with our focus on NAV growth and resilience on the other half.
Matthew W. Benton: You can find more information about the record dates and payment dates for fiscal Q2 distributions on page 22 of the earnings presentation and about the variable supplemental distribution of framework on page 23.
Matthew W. Benton: You can find more information about the record dates and payment dates for fiscal Q2 distributions on page 22 of the earnings presentation and about the Variable Supplemental Distribution Framework on page 23. I'm going to turn it over to Chris now to provide more detail on our results.
Matthew W. Benton: And I'll turn it over to Chris now to provide more detail on our results.
Chris: Thanks, Matt.
Christopher Compton Ericson: Turning to slide seven, you can see how the key earnings drivers described translated into growth and NAB per share. Record adjusted NII per share of 51 cents per share was meaningfully higher than the 46 cents per share of dividends paid out during the quarter. A net realized and unrealized gain of $0.04 per share was driven by unrealized appreciation across the portfolio and the reversal of unrealized depreciation associated with the exit of one portfolio company investment during the quarter. These gains were partially offset by $0.08 per share of net realized loss recognized during the quarter.
Chris: Turning to slide seven you can see how the key earnings drivers, Matt just described translated into growth in NAV per share.
Christopher Compton Ericson: Record adjusted NII per share of <unk> 51 per share was meaningfully higher than the <unk> 46 per share of dividends paid out during the quarter.
Christopher Compton Ericson: Our net realized and unrealized gain of <unk> <unk> per share was driven by unrealized depreciation across the portfolio and the reversal of unrealized depreciation associated with the exit of one portfolio company in investment during the quarter.
Christopher Compton Ericson: These gains were partially offset by <unk> <unk> per share of net realized loss recognized during the quarter.
Christopher Compton Ericson: Together these results drove a net asset value per share increased to $15 12.
Christopher Compton Ericson: Together, these results drove a net asset value per share increase to $15.12, up $0.09 per share from the prior quarter. Speaking of NAB increases, we also anticipate a level of NAB accretion related to the merger with GBDC3, and in the joint proxy statement filed on April 15, 2024, we estimated 38 cents per share of NAV accretion for approximately 2.5% from GBDC's 1231.23 NAV based on GBDC's stock price of $16.60 as of April 9th, 2024.
Christopher Compton Ericson: Up nine <unk> per share from the prior quarter.
Christopher Compton Ericson: Speaking of Nab increases, we also anticipate a level of NAV accretion related to the merger with <unk>.
Christopher Compton Ericson: And the joint proxy statement filed on April 15, 2024.
Christopher Compton Ericson: We estimated 38 per share NAV accretion or approximately two 5% from <unk> 12, 31, 23, NAV based on GBC stock price of $16 60 as.
Christopher Compton Ericson: As of April nine 2024.
Christopher Compton Ericson: <unk> closing stock price on May six 2024 was $17 nine.
Christopher Compton Ericson: GBC's closing stock price on May 6, 2024 was $17.09, a level that would imply $0.50 per share of NAB accretion, or approximately 3.3% upon GBDC's March 31, 2024 NAV per share of $15.12. As a reminder, the level of NAV accretion achieved in the proposed merger is a function of the exchange ratio upon the merger cloak.
Christopher Compton Ericson: A level that would imply a 50 per share of NAV accretion or approximately three 3% upon achieving six March 31, 2024 NAV per share of $15 12.
Christopher Compton Ericson: As a reminder, the level of NAV accretion achieved and the proposed merger as a function of the exchange ratio upon merger close.
Christopher Compton Ericson: I'd encourage you to review the investor presentation on GBDC's website for additional detail. Now, let's go through the details of GBDC's financial results for the quarter ended March 31st, 2024. Start on slide 10, which summarizes our origination activity for the quarter. Net funds growth quarter over quarter decreased by approximately $48.7 million as new investment commitments and delayed draw term loan fundings were outpaced by the net impact of exits, sales of investments, and fair value changes of existing investments. Market-wide deal activity and origination across the Golub Capital platform both improved in the March 31st quarter, and we expect it to continue to improve over the remainder of the year.
Christopher Compton Ericson: I'd encourage you to review the Investor presentation on <unk> website for additional detail.
Christopher Compton Ericson: Let's now go through the details of <unk> financial results for the quarter ended March 31 2024.
Christopher Compton Ericson: I will start on slide 10, which summarizes our origination activity for the quarter.
Christopher Compton Ericson: Net funds growth quarter over quarter decrease by approximately $48 7 million as new investment commitments and delayed draw term loan fundings were outpaced by the net impact of exits and sales of investments and fair value changes of existing investments.
Christopher Compton Ericson: Market wide deal activity and origination across the Golub capital platform, both improved in the March 31 quarter.
Christopher Compton Ericson: We expect it to continue to improve over the remainder of the year.
Christopher Compton Ericson: But having said this, we proactively sought to adjust GBDC's holdings in order to achieve our leverage goals, which resulted in reduced new originations at GBDC during the quarter. Subsequent to quarter end, and based on GBDC being at its leverage target, we did see increased allocations to GBDC that reflect its reduced financial leverage profile. Golub Capital has remained highly selective, closing approximately 2% of deals reviewed during calendar year 2020. That's on the lower end of our typical 2 to 4% selectivity rate and reflects our focus on quality over quantity.
Christopher Compton Ericson: Having said this we proactively sought to adjust <unk> holdings in order to achieve our leverage falls, which resulted in reduced new originations at <unk> during the quarter.
Christopher Compton Ericson: Subsequent to quarter end and based on <unk> being that its leverage target. We did see increased allocations to GBC that reflect its reduced financial leverage profile Gallagher.
Christopher Compton Ericson: <unk> capital has remained highly selective closing approximately 2% of deals reviewed during calendar year 2023.
Christopher Compton Ericson: That's on the lower end of our typical 2% to 4% selectivity rate and reflects our focus on quality over quantity.
Christopher Compton Ericson: The asset mix of new investments shown in the middle of the slide remained predominantly one stop loans looking at the bottom of the site the weighted average rate on new investments was stable quarter over quarter at 11%.
Christopher Compton Ericson: The asset mix of new investments, shown in the middle of the slide, remains predominantly one-stop loans. Looking at the bottom of the slide, the weighted average rate on new investments was stable quarter over quarter at 11%. Slide 11 shows TBC's overall portfolio mix. As you can see, the portfolio breakdown by investment type remained consistent quarter over quarter, with one-stop loans continuing to represent around 85% of the portfolio at fair value. Slide 12 shows that GBC's portfolio remains highly diversified by portfolio company, with an average investment size of approximately 30 basis points.
Christopher Compton Ericson: Slide 11 shows <unk> overall portfolio mix as you can see the portfolio breakdown by investment type remained consistent quarter over quarter with one stop loans continuing to represent around 85% of the portfolio at fair value.
Christopher Compton Ericson: Slide 12 shows that <unk> portfolio remains highly diversified by portfolio company with an average investment size of approximately 30 basis points.
Christopher Compton Ericson: We are big believers in modulating credit risk through position size, which we believe has served GBDC well in previous credit cycles and will continue to be important in the context of future credit cycles. As of March 31, 2024, 93% of our investment portfolio consisted of first lien, senior secured, floating rate loans to borrowers across a diversified range of what we believe to be resilient industries. The economic analysis on slide 13 showed little quarter-over-quarter change.
Christopher Compton Ericson: We are big believers in modulating credit risk position size, which we believe has served <unk> well in previous credit cycles and will continue to be important in the context of future credit cycles.
Christopher Compton Ericson: As of March 31, 2024, 93% of our investment portfolio consisted of first lien senior secured floating rate loans to borrowers across a diversified range of what we believe to be Brasilia industries.
Christopher Compton Ericson: The economic analysis on slide 13 show little quarter over quarter change, let's walk through how to interpret the chart.
Christopher Compton Ericson: Let's walk through how to interpret the chart. We start with the dark blue line, which is our investment income yield. As a reminder, the investment income yield includes the amortization of fees and discounts. Consistent with interest base rates, GBDC's investment income yield has leveled out in recent quarters, increasing modestly on a sequential basis by 20 basis points to 12.8%. Our cost of debt, the teal line, increased modestly by 10 basis points to 5.5%.
Christopher Compton Ericson: We start with the dark Blue line, which is our investment income yield.
Christopher Compton Ericson: As a reminder, the investment income yield includes the amortization of fees and discounts.
Christopher Compton Ericson: With interest base rates.
Christopher Compton Ericson: <unk> investment income yield has leveled out in recent quarters, increasing modestly on a sequential basis.
Christopher Compton Ericson: 20 basis points to 12, 8%.
Christopher Compton Ericson: Our cost of debt the Teal line increased modestly by 10 basis points to five 5%.
Christopher Compton Ericson: As a result, our weighted average net investment spread, the gold line, increased slightly over the prior quarter to 7.3%. We anticipate seeing some reduction in GBC's income yields in future quarters as a consequence of market-wide spread compression.
Christopher Compton Ericson: As a result, our weighted average net investment spread the gold line increased slightly over the prior quarter to seven 3%.
Christopher Compton Ericson: We anticipate seeing some reduction in <unk> income yields in future quarters as a consequence of market widespread compression, but we did not see this reflected in this quarter's numbers.
Christopher Compton Ericson: I'm going to hand, it back over to Matt now.
Christopher Compton Ericson: Thanks, Chris. Now, let's move on to slides 14 and 15 and take a closer look at credit quality metrics. The headline is that credit remains solid and stable. On slide 14, you can see the non-accruals decreased by 20 basis points sequentially to 90 basis points of total debt investments at Fairbank. This represents a continuation of the trend as this level has decreased consistently since the quarter ended 12-31-2022. The number of portfolio company investments on non-accrual status remained at nine as of March 31, 2021.
Speaker Change: Thanks, Chris let's move on to slides 14, and 15 and take a closer look at credit quality metrics. The headline is that credit remains solid and stable.
Christopher Compton Ericson: On slide 14, you can see the non accruals decreased by 20 basis points sequentially to 90 basis points of total debt investments at fair value.
Christopher Compton Ericson: This represents a continuation of a trend is this level has decreased consistently since the quarter ended 12 31 2022.
Christopher Compton Ericson: The number of portfolio company investments on non accrual status remained at nine as of March 31 2024.
Christopher Compton Ericson: Slide 15 shows the trend in internal performance ratings on GBDC's investment portfolio. As of March 31st, 2024, approximately 87% of GBDC's investments were rated four or five, which means they're performing as expected or better than expected at under a. The proportion of loans rated one and two, which are the loans we believe are most likely to see significant credit impairment, remains very low at 50 basis points of the portfolio at fair value. The proportion of loans rated three decreased from 13.7% to 12.3% sequentially.
Christopher Compton Ericson: Slide 15 shows the trend in internal performance ratings on <unk> investments as of March 31, 2020 for approximately 87% of TBD sees investments were rated four or five which means they are performing as expected or better than expected at underwriting.
Christopher Compton Ericson: The proportion of loans rated one and two which are the loans. We believe are most likely to see significant credit impairment remained very low at 50 basis points of the portfolio at fair value.
Christopher Compton Ericson: The proportion of loans rated three decreased from 13, 7% to 12, 3% sequentially.
Speaker Change: As we usually do we're going to skip past slide 16 through 19. These slides have more detail on <unk> financial statements dividend history and other key metrics.
Christopher Compton Ericson: As we usually do, we're going to skip past slides 16 through 19. These slides have more detail on GBDC's financial statements, dividend history, and other key metrics. I'll wrap up this section by reviewing GBDC's liquidity and investment capacity on slides 20 and 21, but first, let's focus on the key takeaways on slide 21.
Christopher Compton Ericson: To wrap up this section by reviewing GBP, six liquidity and investment capacity on slides 20 and 21.
Christopher Compton Ericson: First let's focus on the key takeaways on slide 21.
Christopher Compton Ericson: Our weighted average cost of debt this quarter was 5.5%, which we believe is among the lowest in our period. 66% of our debt funding is in the form of unsecured notes, which includes the post-quarter end repayment of the April 2024 unsecured notes with laddered maturities on remaining unsecured notes ranging from 2026 to 2029. The fixed rate notes coming due in 2026 and 2027 were issued with a weighted average coupon of 2.3%, and as you've heard us say on prior occasions, we did not swap them out for floating rate exposure.
Christopher Compton Ericson: Our weighted average cost of debt this quarter with five 5%, which we believe is among the lowest in our peer group.
Christopher Compton Ericson: 66% of our debt funding is in the form of unsecured notes, which includes the post quarter and repayment of the April 2020 for unsecured notes with ladder maturities on our remaining unsecured notes ranging from 2026 to 2029.
Christopher Compton Ericson: Fixed rate notes coming due in 2026, and 2027 were issued with a weighted average coupon of two 3% and as you've heard us say on prior occasions, we did not swap them out per floating rate exposure.
Christopher Compton Ericson: During the quarter, GBDT issued $600 million of five-and-a-half-year bonds with a stated maturity of July 2029 and a fixed coupon of 6 percent, and in connection with the issuance, entered into an interest rate swap to a floating rate of SOFR plus 2.444 percent. This issuance, along with our December 2028 unsecured notes, improves GBDC's debt maturity ladder while addressing refinancing risk with respect to the $500 million of notes maturing in April 2024, which we subsequently successfully paid off post-quarter.
Christopher Compton Ericson: During the quarter <unk> issued $600 million of five and a half year bonds with a stated maturity of July 2029 and <unk>.
Christopher Compton Ericson: Fixed coupon of 6% and in connection with the issuance entered into an interest rate swap to a floating rate of so purpose to 444%.
Christopher Compton Ericson: This issuance along with our December 2028 unsecured notes improve upon <unk> debt maturity ladder, while addressing refinancing risks with respect to the $500 million of notes maturing in April 2024, which we subsequently successfully paid off post quarter end.
Christopher Compton Ericson: In April, we entered into a second interest rate swap on the December 2028 unsecured notes, resulting in a combined weighted average floating rate on the 2028 and 2029 notes of SOFR plus 272 basis points, which we believe is a highly attractive cost of funds in the context of unsecured notes versus our secured borrowing costs. Overall, our liquidity position remains strong and will be greatly enhanced by the December 2023 and February 2024 unsecured notes issuance.
Christopher Compton Ericson: In April we entered into a second interest rate swap on the December 2028 unsecured notes, resulting in a combined weighted average floating rate on the 2028 and 2029 notes of silver plus 272 basis points, which we believe is a highly attractive cost of funds in the context of unsecured notes.
Christopher Compton Ericson: First is our secured borrowing costs.
Christopher Compton Ericson: Overall, our liquidity position remains strong and greatly enhanced by the December 2023, and February 2020 for unsecured notes issuances. We ended the quarter with approximately $1 9 billion of liquidity from unrestricted cash and undrawn commitments on our meaningfully over collateralized corporate revolver and the unused unsecured revolver.
Christopher Compton Ericson: We ended the quarter with approximately $1.9 billion of liquidity from unrestricted cash, undrawn commitments on our meaningfully over collateralized corporate revolver and the unused unsecured revolver provided by our advisor. Incorporating the impact of the April 2024 repayment of $500 billion in 2024 unsecured notes, available liquidity remained high at approximately $1.4 billion. GBDC's robust liquidity represents 13.1 times its current unfunded asset commitments, or 9.6 times inclusive of the 2024 unsecured notes for payment.
Christopher Compton Ericson: Provided by our adviser.
Christopher Compton Ericson: Incorporating the impact of the April 2020 for repayment of $500 million in 2020 for unsecured notes available liquidity remained high at approximately $1 4 billion.
Christopher Compton Ericson: <unk> robust liquidity represents $13 one times its current unfunded asset commitments or nine six times inclusive of the 2020 for unsecured notes repayment.
Christopher Compton Ericson: The diversification, flexibility, and low cost of GBDC's funding structure is an important element that underpins our three investment grade ratings from Fitch, Moody's, and S&P. GBDC has higher ratings from Moody's and Fitch relative to the majority of the rated BDC sector, providing for deeper and more cost-effective access to the debt market. Now I'll hand it back over to David for closing remarks, and we can open it up to Q&A. Thanks.
Christopher Compton Ericson: The diversification flexibility and low cost of <unk> funding structure is an important element that underpins our three investment grade ratings from Fitch Moodys and S&P.
Christopher Compton Ericson: <unk> has stronger ratings from Moody's and Fitch relative to the majority of the rated BDC sector provided for deeper and more cost effective access to the debt markets now I'll hand, it back over to David for closing remarks, and we can open it up to Q&A.
David B. Golub: Thanks, Matt. So to sum up, GBDC had a strong start to calendar 2024. Strong credit results, high base rates, and lower fees; all three together drove another record quarter for adjusted NII per share. We think these performance drivers, as well as the pending merger with GBDC3, are powerful tailwinds for the company for the coming period. And speaking of the pending merger, the 2024 special meeting of stockholders is scheduled for May 29th. For those of you who have already submitted your vote, thank you.
Christopher Compton Ericson: Matt So to sum up <unk> had a strong start to calendar 2024.
David B. Golub: Strong credit results high base rates and lower fees, all three together drove another record quarter for adjusted NII per share.
David B. Golub: We think these performance drivers as well as the pending merger with <unk> three are powerful tailwind for the company for the coming period and speaking of the pending merger. The 2024 special meeting of stockholders is scheduled for May 29.
David B. Golub: For those of you who have already submitted your vote. Thank you for those investors who haven't yet voted we ask that you. Please do so.
David B. Golub: For those investors who haven't yet voted, we ask that you please do so. While the quarter was strong, it did present some headwinds, and I want to talk about those headwinds before opening the call for questions. The first headwind is that middle market M&A remains relatively slow. You may recall that around the turn of the year, a number of bank CEOs were predicting that M&A activity would accelerate. But we said last quarter that while we were optimistic about deal activity accelerating over the medium to long term, we were more cautious about the short term. And, in hindsight, our caution was justified.
David B. Golub: While the quarter was strong it did present, some headwinds and I want to talk about those headwinds before opening the call for questions.
David B. Golub: The first headwind middle market M&A remains relatively slow.
David B. Golub: You may recall around the turn of the year a number of bank Ceos were predicting that M&A activity will accelerate.
David B. Golub: But we said last quarter that while we were optimistic about deal activity accelerating over the medium to long term, we were more cautious about the short term and in hindsight, our caution was justified.
David B. Golub: While first quarter M&A activity was much better than a year ago and about on par with the fourth quarter of 2023, it was still weak on a relative basis compared to what we see as normal. The M&A market, which dislocated in the spring of 2022, is taking a long time to recalibrate. It's taking longer than we'd like.
David B. Golub: While first quarter M&A activity was much better than a year ago and about on par with the fourth quarter of 2023. It was still weak on a relative basis compared to what we see as normal.
David B. Golub: The M&A market, which dislocated.
David B. Golub: The spring of 2022, it's taking a long time to recalibrate.
David B. Golub: Taking longer than we'd like.
David B. Golub: A second industry headwind was the significant tightening of spreads across credit markets generally, from investment grade to high yield to broadly syndicated loans to private credit. Now, our focus on core middle market businesses helped insulate our portfolio from the full-on effect of spread tightening. However, we weren't entirely immune.
David B. Golub: A second industry headwind was the significant tightening of spreads across credit markets generally from investment grade to high yield to broadly syndicated loans to private credit.
David B. Golub: Now our focus on core middle market businesses helped insulate our portfolio from the full on effect of spread tightening.
David B. Golub: Broadly syndicated loan spreads on new transactions narrowed by 50 to 100 basis points, and in a few cases even more. Many existing loans were repriced, and more repricings are on the way. While spread compression has been a bigger story in the large deal market than in the core middle market, it has been a story in the core middle market too, and we anticipate spread pressure is going to continue for some time across the whole market.
David B. Golub: Aren't entirely immune broadly syndicated loan spreads on new transactions narrowed by 50 to 100 basis points in a few cases, even more.
David B. Golub: Many existing loans were repriced and more re pricings are on the way.
David B. Golub: While spread compression has been a bigger story in the large deal market than in the core middle market.
David B. Golub: It has been a story in the core middle market <unk>, and we anticipate spread pressure is going to continue for some time across the whole market.
David B. Golub: On balance, we think GBDC is well positioned to face these headwinds. We've said many times before that we built GBDC to be resilient across a wide range of potential scenarios. We expect post-merger GBDC to be more resilient than ever, especially in the context of the current market backdrop. Our focus on the poor middle market versus being heavily overweighted by large companies is going to prove to be a very important strength. We've never been members of the bigger is better cult.
David B. Golub: On balance we think TBD is well positioned to face. These headwinds we've said many times before that we built <unk> to be resilient across a wide range of potential scenarios, we expect post merger GBC to be more resilient than ever, especially in the context of the current market backdrop.
David B. Golub: Our focus on core middle market versus being heavily overweight large companies is going to prove to be a very a very important strength. We've never been members of the bigger is better colt and the truth is that the specter of DSL execution gives large borrowers leverage over private credit providers, especially during periods when the.
David B. Golub: And the truth is that the specter of BSL execution gives large borrowers leverage over private credit providers, especially during periods when the BSL market is resurgent, as it is now. So despite light M&A and tightening spreads, we expect our competitive advantages, including our industry-leading fee structure, to permit GBDC to continue to outperform. Let me wrap up with our outlook for the coming period. I expect more dispersion among BDC managers. Every quarter recently, there's been one or more BDCs announcing unexpected bad news, usually in the form of high levels of realized and unrealized losses. We've also seen instability in firm leadership at several BDCs. I think these trends aren't over. We're going to see more negative surprises.
David B. Golub: BSL market is resurgent as it is now.
David B. Golub: So despite bite M&A and tightening spreads, we expect our competitive advantages, including our industry, leading fee structure to permit G. BDC to continue to outperform.
David B. Golub: Let me wrap up with our outlook for the coming period.
David B. Golub: I expect more dispersion among BDC managers every quarter recently theres been wondering ward bdcs announcing unexpected bad needs usually in the form of high levels of realized and unrealized losses. We've also seen instability in firm leadership at several bdcs.
David B. Golub: These trends arent over are we going to see more negative surprises.
Operator: Having said this, I think GBDC is well positioned to be on the favorable end of the manager dispersion spectrum. This is because we believe Golub Capital does a complementary set of things really well. We focus on resilient borrowers in resilient industries. Our relationships and incumbencies make us a preferred partner, and we are unusually good at underwriting. Our investment process and protocols enable us to identify and address issues early, and our depth of expertise in managing problem credits helps us preserve value. We've built these competitive advantages over time and with intent to achieve our mission to be the best in sponsor finance. With that, operator, please open the line for questions.
David B. Golub: Having said this.
Operator: <unk> <unk> is well positioned to be on the favorable end of the manager dispersion spectrum.
Operator: This is because we believe golub capital does a complementary set of things really well, we focus on resilient borrowers in resilient industries, our relationships Incumbencies make us a preferred partner.
Operator: Were unusually good at underwriting.
Operator: Our investment processing protocols enable us to identify and address issues early.
Operator: And our depth of expertise in managing problem credits helps us preserve value.
Operator: We built these competitive advantages over time and with intent to.
Operator: To achieve our mission to be best in sponsor finance with that operator. Please open the line for questions.
Speaker Change: Thank you we will.
Operator: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, simply press star one again. Your first question comes from the line of Finian O'Shea of Wells Fargo. Your line is now open.
Speaker Change: We'll now begin the question and answer session. If you have dialed in and would like to ask a question. Please press star one on your telephone keypad.
Operator: If you would like to withdraw your question simply press Star one again.
Finian O'shea: First question comes from the line of Finian O'shea of Wells Fargo. Your line is now open.
Unknown Caller: Hey, everyone. Thanks and good morning. We're sorry, interested in the comments on spread compression. If you could put some more meat on the bone there, are you seeing meaningful repricing activity, or is this mostly new, new origination, and kind of what is the sort of level of spread versus the back book that you're seeing or expecting to play out?
Finian O'shea: Hey, everyone, Thanks, and good morning.
Speaker Change: We are.
Unknown Caller: Sorry.
Unknown Caller: Interested in the comments on <unk>.
Unknown Caller: Fred compression is if you could put some more.
Unknown Caller: Meat on the bone there is are you seeing meaningful.
Unknown Caller: Repricing activity or is this mostly on.
Unknown Caller: New new origination and kind of what is the.
Unknown Caller: Sort of level of spread versus the back book that you're seeing or expecting to play out.
Speaker Change: Sure. Thanks <unk> for your question.
David B. Golub: Sure. Thanks, Finn, for your question.
David B. Golub: So it's important to make some distinctions between what size borrower we're talking about. In the larger market, we've seen in the last four months a resurgent broadly syndicated market. CLO formation has come back in a giant way.
David B. Golub: So.
Speaker Change: It is important to make some distinctions between what size borrower we're talking about.
Speaker Change: The larger markets.
Speaker Change: You've seen in the last four months.
Speaker Change: Resurgent broadly syndicated market.
David B. Golub: Secondary prices in the broadly syndicated market have risen enormously, and banks who were very reluctant to take underwriting risk are now back prepared to take underwriting risk and aggressively pitching broadly syndicated refinancings of formerly private credit deals. That situation, combined with the relatively low level of M&A that I alluded to in my comments, is translating into a lot of repricing activity and refinancing activity in this larger market. Some of that refinancing activity and repricing activity is resulting in spread compression.
Speaker Change: CLO formation has come back in a giant way.
David B. Golub: Secondary prices in the broadly syndicated market.
David B. Golub: Risen enormously and banks, who were very reluctant to take underwriting risk are now back prepared to take underwriting risk and aggressively pitching.
David B. Golub: Broadly syndicated refinancings.
David B. Golub: Formerly private credit deals.
David B. Golub: That situation combined with the relatively low level of M&A that I alluded to in my comments.
David B. Golub: It's translating into a lot of.
David B. Golub: Repricing activity in refinancing activity.
David B. Golub: In this larger market.
David B. Golub: Some of that refinancing activity and repricing activity as is.
David B. Golub: Resulting in spread compression.
David B. Golub: If you look at the publicly released data for the broadly syndicated market in Q1, it shows approximately 50 basis points of spread compression. But I think in the B3 market, in the large Unitronch market, the degree of spread compression is actually larger than that. I'd say it's between 50 and 100 basis points.
David B. Golub: If you look at the publicly released data for the broadly syndicated market in Q1, it shows approximately 50 basis points of spread compression.
David B. Golub: But I think in the B three market and the large unit tranche market. The degree of spread compression is actually larger than that I'd say, it's between 50 and 100 basis points.
David B. Golub: In many cases, we've seen private credit providers accept lower pricing instead of being refinanced out. And in a number of cases, we've seen sponsors and borrowers choose to replace private credit deals with new broadly syndicated deals. We're seeing both those phenomena. I don't think this trend is ending soon.
David B. Golub: In many cases, we've seen private credit providers.
David B. Golub: Accept lower pricing instead of being refinanced out and in and in a number of cases, we've seen.
David B. Golub: We've seen sponsors and borrowers choose to replace private credit deals with.
David B. Golub: With new broadly syndicated deals we're seeing we're seeing both of those phenomenon.
David B. Golub: I don't think this trend is is ending soon I think we're going to continue to see it in Q in calendar Q2 results.
David B. Golub: I think we're going to continue to see it in calendar Q2 results. I don't think that... What we're talking about here is some phenomenon that's unique to private credit. I think we're seeing spread compression in investment grade, in high yield, in asset-backed, in CLO liability land. It's a very broad phenomenon.
David B. Golub: I don't think that.
David B. Golub: What we're talking about here.
David B. Golub: Some phenomenon that's unique to private credit I think we're seeing spread compression and in investment grade and high yield asset backed in CLO liability land, it's a very broad phenomenon and I think the key to understanding it is that we've seen her.
David B. Golub: Very significant shift in investor sentiment. If you go back a year ago. The overwriting investor sentiment was negative there was an expectation when we're going into a recession.
David B. Golub: And I think the key to understanding it is that we've seen a very significant shift in investor sentiment. If you go back a year ago, the overriding investor sentiment was negative. There was an expectation that we were going into a recession, and there was a lot of concern that it might be a very deep recession. The general investor mood is much more buoyant. There's still debate about when we're going to get cuts in interest rates. But the very debate illustrates the strength of the economy and the generally positive view of the prospects for the economy.
David B. Golub: There was a lot of concern that it might be a very deep recession.
David B. Golub: I think today the.
David B. Golub: General Investor mood is much more buoyant.
David B. Golub: There is still debate about.
David B. Golub: When we're going to get cut in interest rates.
David B. Golub: But the very debate illustrates.
David B. Golub: The strength of the economy and the generally positive view about prospects for the economy.
David B. Golub: Now, I'm focusing those comments on the larger market. In the core middle market, the repricing activity and the spray compression are more modulated. It always moves less than the larger market, but we're insulated.
David B. Golub: Now I'm focusing those comments on the larger markets in the core middle market.
David B. Golub: B.
David B. Golub: Repricing activity and the spread compression is more modulate into always moves less than the larger market.
David B. Golub: We're not immune from changes in the larger market. When we talk about the middle market, I think we're seeing some degree of spread compression there as well. And I expect that we're going to continue to see some spread compression in the middle market. I think this is the biggest headwind facing the private credit universe right now. I've been through a period of very strong results, and we're now in a period where the pendulum is swinging more toward borrower-friendly conditions, where for a long time they were quite lender-friendly.
David B. Golub: But we're insulated we're not immune from changes in the larger market. When we talk about the middle market I think we're seeing some degree of spread compression there as well.
David B. Golub: And.
David B. Golub: I expect that we're going to continue to see some spread compression in the middle market. I think this is the biggest headwind facing.
David B. Golub: The private credit universe right now.
David B. Golub: <unk>.
David B. Golub: Been a period of very strong results and we're now in a period, where the pendulum is swinging more toward <unk>.
David B. Golub: Laura we're friendly conditions, where for a long time they were they were quite lender friendly.
Speaker Change: Okay. That's helpful. Thank you and as a follow up on the merger.
David B. Golub: That's helpful. Thank you. And as a follow-up on the merger, thinking back to the first one, GCIC, that felt like it came with a bit of a technical headwind. Of course, it's a different market now versus then, but we're seeing if you anticipate a similar dynamic of shareholder turnover through the discussions you've had so far.
David B. Golub: Thinking back to the first one GCI see that felt like it came with a bit of a technical headwind of course, it's a.
David B. Golub: Different market now versus then.
David B. Golub: But we're <unk>.
David B. Golub: Seeing if you anticipate a similar dynamic of shareholder turnover through.
David B. Golub: Through the discussions you've had so far.
Speaker Change: So right.
David B. Golub: By way of context, what Finn's alluding to is that in the GBDC-GCIC merger, there were concerns expressed that at the time of the merger, we'd see some sustained amount of selling by GCIC investors. In fact, my recollection is that we didn't.
David B. Golub: By way of context fit is alluding to is that in.
David B. Golub: In the <unk> merger there were concerns expressed that at the time of the merger that we'd see some sustained amount of selling by GCI see investments. In fact, my recollection is we didn't we saw the stock performed reasonably well following the merger.
David B. Golub: We saw the stock perform reasonably well following the merger, and the fears that folks had that we'd see choppiness really did not come to fruition. My expectation is that this time will be similar. We'll have some shareholders in GBDC3 who will want to lighten positions. We'll have some investors who, in the context of GBDC becoming larger, will want to take up larger positions, optimistic that it's not going to be exciting.
David B. Golub: And the fears that folks had that we'd see choppiness really did not.
David B. Golub: Come to fruition my expectation is that this time will be similar will have.
David B. Golub: Some shareholders and <unk>, who will who will want to lightning positions will have some investors who in the context of GBC becoming larger.
David B. Golub: We'll work on it to take up larger positions I'm I'm.
David B. Golub: Optimistic.
David B. Golub: <unk> not going to be exciting.
Unknown Caller: Great. Thanks so much.
Speaker Change: Great. Thanks, so much.
Unknown Caller: Your next question comes from the line of Robert Dodd of Raymond James Your line is open.
Operator: Your next question comes from the line of Robert Dodd of Raymond James. Your line is open.
Unknown Caller: Hi guys, just on the credit quality side and to your point, I mean, no, no, particularly negative things in the quarter. When we look at the three new non-accruals, you did have very small combined, one of them really tiny.
Robert James Dodd: Hi, guys just on the credit quality side and to your point I mean no no.
Robert James Dodd: Particularly negative things in the quarter when we look at the the three new non accruals you did have very small combined one of them really tiny.
Unknown Caller: None of them were in healthcare, but two of them were in software. So has there been kind of a shift? in terms of trends, you're seeing where margin pressure exists or where stress is coming again, these are small numbers, but we're looking for any indicators here or you know where either of those or both of those software businesses were recurring revenue businesses or were they cash flow businesses any color on that?
Robert James Dodd: None of them in health care, but two of them in software.
Unknown Caller: So here's the.
Unknown Caller: And then kind of a shift.
Unknown Caller: And anything in terms of trends, you're seeing where were margin pressure exists where strength is coming again. These are small numbers, but we're looking for any indicators here.
Unknown Caller: Sure.
Unknown Caller: Either of those or both of them software business recurring revenue, where they were they cash flow business and any color on that.
Speaker Change: So Robert I think it's a great question.
David B. Golub: So Robert, I think it's a great question. And again, let me put some context around it.
David B. Golub: Again, let me put some context around it so sometimes when you see.
David B. Golub: So sometimes when you see transcripts provided by Transcription Outsourcing, LLC, heavily dependent on compensation expense, they're having difficulties. I think there've been times over the last couple of years when we've been able to talk that way. We have been able to talk about some challenges in healthcare service businesses. We were able to talk about some challenges with businesses that weren't able to increase prices at the same pace that they were seeing increases in costs, particularly labor costs.
David B. Golub: Trends in credit there are themes that you can look at it and you can say oh, well this industry or this sub sector is showing particular weakness or businesses that are.
David B. Golub: Heavily dependent on.
David B. Golub: On compensation expense they are having difficulties I think there've been times over the last couple of years, where we've been able to talk that way, we were able to talk about some challenges in healthcare service businesses, we were able to talk about some some challenges with businesses that werent able to increase prices at the same pace that they were seeing increases.
David B. Golub: In costs, particularly labor costs.
David B. Golub: To some degree, we're still seeing those two trends across the industry. I think we're pretty much through those two trends within our portfolio, but I'd expect that you're gonna see both of those trends play out across the broadly syndicated market and across much of the BDC market, where I think there are still a significant number of companies that are having challenges because of healthcare-related issues with compensation, with reimbursement levels and cost structures, and with an absence of pricing power.
David B. Golub: We're still seeing those two trends across the industry I think we're pretty much through those two trends within our portfolio, but I would expect that youre going to see both of those trends play out across the broadly syndicated market and across much of the BDC market I think there is still a significant.
David B. Golub: <unk> number of.
David B. Golub: Companies that are having challenges because of health care related.
David B. Golub: Issues with.
David B. Golub: With reimbursement levels and cost structures and with.
David B. Golub: In absence of pricing power. If you look at what we're seeing in our portfolio right now I'd describe it as very idiosyncratic.
David B. Golub: If you look at what we're seeing in our portfolio right now, I'd describe it as very idiosyncratic. To your point, the three additions to our non-accrual are all very small. One of them is a recurring revenue loan, but I wouldn't draw any conclusions about there being some trend in healthcare. We've had challenges from time to time with software companies, and we've had very good success in working them out. I anticipate that we'll continue to see that.
David B. Golub: To your point the three additions to our non accrual all very small one of them is a recurring revenue loan, but I wouldn't draw any conclusions about there being some trend in health care.
David B. Golub: Had challenges from time to time with software companies, we've had very good success and working them out.
David B. Golub: I anticipate that we'll we'll continue to see that.
David B. Golub: Got it. Thank you and then just kind.
Unknown Caller: Got it. Thank you.
Unknown Caller: Kind of.
Unknown Caller: And then just kind of parallel to the spread compression. Usually when there's spread compression, it's not the only thing lenders are giving up, right? So the weighted average upfront fee was down a little bit in the quarter as well, but typically, structures, covenant packages, et cetera, you know, have some losses in regulars in an environment like this. Can you give us any color on that?
Unknown Caller: Parallel to the spread compression usually with respect compression is not the only thing lenders are giving up right.
Unknown Caller: The weighted average upfront fee was down a little bit in the quarter.
Unknown Caller: Well, but also typically structures.
Unknown Caller: Covenant packages et cetera.
Unknown Caller:
Unknown Caller: Have had some losses in.
David B. Golub: How dramatically is that shifting, if at all? Is that more of a concern than the spread compression? You said that's the primary worry right now in private credit, but that's a near-term phenomenon. The structures weaken to the point that future credit becomes a risk. I mean, any thoughts there?
Unknown Caller: Rigorous snacks and in an environment like this can you give us any color on how dramatically is that shifting if at all.
David B. Golub: Is that more of a concern than the spread compression.
David B. Golub: Compression.
David B. Golub: Yes.
David B. Golub: You said that the primary why we right now in private credit, but that's a near term phenomena.
David B. Golub: The structures, we came to the point.
David B. Golub: Credit becomes a risk I mean, any any thoughts there.
Speaker Change: So I think you make a very important point, which is youre right.
David B. Golub: So I think you make a very important point, which is you're right that, generally speaking, we're always either in an environment where the pendulum is moving toward more borrower-friendly or more lender-friendly. And when it's moving in the direction of being more borrower friendly, it tends not to move just in terms of spread, it also tends to move in terms of documentation terms, in terms of leverage, in terms of structure. I emphasize spread in my comments today because I think that's the area we've seen the most significant movement.
David B. Golub: Generally speaking, we're either we're always either in an environment, where the pendulum is moving toward more borrower friendly or more lender friendly and when it's moving in the direction of more borrower friendly.
David B. Golub: It tends not to move just in terms of spread it also tends to move in terms of.
David B. Golub: Documentation terms in terms of leverage in terms of of structure.
David B. Golub: Aye.
David B. Golub: Emphasize spread in my comments today, because I think thats the area, we've seen the most significant movement.
David B. Golub: And I think that.
David B. Golub: And I think that all of these changes highlight another really important point, which is origination. Strength is going to become a larger and larger source of differentiation amongst managers. What I mean by that is, managers who have large portfolios with a lot of incumbency opportunities and who have particularly strong relationships with sponsors who have scale and depth of expertise are going to be able to navigate this coming environment with much more aplomb than folks who don't have those kinds of advantages. Because this is the kind of environment where it gets harder to find attractive investments.
David B. Golub: All of these changes highlight another really important point, which is a refrigeration.
David B. Golub: Strength is going to become a larger and larger source of differentiation amongst managers.
David B. Golub: And by that is.
David B. Golub: Managers, who have large portfolios with a lot of incumbency opportunities you have particularly strong relationships with sponsors who have.
David B. Golub: Scale and depth of expertise there going to be able to navigate this coming environment much.
David B. Golub: With much more aplomb than than folks, who we don't have those kinds of advantages. Because this is the kind of environment, where it gets harder to find attractive loans.
Speaker Change: Understood. Thank you.
Operator: on this term. Thank you.
Operator: Again, if you would like to ask a question. Please press star one on your telephone Keypad. Your next question comes from the line of Paul Johnson of <unk> Double you. Your line is open.
Operator: Again, if you would like to ask a question, please press star one on your telephone keypad. Your next question comes from the line of Paul Johnson of KBW. Your line is open. Thank you.
Paul Conrad Johnson: Hey, good afternoon, thanks for taking my questions.
Unknown Caller: Good afternoon. Thanks for taking my question. On those situations where you are facing the same spread compression or the possibility of sea compression, I mean, what is the overall philosophy on, you know, refinancing those incumbent borrowers at a, you know, accepting a lower fee, lower Transcribed by https://otter.ai
Unknown Caller: All of those situations, where you are seeing resale savings spread compression or possibility.
Unknown Caller: Fee compression I mean, what is the overall philosophy.
Unknown Caller: Refinancing those incumbent borrowers that are accepting them.
Unknown Caller: Fees are lower.
Unknown Caller: Spread versus.
Unknown Caller: Letting the logo.
Unknown Caller: So.
David B. Golub: So we're in the business of making good investments. I know that sounds silly and apple pie, but I actually think it's a really important distinction because we do compete in a marketplace where some folks are more focused on quantity than quality. So we make all of our assessments based on risk reward, Paul.
Unknown Caller: We're in the make good investments business, I know that sounds silly and Apple pie, but I actually think it's a really important distinction because we.
David B. Golub: We do compete in a marketplace where some.
David B. Golub: Folks are more focused on quantity than quality. So we make all of our assessments based on risk reward ball.
David B. Golub: And we do sometimes come to conclusions that when a borrower who's requesting a lower spread, the right answer is to say yes. But we also say no sometimes. And in the last quarter, the number of examples I can think of where we said no, and in some cases, we were refinanced out. So it's important, I think to maintain discipline. Part of maintaining discipline is being good at origination so that you don't feel pressured to accept a situation where the risk-reward on a credit is unattractive just because you need to keep your book full.
Paul: We do.
David B. Golub: Sometimes come to conclusions that a.
David B. Golub: Borrower who's requesting a lower spread that the right answer is to say yes.
David B. Golub: We also say no sometimes and in the last quarter.
David B. Golub: The number of examples I can think of where we said where we said no.
David B. Golub: And in some cases, we were refinanced out.
David B. Golub: So it's important I think to maintain discipline part of maintaining discipline is being good at origination. So that you don't feel pressured to.
David B. Golub: Except a situation where the risk reward on that credits unattractive, just because you need to keep your book full.
Speaker Change: That makes sense.
Unknown Caller: That makes sense, and I appreciate the thoughtful answer there. And my last question was just on that.
Speaker Change: Appreciate the thoughtful answer there.
Speaker Change: And my last question was just on the.
Unknown Caller: Change in portfolio yield this quarter it ticked higher by 20 basis points, just wondering if there's anything.
Unknown Caller: Change in portfolio yield this quarter, you know, ticked higher by 20 basis points. Just wondering if there's any... No specific amount of run-through there to drive that, just kind of given the... The Spread Compression we're talking about, you know, maybe more on a forward basis, but any color there. I think it's just noise.
Unknown Caller: Specific to let it run through there.
Unknown Caller: Drive that just kind of given that yes.
Unknown Caller: Spread compression, we're talking about maybe more on a forward basis, but.
Unknown Caller: Any color there would be great. Thanks.
David B. Golub: I think it's just noise, and I wouldn't draw any conclusions from that. But I agree with you that that seems surprising in the context of the theme of spread compression.
Unknown Caller: I think it's just noise.
David B. Golub: I wouldn't
David B. Golub: You can draw any conclusions from that.
David B. Golub: Agree with you that.
David B. Golub: That that seems surprising in the context of the.
David B. Golub: The theme of spread compression.
David B. Golub: There are no further questions at this time I will now turn the conference back over to David Golub for closing remarks.
David B. Golub: There are no further questions at this time. I will now turn the conference back over to David Golub for closing remarks.
David B. Golub: Great. Well, thanks everyone for joining us today, and we look forward to talking to you again next quarter. As always, if you have any questions, in the meantime, please feel free to reach out.
David B. Golub: Great.
David B. Golub: Thanks to everyone for joining us today, and we look forward to talking to you again next quarter as always if you have any questions in the meantime, please feel free to reach out.
Speaker Change: Thank you ladies and gentlemen that concludes today's call. Thank you all for joining you may now disconnect.
Operator: Thank you. Ladies and gentlemen, that concludes today's call. Thank you all for joining us. You may now disconnect.
Operator: [music].
Operator: Okay.
Operator: [music].
Operator: Okay.
Operator: [music].
Operator: Okay.
Operator: [music].
Operator: Okay.
Operator: [music].
Operator: Okay.
Operator: Yes.
Operator: Yes.
Speaker Change: Thank you.
Operator: [music].
Operator: Sure.
Operator: [music].
Operator: Okay.
Operator: [music].
Operator: Okay.
Operator: [music].
Operator: Okay.
Operator: Okay.