Q1 2025 Golub Capital BDC Inc Earnings Call
Hello, everyone and welcome to G. B D. C. S earnings call for the fiscal quarter ended December 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.
<unk> 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.
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 and G. Bdcs SEC 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 dot Golub capital BDC Dot com and click the investor 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 I am pleased to turn the call over to David Golub, Chief Executive Officer of G. B D C.
Hello, everybody and thanks for joining us today I'm joined by Chris Erickson, our CFO and not betting our chief operating officer 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 partnership oriented private equity sponsors.
So yesterday, we issued our earnings press release for the December 31 quarter, and we posted an earnings presentation on our website will be referring to that presentation during today's call.
I'm going to start as usual with headlines 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 we will open the floor for some questions.
So headlights, but the headline is that <unk> had a strong quarter and a strong start to fiscal year 2025.
We hit our ASP shouldn't be good board hears the highlights adjusted.
Adjusted NII per share was 39.
This corresponds to an adjusted NII return on equity of 10, 1%.
If you exclude the impact of some noncash interest expense that was related to our interest rate swap adjusted NII for the quarter was actually 40 per share.
Adjusted net income per share was 42 per share this corresponds to an adjusted return on equity of 11%.
Adjusted net income per share included <unk> <unk>, adjusted net realized and unrealized gains the vast majority of <unk> portfolio has been performing well and continued to perform well in the December 31 quarter. In fact, we saw a nice lift in GBT CS overall portfolio credit metrics this quarter.
And we also saw nice growth in G. Bdcs investment portfolio, new deal activity continue to pick up in the market and <unk> was able to find attractive investment opportunities, while remaining highly selective enabling us to get back to our target leverage.
With that let me pass the call over to Matt to discuss the quarter in more detail.
Matt: Thanks, David I'm going to start on slide four.
Matt: <unk> earnings were driven by three key factors first overall credit performance was solid we.
Matt: We recognized unrealized losses on three non accrual investments that were restructured in the quarter.
Matt: These investments were on nonaccrual as of September 32024, but these losses were more than offset by gains elsewhere.
Matt: Overall, we're pleased with the credit picture, a TBD and we'll share how the progress is visible in <unk> quarter and credit metrics.
Matt: Earnings continue to be supported by high base rates and attractive spreads consistent with recent quarters, having said this we did see some reduction in yields this quarter, primarily from a decrease in sulfur and to a lesser extent from some continued spread compression.
Matt: The spread compression was more pronounced invisible and new investments, but we have seen some repricing of existing investments, particularly in the large market of our portfolio.
Matt: Repricing dynamics in the core middle market are less prolific than the large market where drive by re pricings are more common.
Matt: At quarter end, we analyzed <unk> portfolio in the context of current market spreads and believe there is limited repricing risks left within the existing loan book.
Matt: Third we realize a reduction in borrowing costs in the quarter bus from base rate decline and because of the funding cost benefits associated with the November 2020 for funding structure initiatives that we discussed on last quarter's earnings call.
Matt: We didn't get a full quarters benefit of those lower funding costs, we will get that in the March 31 quarter.
Matt: Fourth earnings continue to benefit from lower expenses due to GBT cst's structure.
Matt: And fifth earnings were negatively impacted in the quarter by a penny per share related to noncash interest expense associated with interest rate swaps on our fixed rate unsecured notes.
Matt: Adding back the penny per share impact on adjusted NII from noncash interest expense implies approximately <unk> 40 of adjusted NII per share.
Matt: Let me summarize portfolio activity and credit quality in the quarter.
Matt: Gross originations were $1 two up from last quarter as we thought to continue to increase leverage post merger.
Matt: After factoring in repayments and unfunded commitments associated with originations.
Matt: Net funds increased by $450 million sequentially.
Matt: This represented a net portfolio growth of approximately five 5% quarter over quarter <unk>.
Matt: <unk> did not receive the full benefit of the earnings power of this portfolio growth because a lot of the growth was back end weighted.
Matt: Last quarter I said, the lending environment was getting more borrower friendly across all credit markets. This continued in the December 31st quarter, especially in the large markets segment, where we saw more spread compression looser deal documentation and higher leverage.
Matt: Despite this golub capital's originations thats in calendar Q4 continued to depict our conservative.
Matt: One our selectivity rate of less than 4% to a repeat borrower percentage in excess of 70%.
Matt: <unk> gala back that as the lead or sole book runner and 88% of our transactions.
Matt: For our average Ltvs at the time of origination has generally been in the mid 30% to mid 40% range.
Matt: And five given the risk adjusted pricing dynamics, we see across the entire middle market. We are choosing to primarily play in the core middle market <unk>.
Matt: Median EBITDA for our calendar Q4, 2024 originations was $53 million we.
Matt: We believe this is a nice differentiator for gala versus many of our peers solely focused on the large borrower market.
Credit statistics improved quarter over quarter.
Matt: Investments in our ratings category, four and five increase to nearly 90% of the portfolio at fair value as of December 31, 2024 from approximately 87% the prior quarter.
Matt: For context this marks the highest combined level.
Matt: Four and five rated investments at GBT.
Matt: Since the September 2022 quarter.
Matt: Investments in rating category three declined from 11, 6% of the portfolio at fair value as of September 32024 to eight 8%.
Matt: And investments in rating categories, one and two remain very low representing just one 3% of the total portfolio at fair value.
Matt: As a percentage of total investments at fair value non accrual investments declined from a very low one 2% at September 32024 to just 50 basis points the lowest level at GBT since 2019.
Matt: In the quarter the number of nonaccrual investments decreased to nine following the restructuring of three former nonaccrual investments.
Matt: Continuing on slide four let me briefly summarize distributions paid in certain balance sheet changes in the quarter.
Matt: Total distributions paid in the quarter were <unk> 48 per share.
Matt: This included one the quarterly base distribution of <unk> 39 per share to <unk> <unk> per share quarterly variable supplemental distribution that we declared in November 2024, and finally the final five cent per share special distribution declared in June 2024 in conjunction with the <unk>.
Matt: Three merger close.
Matt: NAV per share decreased by <unk> on a sequential basis to $15 13.
Matt: Similarly, because of distributions paid including the special distribution exceeded earnings.
Matt: Net debt to equity increased quarter over quarter to $1 109 terms. This reflects leverage net of available cash and cash crap that debt securitizations for the purposes of paying down principal outstanding notes.
Matt: Over the last quarter the increase in net leverage largely happened in the last few weeks of the 12 31 for <unk>.
Matt: <unk> average net leverage during the quarter was just 114 turns as a result, we expect <unk> to recognize the full run rate profitability benefit of its larger investment portfolio next quarter. Further we expect <unk> to maintain average net leverage near our current target of 1.15 turns.
In November 2024, we executed a series of debt funding related transactions, we expect to drive down <unk> weighted average cost of debt, including a $2 $2 billion <unk> term debt securitization with AAA notes priced at <unk>, plus 158 basis points.
Matt: In conjunction with the CLO pricing, we redeemed some higher cost debt securitizations and debt facilities.
Matt: We expect to recognize the full run rate profitability benefit from these transactions in the March 31, 2025 quarter, which we believe will add incremental adjusted NII that we think will be a valuable for profitability cushion to the extent that we get further base rate or investment spread reductions.
Matt: There are several other drivers of higher profits that we are working on including further borrowing cost optimization as we look across our existing funding structure.
Matt: <unk> was upgraded by Moody's this quarter to <unk> two rating with a stable outlook, which we believe enhances our ability to issue low cost unsecured debt.
Matt: Portfolio rotation, we believe the successful monetization of certain non earning equity investments and low yielding loans associated with prior restructured names with the subsequent redeployment of those proceeds into new core middle market originations could generate incremental NII.
Matt: I'll include the obvious caveat that we have work to do to successfully resolve these names and it won't all happen overnight, but we have the skills and resources to do this.
Matt: Let's turn to distributions declared in the quarter.
Matt: The board declared a regular quarterly distribution of <unk> 39 per share representing an annualized dividend yield of 10, 3% based on <unk> NAV per share as of December 31, 2024.
Matt: Adjusted NII per share adjusted for the one <unk> per share impact from noncash interest expense related to interest rate swaps continues to provide a comfortable cushion above our regular quarterly distribution of <unk>.
Matt: Abiding us distribution coverage of 103%.
Matt: We expect the profitability drivers I discussed earlier to provide incremental cushion going forward.
Matt: Typically I skipped slide five but I want to cover it this quarter as I do think some perspective on <unk> quarter over quarter profitability would be helpful. Since we've had some moving pieces. These last couple of quarters.
Matt: In the 932024 quarter GBC generated 47 of adjusted NII per share, which is shown on slide five.
Matt: What you don't see on the page is that the 47 included a positive benefit.
Matt: <unk> per share from the noncash impacts from our interest rate swaps, which we discussed last quarter.
Matt: It also included a <unk> <unk> per share partial waiver of the income incentive fee.
Matt: Adjusting for those two items <unk> 932024, adjusted NII was <unk> 41 per share.
Matt: This quarter as I mentioned <unk> generated <unk> 40 of adjusted NII after eliminating the noncash impact from the interest rate swaps I mentioned earlier.
Matt: There was not an income incentive fee waiver this quarter.
Matt: So on an apples to apples basis G. BDC side modest decrease in adjusted NII quarter over quarter from 41 to <unk> 40.
We think this is a solid result, given the base rate and spread movements during the quarter.
Matt: So how was <unk> able to minimize the reduction to adjusted NII quarter over quarter, given the headwinds on the rate side first.
81% of its liabilities are floating rate so our borrowing costs benefited from sofa decrease we have meaningfully reduced <unk> asset sensitivity over the past year and we've now seen the benefits as base rates decreased when do you think <unk> is an outlier in the sector and is better positioned than most for a neutral.
Matt: <unk> base rate environment.
Matt: Second GBC modestly increased financial leverage and third <unk>, leading fee structure structurally creates a higher return buffer.
Matt: I'm going to turn it over to Chris now to continue our presentation.
Chris Erickson: Thanks, Matt.
Chris Erickson: Turning to slide seven you can see how the earnings drivers, Matt just described and excess distributions paid in the quarter translated into achieving six December 31, 2024, NAV per share of $15 13.
Chris Erickson: Adjusted NII per share of <unk> 39 per share was below the <unk> 48 per share of aggregate distributions paid out during the quarter net.
Chris Erickson: Net realized and unrealized gains or <unk> <unk> per share.
Chris Erickson: Together these results drove a net asset value per share decreased to $15 13.
Chris Erickson: Down <unk> <unk> per share from the prior quarter.
Chris Erickson: If we turn to slide 10, which details our origination activity for the quarter.
Chris Erickson: Net funds quarter over quarter increased by $450 million, representing a five 5% increase in total portfolio size versus September 32024.
Chris Erickson: Looking at the bottom of the slide the weighted average rate on new investments was nine 4%.
Chris Erickson: <unk> debt repaid in the quarter were at a weighted average rate of 11, 3% and as David and Matt described at the outset. This contributed to a lower investment yield on the portfolio from prior quarters.
Chris Erickson: 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 87% of the portfolio at fair value.
Chris Erickson: And slide 12 shows that Gbc's portfolio remains highly diversified by portfolio company with an average investment size of approximately 30 basis points.
Chris Erickson: Vincent with prior quarters. Additionally, our largest borrower represents just one 5% of the debt investment portfolio and our top 10 largest borrowers represent below 13% of the portfolio.
Chris Erickson: We are big believers in modulating credit risk through position size, which we believe has served <unk> well in previous credit cycles.
Chris Erickson: As of December 31, 2024, 92% 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.
Chris Erickson: The economic analysis on slide 13 highlights the drivers of the change in <unk> net investment spread to 5%, let's walk through this slide in detail.
Chris Erickson: We'll 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.
Chris Erickson: <unk> investment income yield fell 80 basis points sequentially to 11, 2% and as Matt highlighted this was predominantly the result of a 99% floating rate investment portfolio re indexing in the quarter to lower three months and one month sulfur reference rates and to a much lesser extent lower weighted average.
Chris Erickson: Fred on debt investments in the portfolio, which was driven via net originations at lower spreads and some repricing activity in the existing portfolio.
Chris Erickson: Our cost of debt the Teal line decreased 60 basis points to six 2%, reflecting our 81% floating rate debt funding structure as.
Chris Erickson: As Matt described earlier, we expect further improvement in <unk> weighted average cost of debt next quarter as we see a full quarter impact from the transactions we executed in November and December 2024.
Speaker Change: Net net our weighted average net investment spread the gold line decreased 20 basis points sequentially to 5% I'll turn the floor back over to Matt now.
Matt: Thanks, Chris let's move on to slides 14, and 15 and take a closer look at the improving credit quality metrics on.
Matt: On slide 14, you can see the non accruals decreased by 70 basis points to 0.5% of total investments at fair value the lowest level since September 2019.
Matt: Slide 15 shows the trend in internal performance ratings are highlighted earlier of note investments rated three seasonally in a borrower could be out of compliance with debt covenants decreased materially to just eight 8% of the total investment portfolio.
Matt: 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 just one 3% of the portfolio at fair value.
Matt: 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.
Matt: I'll wrap up this section by reviewing <unk> liquidity and investment capacity on slides 20 through 22.
Matt: First let's focus on the key takeaways on slide 22, our weighted average cost of debt. This quarter was six 2% materially down from the prior quarter, reflecting the debt funding structure transactions that we executed.
Matt: 44% of our debt funding is in the form of unsecured notes with no upcoming maturities in 2025, and well ladder through 2020.
Matt: The 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 that out for floating rate exposure.
Matt: The remainder of Gpt's total debt funding is floating rate or swapped to floating again this dynamic contributes to GBT ceding less asset sensitive than it was a year ago.
Matt: Following quarter end Moodys upgraded <unk> corporate credit rating and senior unsecured shelf rating <unk> two stable from <unk> three positive.
Matt: With this upgrade GBT sees one of just three publicly traded Bdcs split both the BW late two from Moody's and a triple B from Fitch, we encourage investors to read the Moodys report, but we believe the upgrade was the result of the collection of <unk> differentiating qualities that we consistently discussed on our earnings call.
Matt: Namely our highly diverse and first lien oriented portfolio.
Matt: Liquidity and capital management, and a track record of stellar that's Moody's work not ours credit performance extending back to our IPO in 2010.
Matt: Overall, our liquidity position remains strong and we ended the quarter with approximately $1 1 billion of liquidity from unrestricted cash undrawn commitments that are meaningfully over collateralized corporate revolver and the unused unsecured revolver provided by our advisor.
Matt: Now I'll hand, it back over to David for closing remarks, and Q&A David Thanks.
David Golub: Thanks, Matt.
David Golub: <unk> had a strong first quarter and a strong start to the fiscal year I wanted to touch briefly on our outlook before we open the line for questions.
David Golub: So one the market dynamics, we talked a lot about in 2024 was spread compression we saw spread compression across all credit markets from investment grade to high yield.
David Golub: The broadly syndicated market and enter our markets in our markets. This impacted both new deals and some existing deals that saw repricing amendments spread compression has been much more pronounced in the broadly syndicated market than it has been in the private credit market within private credit its been more pronounced in the large si.
David Golub: Of the market and then in the core middle market, but those segments of the credit market has been completely immune.
David Golub: We look beyond spread compression and look through a wider lens across all risk assets markets today, our pricing and considerable optimism about the business climate.
David Golub: I think that raises an interesting question is is that.
David Golub: Optimism justified.
David Golub: If you've listened to our earnings calls before you probably can predict and I'm not going to make some bold forecast our mantras very consistently to stay humble about making macro predictions, because we're not macroeconomists and because consensus expectations generally been so wrong. So consistently over the course of the last couple of.
David Golub: Years.
David Golub: I do want to offer a few observations first.
David Golub: First observation.
David Golub: <unk> economy is doing quite well.
David Golub: <unk> capital Middle market report highlighted how this last quarter was the ninth in a row, showing very solid revenue and EBIT growth.
David Golub: Do not see signs of an impending slowdown in our data.
David Golub: Our second observation.
David Golub: Private equity sponsors who are voting with their wallets transaction volume continue to pick up in calendar Q4 in.
David Golub: I think it seems likely to increase further through 2025 dealmakers seemed to be more excited about deregulation and they are concerned about tariffs.
David Golub: Both of these observations are consistent with the optimistic view.
David Golub: Let's look at the other side at the same time that they're these reasons for optimism there also clear signs of elevated credit stress across the market.
David Golub: In the BSL market. The <unk> publishes data about defaults adjusted for liability management transactions I think thats the right way to look at it and their data shows that we're now looking at a rate of about four 7% for the 12 months ended December 31.
David Golub: More than double the 20 year average little hard to get apples to apples historical comparisons now that we've entered the era of liability management transactions, but I think that's about right. It's about double <unk>.
David Golub: Signs of rising credit stress also show up in reports from the major rating agencies, including S&P and Fitch.
David Golub: And from major law firms that are covering restructurings and bankruptcies.
David Golub: So there are cross currents in the market that werent, both optimism and concern.
David Golub: We think this is the type of environment that historically has separated lenders with strong businesses lenders with real competitive advantages.
David Golub: From the new lease that the firms that lack the characteristics to be successful long term players.
David Golub: Not surprising to us that in the last five quarters, we've seen increased dispersion in performance among BDC managers and we expect to see more of this in the coming period.
David Golub: We believe golub capital and GBC will once again beyond the good side of this performance dispersion spectrum, and we'll be delivering more good boring results for our shareholders.
David Golub: With that let's open the line for questions.
Speaker Change: Thank you we will now begin the question and answer session. If you would like to ask a question. Please press star one on your telephone keypad to raise your hand and joined the queue. If you would like to withdraw your question simply press Star one again.
Your first question today comes from the line of Ray Cheesman from Anfield capital. Your line is open.
Ray Cheesman: Good morning, David and congratulations on the steering the ship very well during this changing time.
Ray Cheesman: My questions. This morning are the dollar has rallied strongly as the new administration has come in regulations have declined or being attempted to be reduced and tariffs of course, they go on and off seemingly once in the morning. Once in the evening and we ended up with only one of the three candidates.
Ray Cheesman: Remaining at the end of what it looks like at the end of this week I'm wondering how in this fishbowl of craziness.
Ray Cheesman: How do you think the portfolio will respond I believe you almost exclusively.
Ray Cheesman: A domestically focused owner of.
Ray Cheesman: Manufacturing and service entities, so I'm guessing, it's not much but I'm very interested in your answer.
Ray Cheesman: Yes, we certainly live in interesting times right now thank you for the question.
Ray Cheesman: A couple of observations first observation, we are relatively insulated from movements in foreign exchange rates and movements in tariffs because of the construction of the portfolio. As you mentioned most of the portfolio is U S.
Ray Cheesman: Borrowers U S companies that are serving other U S companies, a very large proportion of the base is.
Ray Cheesman: These are our borrowers as service companies.
Ray Cheesman: Including including software providers we.
Ray Cheesman: We do have.
Ray Cheesman: A significant portion of the portfolio minority, but significant portion in Europe, but these are not European companies doing business in the U S. So much as their European companies that are that are doing business with other European companies.
Ray Cheesman: We're underweight in.
Ray Cheesman: In manufacturing, we are underweight in areas that have commodity exposure.
Ray Cheesman: And looking at the question of tariff vulnerability.
Ray Cheesman: And for obvious reasons, everyone since the election ought to be planning for the possibility of tariffs one of the good news elements of our business as we work with very smart private equity sponsors and very talented management teams. They are all over this issue as well based on the work that we've done.
Ray Cheesman: So far I don't think we have a meaningful.
Ray Cheesman: A meaningful vulnerability.
Ray Cheesman: Our first order basis to tariffs, but I wanted to sound a note of caution because I don't think anyone knows what the second third fourth order impacts could be.
Trade war, probably isn't going to go well for anybody.
Ray Cheesman: So this is a period where in my judgment caution.
Ray Cheesman: Is best looking for resilience strategies that are going to do well across a variety of different macroeconomic scenarios.
Ray Cheesman: And those are familiar mantras for Golub capital.
Ray Cheesman: It doesn't require a pivot for us in our approach.
Speaker Change: Your next question comes from the line of Finian O'shea from Wells Fargo. Your line is open.
Finian O'shea: Hey, Ron good morning.
Finian O'shea: And that really continuing there.
Finian O'shea: Your closing remarks, and a discussion.
Speaker Change: Sorry could you hear me well ahead speaker on better now.
Finian O'shea: Great. Thanks.
Speaker Change: I just wanted to continue on the loss environment that David you hit on towards the end, but for for direct lending can you talk about what how this has changed.
Finian O'shea: Over time and.
Finian O'shea: Importantly, today with the level of competition the degradation of terms like leverage covenants, and so forth and what that means for.
The expected.
Finian O'shea: Loss rate and in the direct lending asset class, we can see that.
Finian O'shea: Obviously as you pointed out it goes it's going higher and in the leveraged finance markets. Those of course are much more transparent we see it in real time and it is much slower to play out.
Finian O'shea: In private so seeing if you had any.
Speaker Change: Just high level Guy.
Speaker Change: Good guide for Us there thanks.
Sure. So in today's environment, we have an interesting.
Speaker Change: Real time experiment.
Speaker Change: In looking at.
Speaker Change: How credit stress is showing up in the more liquid broadly syndicated loan market and how it's showing up in private credit markets and I think it's it's very instructive to look at both at the same time.
Speaker Change: One difference is Europe.
Speaker Change: In that there is.
Speaker Change: More information about what's going on in the broadly syndicated market.
We're seeing the signals of credit stress in the form of higher default rates higher levels of liability management transactions more triple C credits.
Speaker Change: One interesting element of the difference is the second piece, we're seeing liability management transactions, we really arent seeing those transactions in the private credit market.
Speaker Change: Liability management transactions are proving bad for recoveries in the broadly syndicated market.
Speaker Change: I think they are largely a transfer of value from.
Speaker Change: Lenders to lawyers and restructuring advisors do they certainly arent working for private equity firms, who have been very few successful turnarounds of companies that have undertaken liability management transactions virtually all of them end up going through restructurings. They just.
Speaker Change: Delay the inevitable.
Speaker Change: He ended up costing creditors significant amounts through that delay.
In the private market.
Speaker Change: We are seeing in visa more credit stress its not broad it's a tail and it's not everywhere, it's more concentrated in the portfolios of some players than in others.
Speaker Change: One of the characteristics that we're seeing.
Speaker Change: The private credit market.
Speaker Change: Similar to the broadly syndicated market is that when companies hit real difficulties, it's often because of liquidity issues as opposed to because of covenant issues and thats, particularly true in the larger end of the market.
Speaker Change: That means that by the time.
Speaker Change: Lenders get into the picture and are able to take over control of situations.
Speaker Change: Company is.
Speaker Change: Has had time to detour very significantly those can be harder turnarounds too.
Speaker Change: One of the reasons I strongly prefer the core middle market is that we tend to be either sole lender and we tend to be one of a small number of lenders. We tend to have stronger documentation terms and we're able to address problems in our borrowers much earlier.
Speaker Change: So I think what we're going to see in the coming period is it continuing playing out of this tale of companies that is less good at at addressing higher interest rates has less pricing power hasnt grown over the course of the last couple of years.
Speaker Change: We're going to see the metal.
Speaker Change: A number of private credit players, who haven't been tested in prior cycles.
Speaker Change: And two things are going to be tested one is how good are they at underwriting and the second is how good are they at managing in turning around Underperformers and both of those are critical skills for successful private credit players over time.
Speaker Change: I think we will fare very well in that evaluation.
Speaker Change: Great.
Speaker Change: Helpful color.
Speaker Change: I guess, just another high level follow up on the platform.
Speaker Change: You talked about your maybe the closing remarks as well some of the <unk>.
Speaker Change: A lot of the newer players can you talk about how that is.
Speaker Change: Maybe changing golub pushing you.
To grow faster as I think all of us building out more reach into into insurance and retail like Thats, where a lot of the capital is being raised now is the.
Speaker Change: Is the sort of.
Speaker Change: Or how much faster if any is the sort of golub train running on on fundraising and.
Speaker Change: Origination in response to today's competition. Thanks.
Speaker Change: So we're not running faster because competition in fact, we don't.
Speaker Change: <unk> run our strategy in response to how other people are playing our approach to growing golub capital has for years been to.
Speaker Change: Focus.
Speaker Change: <unk> on building competitive advantages in a very narrow set of activities. So we are a specialist in private credit and in sponsor finance in an era of multi strategy alternative asset managers, and we're not changing our stripes on that front.
Speaker Change: A couple of years ago, when a number of our competitive rather and saw an opportunity to grow a lot in the large private credit large markets competing with the broadly syndicated market. We chose to turn left and recommit ourselves to the core middle market and I'm very happy that we have.
Speaker Change: Made that decision we are now.
One of the largest one of the dominant players in the core middle market and I think thats a better business. So we continue to.
Speaker Change: Speak to our own drums in it's a different drum from others in the industry and we think we think we think it's the right drug for us.
Speaker Change: Awesome that's helpful. Thanks, so much.
Speaker Change: Again, if you'd like to ask a question. Please press star one on your telephone Keypad. Your next question comes from the line of Robert Dodd from Raymond James Your line is open.
Robert Dodd: Hi, Good morning, Good morning, everyone couple of questions on the liability side and then the actual trial on the liability side.
Speaker Change: You gave in the presentation the weighted average cost effectively in the fourth.
Speaker Change: December quarter were $6, two and it hasnt benefitted from Dolby activity, which you did their work during the quarter. So can you give us a scale right.
How what's.
Speaker Change: What's the scale of the relative cost savings or savings.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: Once it's fully effective for full quarter, how significant is that cost saving on the life side.
Speaker Change: So really glad you asked the question Robert because I think how firms manage the right hand side of the balance sheet is just so critically important to long term success and we've got a great team that focuses on that.
Speaker Change: I'm going to hand, the mic to Matt Beaton described in more detail the steps that we've undertaken in the last few months to take advantage of reduced spreads in liability markets and how thats going to be impacting our profitability.
Speaker Change: Ability on a go forward basis.
Robert Dodd: Hi, Robert Hi, how are you.
Speaker Change: It's a good question.
Robert Dodd: The easiest way to think about.
Robert Dodd: Is look at page 22 of our Investor presentation, which shows our debt stack.
Robert Dodd: The benefits of the funding structure initiatives, which we've talked a lot about.
Robert Dodd: Right issuing the inexpensive CLO.
Robert Dodd: Taking out higher cost debt facilities didn't really take effect until later in the quarter. So we closed the $2 2 billion CLO debt had a blended interest expenses sofa, plus 158 basis points on November 18th we took out at that time some of the more expensive legacy debt.
Robert Dodd: <unk> that we had but we Werent for example, able to call. The GBC three 2022, that's two securitization until December 16th and recall that was $225 million of third party notes priced at so for US 260 basis points. So so that six 2% weighted average cost of debt that you see on that.
Robert Dodd: Slide it reflects again the weighted average cost over the entire quarter, which includes operating for a good chunk of the quarter with those higher cost legacy facilities.
Robert Dodd: If you.
Robert Dodd: If you look at where we are today, the easiest way to think about it would be the current in place weighted average cost of funds for JBT would be to apply a four 3% current silver base rates through that debt stack and apply the weighted average spread on the page two that which would give you around five 5% weighted.
Robert Dodd: Average cost of debt today.
Robert Dodd: That's in place that's where it is today one other point that I would mention is.
Robert Dodd: There is obviously always a lot of moving parts. When you think about the right and left side of the balance sheet here.
Robert Dodd: For the Clo's, both of which comprise almost $1 billion six of outstanding par those did not reset their reference base rates lower until post quarter end. So they reset in January so again, that's where you start to see some of the big differences and again my simple math there doesn't include amortizing fees into it but that's it.
Robert Dodd: The way to think about it.
Robert Dodd: Got it got it very very helpful. Thank you I'll now another one follows up on that on the Jpmorgan facility I mean.
Robert Dodd: It's a good facility attractive pricing.
Robert Dodd: It's novo facilities that we've constructed when you have the credit rating with you today.
Robert Dodd: So what are the what do you think is the potential.
Robert Dodd: Can do on on that facility I mean, obviously, you've got <unk>.
Robert Dodd: Many years to run.
Robert Dodd: Just want to let it sit but at the same time it was up.
Robert Dodd: And are you a triple b minus one structured that another triple B flat equivalent.
Yes, we do think that as another good question. There is there is room for improvement there as we look at what some of our peers has done in market.
Robert Dodd: You can look at some of our close peers.
Robert Dodd: How they have amended their existing facilities and again when we price when we put that facility in place we had best in class pricing on that facility.
Robert Dodd: We obviously have very good relationships on the bank side, we've got a very long very successful track record and we can leverage that so you should you should definitely assume that we're evaluating that very very closely that if we're successful there would be some nice upside to the to the current plus 175 basis point spread that we have.
Robert Dodd: Today.
Speaker Change: Got it. Thank you if I can flip to the asset side I mean on the note.
Speaker Change: The tail, which I think you've addressed very well within that but on the.
Speaker Change: I think it was 90% on that pedigree top performing performing above expectations.
Speaker Change: <unk>.
Speaker Change: Does that does that create the market is getting more active does it create a risk to.
Speaker Change: To that list.
Speaker Change: Those assets that are performing above expectations become acquisition targets.
Speaker Change: In a more.
Speaker Change: <unk> market and what's what's the risk that you see significant portfolio churn.
Speaker Change: As we go through 'twenty five.
Speaker Change: We seem to think in the fourth quarter bore activity just continues to them.
Speaker Change: So it's a great question, if you look at overall levels of.
Speaker Change: Portfolio turnover in the last couple of years, they've been below normal levels, Robert and Thats.
Speaker Change: For the obvious reason that M&A activity.
Speaker Change: May June of 2022 in response to the interest rate hikes M&A activity fell very significantly so.
Speaker Change: Logic would tell you if our loans have a typical five or six year maturity and the usual average life with one of our loans is three years and we've gone through a period when M&A activity and repayments have been lighter than usual, but at some point that's going to.
Speaker Change: Shifting into an environment, where M&A activity and portfolio turnover is going to be higher than normal.
Speaker Change: The good news is that when that happens I think there will also be.
Speaker Change: A lot of activity available for us in the new loan category. So my expectation would be the two things would happen at the same time, we'd see both higher new originations and higher repayments and I think that's the pattern that we've seen in the past when we've seen this kind of pattern.
Speaker Change: That will make that will make for a period of higher portfolio turnover.
Speaker Change: Manageable.
Speaker Change: Just one.
Speaker Change: Add on question to that do you think.
Speaker Change: Do you think if that would there be a change in the potential mix between large and small in core middle market. If the activity picks up could you.
Speaker Change: See the churn, but you you might have.
Speaker Change: Correct, correct or I am happy to shift more towards larger transactions, if thats, where all the activity is continuing do you think.
Speaker Change: Recurring do you think there is a.
The potential for a mix shift there.
Speaker Change: Okay.
Speaker Change: So one of the great strengths of the platform Robert is that we participate in transactions that range from quite small $20 million EBIT to companies.
Speaker Change: Two large companies to companies that have hundreds of millions of dollars in EBITDA and to whom we have.
Speaker Change: Across the platform multibillion dollar loans. So we have an ability to move our origination to where we see the most attractive opportunities.
Matt Beaton: I will tell you to reiterate something that Matt said.
Speaker Change: Our.
Speaker Change: Comments at the start of this call we have seen the most attractive opportunities in the recent period in the core middle market and my expectation is that that's going to continue.
Speaker Change: Large measure because that's where our competitive advantages are strongest that's where we are a dominant player that's where our relationships and our incumbencies and our expertise are particularly valuable.
Speaker Change: Having said that I think being able to play the breadth of companies across different size ranges gives us the capacity to adjust if we're in an environment along the lines of what Youre, describing if we're in an environment in which.
Most of the new M&A activity is in larger companies I don't think that's what's going to happen I think when we start to see more activity, it's going to it's going to be across the spectrum. In fact, it may even be disproportionately middle market.
Speaker Change: But if it happened the way you described I think that'd be fine.
Speaker Change: Okay. Thank you.
Speaker Change: Our next question comes from the line of Ray Cheesman from Anfield Capital. Your line is open.
Speaker Change: David Thanks for the follow up I was wondering software has been a very.
Speaker Change: Attractive place for Bdcs, including yours to put money to work and earn great returns.
Speaker Change: How do you feel about the category, possibly be impacted going forward as artificial intelligence adjusts not only the hardware side with the Nvidia story, but but now it's getting into software with deep sea supposedly doing a lot more with software than its ever done with hardware. So I was just wondering do you see the category.
Speaker Change: Possibly being a different kind of bucket going forward.
So youre right that software has been a very favorable industry for Golub capital. We were very early in identifying software is being an industry with a lot of good credits almost 15 years ago now when we started being a large software lender.
Speaker Change: But a couple of comments one is <unk>.
Speaker Change: <unk> never been a no brainer, they're good software companies and there are bad software companies.
Speaker Change: We've learned how to be a very good software lender not all lenders are good software lenders. It takes a lot of skill.
Speaker Change: Skill and expertise to be able to understand the credit characteristics and strategic positioning of different a different.
Speaker Change: Suffer software companies on a go forward basis I think that.
Speaker Change: That act of being able to distinguish between good good software companies and less good ones is going to be even more important and harder and one of the reasons for that is AI. Some software companies are going to be able to use AI as a means of enhancing.
Speaker Change: The value proposition for their clients and some other software companies are going to see situations arise where AI challenges there.
Speaker Change: Historical and competencies. So so I think this is.
Speaker Change: Very important area for firms to have really strong internal expertise in order to evaluate and distinguish between.
Speaker Change: The firms that are going to be winners in the firms that are going to be losers as a consequence of AI.
Speaker Change: The only thing that's going to distinguish winners and losers in software there are many many other.
Speaker Change: Factors that play as well and I think I think firms that are good at software lending are going to need to be very good at evaluating those other factors as well.
David Golub: And that concludes our question and answer session I will now turn the call back over to David Golla for closing remarks.
David Golub: Well. Thank you all for joining us today I appreciate your attention and your time as always if you have further questions or issues that we didn't cover today. Please feel free to reach out and we look forward to talking to you next quarter.
Speaker Change: This concludes today's conference call. Thank you for your participation you may now disconnect.
Speaker Change: Yes.