Q4 2024 Golub Capital BDC Inc Earnings Call
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Speaker Change: Hello everyone and welcome to GBDC's earnings call for the fiscal year and fiscal quarter ended September 30, 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.
Speaker Change: 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 GBDC's SEC filings.
Speaker Change: For materials we tend 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.
Speaker Change: As a reminder, this call is being recorded. With that, I'm pleased to turn the call over to David Golub, Chief Executive Officer of GBDC.
David Golub: Hello, everybody, and thanks for joining us today. I'm joined by Chris Ericson, our Chief Financial Officer, and Matt Benton, our Chief Operating Officer.
David Golub: For those of you who are new to GBDC, our investment strategy is to focus on providing first lien senior secured loans to healthy, resilient middle market companies that are backed by strong partnership-oriented private equity sponsors.
David Golub: will be referring to that presentation during the course of today's call.
David Golub: I'm going to start as usual with headlines and with a summary of performance for the quarter and then Matt and Chris are going to go through our operating and financial performance for the quarter in more detail. And finally, I'll wrap up with our outlook for the coming period and I'll take some questions.
David Golub: The headline is that GBDC had a good fourth quarter and a solid fiscal 2024. You'll recall that fiscal 2024 had a number of landmark events that made GBDC's shareholder value proposition more compelling.
David Golub: First, a permanent reduction in the company's incentive fee rate. Second, a new supplemental variable distribution framework, and that distribution framework has led to $0.29 per share of supplemental distributions so far.
David Golub: And third and most importantly, the closing of a second win-win-win affiliate merger with GBDC3. So while we're going to focus today on GBDC's performance for the final quarter of the fiscal year, I think it's important to keep in mind the transformational nature of Fiscal 2024 as a whole.
David Golub: With that context, let me touch on a few highlights before I hand it over to Matt and Chris.
Speaker Change: Adjusted NII per share was 47 cents for the quarter. This corresponds to an adjusted NII return on equity of 12.4 percent. Adjusted NII return on equity for the full fiscal year was 12.9 percent.
Speaker Change: Adjusted net income per share for the quarter was 36 cents and that corresponds to an adjusted return on equity of 9.4 percent for the quarter. Adjusted return on equity for the full fiscal year was 10.7 percent.
Speaker Change: GBDC's results benefited from the continuation of several trends that we've highlighted over the course of recent quarters. First, borrower performance remained generally strong, as you'll see when we talk through key credit metrics.
Speaker Change: Second, high base rates continue to boost the earnings power of GBDC's portfolio. Third, GBDC's industry-leading fee structure.
Speaker Change: The fee structure, combined with a voluntary three-cent-per-share incentive fee waiver from GBDC's Investment Manager during the quarter, it meant that shareholders captured more of the value that GBDC created.
Speaker Change: That said, GBDC also faced some headwinds during the quarter. Primarily headwinds from a tail of underperforming borrowers that I think everybody in credit is facing these days.
Speaker Change: We talked last quarter about how GBDC had negative outcomes on loans to Pluralsight and Imperial Optical.
Speaker Change: During the September 30th quarter, we worked through restructuring of Pluralsight, as well as one other long-time non-accrual credit. And you can see this reflected in realized losses that are in this quarter's P&L.
Speaker Change: Our focus, as always with underperforming borrowers, is to use our deep bench of experienced investment professionals and the playbook that we've developed over several decades to minimize ultimate losses.
Speaker Change: In both these cases, GBDC now holds post-restructuring equity positions that we believe have upside potential.
Speaker Change: During the September 30th quarter, we also took some fair value markdowns on several other companies that are underperforming. The quantum of net realized and unrealized losses, it improved quarter over quarter, but it was again higher than our version of normal.
Speaker Change: So in short, fiscal Q4 performance was good. It wasn't great, but it was good, and it gave GBDC a solid ending to a transformational fiscal year that we believe sets up GBDC very well for the long term.
Speaker Change: I'll come back to this theme when I go through our outlook at the end of our prepared remarks.
David Golub: With that, I'll pass the mic over to Matt Benton to discuss the quarter in more detail. Thanks, David. I'm going to start on slide 4.
Matt Benton: Adjusted NII per share was 47 cents, corresponding to an adjusted NII ROE of 12.4 percent. Adjusted earnings per share is 36 cents, corresponding to an adjusted net income ROE of 9.4 percent.
Matt Benton: GBDC's earnings were driven by three key factors. First, credit performance was generally solid. But as David said, we took some fair value write-downs on several underperformers.
Matt Benton: Second, earnings were supported by continued high base rates consistent with recent quarters.
Matt Benton: Third, GBDC benefited from sustainably lower expenses due to its leading investment advisory fee structure. And fourth, Golub Capital, GBDC's investment manager, elected to voluntarily waive, on a one-time basis, a portion of its fee this quarter.
Matt Benton: This equated to an approximately 3 cent per share benefit to net investment income and earnings.
Matt Benton: We did this to enhance the shareholder experience by giving investors an early benefit from the cost of funds reductions GBDC will recognize from the debt funding initiatives we undertook post-quarter end. I'll hit on these exciting initiatives in more detail in a bit.
Matt Benton: Let me summarize portfolio activity and credit quality in the quarter. Gross originations were nearly a billion dollars, up from last quarter as we sought to take leverage up modestly post-merger.
Matt Benton: After factoring in repayments and unfunded commitments associated with originations, net funds increased by $368 million sequentially.
This represented net portfolio growth of approximately 5%.
Matt Benton: GBDC did not get the full benefit of the earnings power of this portfolio growth because much of that growth was backend weighted.
Matt Benton: I want to offer some comments around the environment in general. The underwriting pendulum in the current environment has swung to more borrower-friendly across all credit markets, from investment grade which is trading at 20-year tights, to the broadly syndicated market, to private credit.
Matt Benton: In larger size transactions especially, we are seeing spread compression, looser deal documentation, especially around EBITDA definitions, and higher leverage.
Matt Benton: As these underwriting trends have shifted over this past year, we have purposely chosen to be more selective and to focus more on core middle market transactions.
Matt Benton: Our wide funnel allows us to be picky. We typically see over 2,000 opportunities annually.
Year-to-date at Golub Capital, our origination stats depict our conservatism.
Matt Benton: Third, Golub Capital acted as the lead or sole book runner in over 87% of our transactions. And year to date, we've been the sole lender in almost a quarter of the deals that we've done. So we're controlling structures and documentation, which, as everyone knows, is our typical MO.
Matt Benton: Fourth, our average LTVs at the time of origination have generally been in the mid-30% to mid-40% range, with an average LTV of approximately 37%.
Matt Benton: Finally, given the risk-adjusted pricing dynamics, we are choosing to play in the core middle market. The median EBITDA for our origination has been below $60 million.
Speaker Change: While the overall credit performance of GBDC's investment portfolio remained strong, consistent with David's overview, we did see a small increase in Category 3 credits this quarter.
Speaker Change: Investments in Rating Categories 4 and 5 decreased slightly from 89.2% of the portfolio at their value to 87.1% during the quarter.
Speaker Change: Investments in Rating Category 3 increased from 10.1% of the portfolio as their value to 11.6% quarter-over-quarter.
Speaker Change: And investments in rating categories 1 and 2 remain very low, representing just 1.3% of the total portfolio at fair value. As a percentage of total debt investments at fair value, non-accruals increased slightly to 1.2% at quarter end from 1% in the June quarter.
Speaker Change: As a reminder, these metrics are well below the BDC sector average.
Speaker Change: In the quarter, the number of non-equivalent investments increased to 11 as the restructuring of three former non-equivalent investments is offset by the addition of four non-equivalent investments in the quarter. Several of these were very small positions.
Speaker Change: Continuing on slide four, let me briefly summarize distributions paid and certain balance sheet changes in the quarter.
Speaker Change: Distributions paid in the quarter of $0.49 per share included not only the quarterly-based distribution of $0.39 per share, but also the $0.05 per share quarterly variable supplemental distribution declared in August.
Speaker Change: as well as the $0.05 per share special distribution declared in June 2024 in conjunction with the GBDC3 merger closing.
Speaker Change: We expect these supplementals to eliminate GBDC's need to pay excise tax on undistributed earnings. As we've said in the past, we would prefer, in general, to return capital to shareholders versus paying any form of an excise tax.
Speaker Change: NavPerShare decreased by 13 cents on a sequential basis to $15.19 because distributions were unusually high.
Speaker Change: Despite the decrease, GBDC's NAV per share is now 17 cents higher than it was at September 30, 2023, which we believe is a clear outlier in the BDC sector.
Speaker Change: From a leverage perspective, debt-to-equity increased quarter over quarter to one spot zero nine turns on a net-of-cash basis. This includes cash trapped in debt securitizations for the purposes of paying down principal on outstanding notes.
Speaker Change: As I mentioned earlier with respect to assets, the increase in net leverage largely happened in the last few weeks of the quarter. GBDC's average net leverage during the quarter was just 1.02 turns.
Speaker Change: Increasing that leverage further, our target is 1 spot, 1-0 turns to 1 spot, 1-5 turns.
will be an additional tailwind for profitability.
Speaker Change: Let's turn to distributions declared in the quarter. The Board declared 43 cents of total distributions, a regular quarterly distribution of 39 cents per share, and a fiscal Q4 supplemental distribution of 4 cents per share.
Speaker Change: Taken together, these distributions correspond to an annualized dividend yield of 11.3% based on GBDC's NAV for share as of September 30, 2024.
Speaker Change: Adjusted NII per share continues to significantly exceed the company's regular quarterly distribution, resulting in regular distribution coverage of 121%.
Speaker Change: In addition, our board declared in June 2024 additional special distributions to be paid in three equal installments of five cents per share following the merger close on June 3, 2024.
Speaker Change: The final special distribution of $0.05 per share will be paid on December 13, 2024 for stockholders of record as of November 29, 2024.
Speaker Change: You can find more information about the record dates and payment dates for fiscal Q4 distributions on slide 23 of the earnings presentation and about the variable supplemental distribution framework on slide 24.
Speaker Change: I'm going to turn it over to Chris now to provide more detail on our results. Chris? Thanks, Matt. Turning to slide 7, you can see how the key earnings drivers Matt just described translated into GBDC's September 30, 2024 NAB for Share of $15.19.
Net realized and unrealized losses were $0.11 per share.
Speaker Change: Together, these results drove a net asset value per share decrease to $15.19, down $0.13 per share from the prior quarter.
Speaker Change: Let's now go through the details of GBC's financial results for the quarter ended September 30, 2024. We'll start on slide 10, which summarizes our origination activity for the quarter.
Speaker Change: Net funds growth quarter over quarter increased by $368 million, representing a 5% increase in total portfolio size versus June 30, 2024.
Speaker Change: The asset mix of new investments shown in the middle of the slide remain predominantly one-stop loans.
Speaker Change: And looking at the bottom of the slide, the weighted average rate on new investments decreased modestly quarter over quarter to 10.7%.
Speaker Change: We continue to be highly selective as the average loan-to-value on Golub Capital's middle market originations during the quarter was below 40% with a disproportionate amount of these originations for repeat borrowers.
Speaker Change: Slide 11 shows GBC'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 86% of the portfolio at fair value.
Speaker Change: Slide 12 shows that GBC's portfolio remains highly diversified by portfolio company, with an average investment size of approximately 30 basis points.
Speaker Change: Additionally, our largest single borrower represents just 1.5% of the portfolio, and our top 10 largest borrowers represent just 13% of the portfolio.
Speaker Change: We are big believers in modulating credit risk through position size, which we believe has served GBC well in previous credit cycles and will continue to be important in the context of the current cycle.
Speaker Change: As of September 30, 2024, 92% of our investment portfolio consisted of first-line, senior-secured, floating-rate loans to borrowers across a diversified range of what we believe to be resilient industries.
Speaker Change: The economic analysis on slide 13 highlights the drivers of the change in GBC's net investment spread to 5.2%.
Let's walk through this slide in detail.
Speaker Change: We start with the dark blue line, which is our investment income yield. And as a reminder, the investment income yield includes the amortization of fees and discounts.
Speaker Change: GVDC's investment income yield fell 30 basis points sequentially to 12%, primarily due to reduced discount amortization as compared to the prior quarter, as well as the impact of moderating investment spreads over recent quarters and, to a lesser extent, the impact of lower interest base rates in September.
Speaker Change: Our cost of debt, the teal line, increased 30 basis points to 6.8% as we saw the full quarter impact of the assumption of GBC III debt funding facilities.
Speaker Change: Matt will detail later in the call how we already executed a multifaceted plan to reduce GBDC post-merger debt funding costs.
Speaker Change: As a result, our weighted average net investment spread, the gold line, decreased 60 basis points sequentially to 5.2%.
Speaker Change: Additionally, we recognize the decrease in interest expense during the quarter associated with marking to fair value our existing interest rate swaps on the 2028 and 2029 notes.
Speaker Change: Edge accounting requires us to fair value the interest rate swaps on a quarterly basis and recognize any changes in fair value through interest expense.
Speaker Change: But it's important to recognize this is a non-cash expense and will net the zero over the lives of the swaps.
Speaker Change: Consistent with prior periods, we have excluded the net change in fair value related to our interest rate swap hedges from the calculation of our weighted average cost of that, since these are non-cash amounts that will net to zero over the life of the swaps.
Speaker Change: We believe with nearly 80% of GVDC's total debt funding represented by floating rate exposure that GVDC is well positioned for declining interest rates.
I'll turn the floor back over to Matt now.
Matt Benton: 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.
Matt Benton: On slide 14, you can see the non-equals increased modestly by 20 basis points sequentially to 1.2% of total debt investments of pure value.
Matt Benton: Slide 15 shows the trend in internal performance ratings on GBDC's investments.
Matt Benton: As of September 30, 2024, approximately 87.1% of GBDC's investments were rated 4 or 5, which means they're performing as expected or better than expected at underwriting.
Matt Benton: The proportion of loans rated 1 and 2, which are the loans we believe are most likely to see significant credit impairment, remain very low at just 1.3% of the portfolio at fair value.
Matt Benton: As we usually do, we're going to skip past slides 16 to 19. These slides have more detail on GBDC's financial statements, dividend history, and other key metrics.
Matt Benton: Slide 21 describes some actions that we took subsequent to September 30, 2024, regarding GBDC's post-merger funding structure.
Matt Benton: Recall the time of the merger we discussed the opportunity to drive improvements in GBDC's funding.
Matt Benton: In early November, we announced the pricing of a new $2.2 billion GBDC term debt securitization with AAA notes priced at sober plus 156 basis points.
Matt Benton: and I'm going to share with you a very attractive level relative to the levels at which we borrow under our secured corporate revolver.
Matt Benton: This includes a four-year reinvestment period with attractive underlying structural terms that provide meaningful flexibility.
Matt Benton: In conjunction with the CLO pricing, we elected to announce a full repay of certain of GBDC's legacy higher cost debt securitizations.
Matt Benton: Additionally, we issued a Notice of Redemption to redeem the GBDC3 2022-2 debt securitization in full on December 16, 2024. As a note, this securitization has pricing of 3 months SOFR plus 260 basis points.
Matt Benton: Further, we announced an increase in the size of the J.P. Morgan credit facility to $1.9 billion, and all amounts outstanding on the GBDC-3DB credit facility were repaid and the facility was terminated.
Matt Benton: We believe the combination of these debt funding initiatives will meaningfully lower GBDC's cost of funds and leave GBDC again with one of the lowest cost debt funding structures in the BDC sector, while also meaningfully extending its debt maturity ladder.
Matt Benton: We expect GBDC to recognize the full run rate benefit of these actions in the March 31, 2025 quarter.
Matt Benton: Slide 22 details GBDC's funding structure and other key takeaways. Our weighted average cost of debt this quarter was 6.8%. As you heard me just describe, we expect the funding actions that we took subsequent to quarter end are expected to reduce GBDC's cost of funds over time.
Matt Benton: 43% of our debt funding is in the form of unsecured notes, with no upcoming maturities in 2024 or 2025.
Matt Benton: The fixed rate notes coming due in 2026 and 2027 were issued with a weighted average coupon of 2.3%, and as you have heard us say on prior occasions, we did not swap them out for float-in exposure.
Matt Benton: The remainder of GBDC's total debt funding is floating rate or swap to floating.
Matt Benton: Overall, GBDC's liquidity position remains strong, and we end the quarter with approximately $1.4 billion of liquidity from unrestricted cash, undrawn commitments on our meaningfully over-collateralized corporate revolver, and the unused, unsecured revolver provided by our advisor.
Matt Benton: I'm going to hand it back over to David now for closing remarks and Q&A. David? Thanks, Matt. So to sum up, GBDC had a good fourth quarter and wrapped up a strong fiscal 2024.
Matt Benton: I want to end with our outlook and then I'm going to open the line for questions.
Matt Benton: We talked last quarter about a few headwinds that we anticipated the market generally, and GBDC, would face with respect to credit spreads and origination. Our view today is largely unchanged, but I want to touch briefly on each of these three areas.
Bruce, let's talk about our outlook for credit.
Bruce: You can see it today in the BSL market, LSTA estimates for the default rate adjusted for liability management transactions is now running at north of 4% annualized. That's more than double the long-term average.
Bruce: We can also see it in reports from major credit rating agencies like S&P and Fitch, and from the major law firms that are covering restructurings and bankruptcies.
Speaker Change: Now I'm going to say something that may surprise many of you. We think this increased credit stress is a good thing.
David Golub: Golub Capital's consistently outperformed in challenging markets and we're quite confident this will be the case this cycle too.
David Golub: more defaults, more underperforming credits. These should cause market conditions to shift from where they are now, which is pretty borrower-friendly, to more lender-friendly, and it should chase out some of the tourists who've entered direct lending but lack the characteristics to be successful long-term.
David Golub: Let's shift now to the second headwind, to spreads. The broadly syndicated loan market saw striking spread compression in 2024. I talked about this last quarter. And private credit lenders have also seen spread compression. The dynamic has been most pronounced among borrowers with over $100 million in EBITDA, what we call the large market segment.
David Golub: The water market segment is where a number of our competitors focus. I point out it's not our focus. We prefer to focus on the core middle market. And the core middle market, it wasn't immune from the spread compression trends.
David Golub: But we see wider pricing, lower leverage, better documentation terms, and frankly, less competition there.
David Golub: Finally, origination. Consensus expectations had called for a robust recovery in the level of M&A activity in 2024. We were more cautious and our call has proven to be correct. We've experienced a pickup in M&A activity this year, but not a large pickup.
David Golub: We do think we're going to see a pickup in 2025, falling interest rates, less political uncertainty, continuing pressure on PE sponsors to return money to LPs. All of these are tailwinds for M&A activity in 2025.
David Golub: I think it's early to predict an M&A supercycle, but we are seeing signs of improving activity.
David Golub: So, in sum, across all three of these headwinds, we see signs of better conditions, and we anticipate that market conditions are going to improve over the course of 2025.
David Golub: Having said that, I want to spend a minute on what happens if we're wrong on this. After all, consensus predictions have been wrong a lot in the last several years.
And here's the good news.
David Golub: Whatever the coming period may bring, we think GBDC is well positioned to outperform.
David Golub: This is because we think Golub Capital does a complementary set of things very well. We're good at identifying resilient borrowers that are in resilient industries. Our relationships and incumbencies make us a preferred partner for attractive sponsor-backed companies.
David Golub: Our investment process and protocols enable us to identify and address issues that arise early on. And the depth of our expertise in managing problem credits, that helps us preserve value.
David Golub: We've built these competitive advantages over time with great intent, with great effort. This is our 30th anniversary year, and we're proud to be celebrating what we call 30 years of good boring.
With that, let me open the line for questions.
Speaker Change: We will now begin the question and answer session. If you would like to ask a question, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again.
Speaker Change: Again, if you would like to ask a question, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, press star 1 again.
Speaker Change: And our first question comes from the line of Robert Dodd with Raymond James. Robert, please go ahead.
Robert Dodd: Hi guys and thanks for all the color on the call as always. I mean one of the questions, I mean David, you went through credit, spreads, regeneration, etc. What about, I think Matt mentioned, I mean terms.
Robert Dodd: You're starting to see weaker EBITDA definitions, et cetera, and things like that. Where is that on the scale of...
Robert Dodd: of best to worst across, you know, across cycles. Because obviously, you know, spreads...
Robert Dodd: reach a low and then spreads don't go down anymore but everything else around them in terms of document structures and definitions weakens and then that swings the other way at some point. So where would you say we are in the cycle of not just spreads but like all the other bits that go with it?
Robert Dodd: in particular documentation terms to also be talking about in the context of a market segment.
Robert Dodd: So in particular, if we think about core middle market versus large market, there's always a
Pretty meaningful difference in documentation terms.
Robert Dodd: In the poor middle market, we typically have this thing called covenants. We typically have strong protections against leakage of various sorts. We typically have strong definitions of EBITDA. In the larger market, where we and other private credit lenders compete against the broadly syndicated market,
Robert Dodd: There's more variability in the strength of documentation terms, and as we move from a lender-friendly market to a more borrower-friendly market, we see more movement in documentation terms.
Today, the broadly syndicated market is...
Very strong.
It has...
Robert Dodd: come back in an enormous way in 2024. I think the death of the broadly syndicated market was prematurely called. Last year, I was very vocal that it was going to come back and that people were overhyping the growth of private credit relative to the broadly syndicated market.
Robert Dodd: And, you know, we've improved, right, and the broadly syndicated market has...
Robert Dodd: refinanced a lot of loans that were financed in the private credit market. It's also been a threat to the private credit market, which has caused private credit lenders to agree to repricings and to agree to documentation in terms of new loans that are more borrower-friendly.
Robert Dodd: So today I would characterize documentation terms as being on the borrower-friendly side of the spectrum, on the large market side. They're not
Robert Dodd: quite at 2021 levels, but they're relatively borrower-friendly. And that's one of the reasons, Robert, that we
Speaker Change: We've been more focused than ever on sticking to our core focus on the core middle market.
I appreciate that, Carlo. Thank you.
Speaker Change: To the point of 2021, I mean, you're clearly not calling 2025 as going to be another 2021. What are the, currently, what are the push and takes on, I mean, where do you, do you expect it to be just behind 21 but meaningfully stronger than 22, 23, 24, or where would you rank it and what would it take
Speaker Change: in terms of things you're seeing in the market, because clearly not seeing that kind of like yet. What would it take for you to put a Supercycle label on it?
So,
2025 M&A Volumes
Speaker Change: are a question mark right now. Let's talk about both the tailwinds as well as the headwinds. On the tailwind side, we have somewhat lower rates.
We have lower spreads. We have somewhat less
Speaker Change: political slash policy uncertainty now that the elections have gone through. We've got the continuing pressure on private equity firms to deliver more disposition proceeds to their investors.
Speaker Change: have not yet spent enough of their current funds to spend money. So there are some very significant tailwinds that I think...
Speaker Change: recognize are really powerful. On the headwind side, we still have a lot of uncertainty. I think
and I'll see you next time.
Speaker Change: We don't know where things are going to go on taxes, on tariffs, on spending levels. There's a lot of geopolitical uncertainty highlighted in the last few days in the developments in the Ukraine war.
Speaker Change: There's a significant question as to what's going to be the catalyst for more M&A activity, because what tends to happen, Robert, is a bit of a snowball effect. As you have more M&A activity, there
Speaker Change: comes with that more certainty about what market clearing price levels are going to be and that in turn leads to more M&A activity.
Speaker Change: I'm not saying we're not going to have a big M&A year in 2025. I'm saying I'm not sure.
Speaker Change: And I think it's too early right now to be pounding the table saying we're going to see an M&A super cycle in 2025. We may. I hope we do. But I think it's too early to make that call.
of the liability side. Any thoughts on, obviously...
Speaker Change: Unsecured spreads aren't just down for BSL borrowers, they're down for BDC borrowers as well. So how would you characterize the positioning? Are you done on the secured but there's still work to be done on the unsecured or how would you take a view on that?
something that I think is a
Speaker Change: core competitive advantage of Golub Capital. We're good at it. We're good at sustaining over time a low cost flexible balance sheet.
Speaker Change: Right now, to your point, we have done a lot of work on it.
Speaker Change: have gotten a lot of the benefits that we talked about at the time of the merger in respect of reducing the borrowing costs.
Speaker Change: of the Postmerger Combined Company. But I take your point. I think, you know, across the spectrum, we're seeing attractive opportunities to put new debt on, both secured and unsecured. And, you know, it's our job to
Speaker Change: to keep looking for opportunities for GBDC to take advantage of that.
Speaker Change: Again, if you would like to ask a question, simply press star followed by the number 1 on your telephone keypad.
Paul, if you're on mute, please unmute.
Paul: Apologize there, I was on mute, but thanks for taking my questions.
Paul: or CBDC, and I'd also just ask, kind of given some of the comments on,
cautious on, you know, credit.
You know, the pricing.
Speaker Change: The Environment is a little bit less favorable today. Why deploy so much now into this quarter, instead of trying to pull a little bit back potentially for a better year of activity next year?
Speaker Change: Thanks, Paul. Good question. So a couple of comments on this. We always deploy across the whole Golub platform.
Speaker Change: This quarter is no different, we didn't change our allocation policy in a way that was aimed at increasing allocations to GBDC.
Speaker Change: Having said that, we were hoping for an opportunity to increase assets within GBDC. Coming out of the merger, you'll recall that we were well under our target leverage level.
Speaker Change: In fact, I would argue in the quarter we just finished, we were still significantly under our target leverage level. We had an average leverage over the quarter of just slightly over one times, and our target is 1.1 to 1.15.
Speaker Change: Second point I'd make is that the total new investment commitments is
Speaker Change: a little bit overstated in the sense that there is some
Speaker Change: The 368 million, which is not an eye-popping number at all. It's a pretty normal-looking number. The third point I'd make is that
While it's a
Speaker Change: challenging environment from a new origination standpoint, we have some giant advantages.
Speaker Change: and two of those giant advantages are our relationships with private equity sponsors and our existing portfolio.
Speaker Change: And both of those really shone through in this last quarter. Almost all of our new origination was with repeat sponsors.
Speaker Change: and a very disproportionate from normal portion of our origination was repeat borrowers. So we're really leaning in during this period on our competitive advantages and focusing on sponsors and borrowers and industries that we have expertise in.
Speaker Change: Appreciate that. That's a very helpful answer. And then one for possibly Chris. Just on the non-cash interest expense related to the swap this quarter, is there any way to quantify what that was on a per share basis of non-cash interest expense?
as a result of the swap markdown.
Yeah, hey Paul. It was about...
It was about two cents a share.
Speaker Change: Got it, thank you. Those are all my questions, thank you very much.
Speaker Change: And your next question comes from the line of Ray Chisman with Anfield Capital. Ray, please go ahead. Thank you for taking the question. The first one is, at the decline in yield, was it due mostly to anything you did that was due, where the competition forced the spread down, or was it, as I'm seeing in other bank credits I'm in, repricings rather aggressively here?
Speaker Change: So, I would say it's a combination of factors. We have seen in the larger side of our portfolio, the large market borrowers, we have seen some movements, as you described, where there are repricings that take place. We also, and you can see it on page 10 of the presentation, the weighted average spread on new loans is lower than it has been in prior quarters, reflecting the spread compression that we've been talking about.
Speaker Change: So it's a variety of factors, a third one I mentioned, you know, which we're all going to see more of over the, we all have managed floating rate assets are going to see more of over the course of the coming period is declining base rates.
So it's all three of those.
Speaker Change: The second one would be, considering the way Pluralsight started and proceeded with the sponsor, simply
Speaker Change: packing up his toys and going home. I mean sponsors usually you, I think your experience would say, usually work with their creditors and try to get a better outcome. I mean you're not seeing a repeat of that kind of behavior anywhere else in the portfolio, I hope.
Speaker Change: So we always have good dialogue with our with our sponsor clients and and there's a range of sponsor reactions to
workout situations.
Speaker Change: Our first choice is to work with sponsors toward win-win solutions that involve continuing contributions and continuing benefits to the sponsor, but if a sponsor concludes that they're not in a position to do so for any of a number of reasons, we're
Speaker Change: We're quite content to take the keys and to run with the situation. That's always been something that we've done, Ray, and this current period and coming period, I don't think it's going to be any different.
Speaker Change: Last one for you is, are there, in your opinion, any additional...
Speaker Change: vehicles inside of GBDC that will eventually make their way into our larger pile for continued either positive leverage on the operations side or cost of funds side or or you know just in general okay are we going to get bigger
Speaker Change: Because we'll be better or do you think this is a good size for the current environment we're in?
Speaker Change: At Golub Capital, generally, we're always looking for opportunities in areas where we have expertise, in areas where we have competitive advantage to grow the portfolio.
Speaker Change: Pleased right now. I'm very satisfied right now with the strategy of GBDC. It's been
Speaker Change: very consistent for 14 years. I see more opportunities for us to grow in that strategy.
Speaker Change: So I'm not I'm not anticipating any major changes. I'm not anticipating, for example, that we're going to announce in coming days investments in specialty finance subsidiaries in unrelated areas as some of our competitors have done. That's not our MO.
Speaker Change: The question was really, is there a GBDC 4, which you think will eventually end up in GBDC public?
Oh, sorry, I misunderstood your question. We do have a...
Speaker Change: private BDC called GBDC-4. It's a public filer. You can look at it, and it's possible that there will come a time after it's matured where it will make sense to look at
liquidity options for GBDC4, including a potential merger with GBDC.
Speaker Change: If you were to be 10 billion in size instead of 8, is that something which would be an advantage in today's marketplace or do you think that the size you are now is optimal for the environment now?
Speaker Change: So, I really think about that across all of Golub Capital and not specifically about GBDC. We're very focused on making sure, as a platform, that we have a size that's appropriate for the opportunities that are before us.
and that we're not...
Speaker Change: We're not in the business of raising money and then deploying it as best we can. We're not believers in the raise money and then deploy it as best we can model of asset management.
Speaker Change: So, one of the questions that we think about a lot, Ray, and it's a question not just for GBDC but across the Golub platform, is what's the right level of dry powder to develop in order to take advantage of market conditions?
Speaker Change: without either having too much dry powder or too little dry powder.
Speaker Change: Again, if you would like to ask a question, simply press star followed by the number 1 on your telephone keypad.
Speaker Change: I want to thank everyone for their for their attendance today and their questions and as as usual if if anybody has anything else they would like to talk about please feel free to reach out. Thanks for coming today.
Disc.
Speaker Change: This concludes today's call. Thank you all for joining. You may now disconnect.