Golub Capital BDC Q1 2026 Golub Capital BDC Inc Earnings Call | AllMind AI Earnings | AllMind AI
Q1 2026 Golub Capital BDC Inc Earnings Call
Speaker #1: Hello, everyone, and welcome to
Operator: Hello everyone, and welcome to GBDC's earnings call for the fiscal quarter ended 31 December 2025. 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. 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. 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 and Presentations link.
Operator: Hello everyone, and welcome to GBDC's earnings call for the fiscal quarter ended 31 December 2025. 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. 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. 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 and Presentations link.
Speaker #1: fiscal quarter ended December 31, 2025. Before we begin, GBDC's earnings call for the 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 now.
Speaker #1: historical facts made during this call may 1995. Statements other than statements of guarantees of future performance or results in involving a number of risks and may differ materially from those in the forward-looking statements as a result of a number of litigation reform act of from time to time in GBDC's factors, including those described SEC filings.
Speaker #1: For materials call, please visit the investor resources tab on the homepage of our website, which is www.golubcapitalbdc.com, and click on the events and presentations we intend to refer to on today's earnings resources section.
Speaker #1: Our earnings release is also everybody, and thanks for joining us today.
Operator: 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'm pleased to turn the call over to David Golub, Chief Executive Officer of GBDC.
Operator: 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'm pleased to turn the call over to David Golub, Chief Executive Officer of GBDC.
Speaker #1: As a reminder, that, I'm pleased to turn the call over to link. available on our website in the investor David Golub, Chief Executive Officer
Speaker #1: of GBDC. Hello,
David Golub: Hello everybody, and thanks for joining us today. I'm joined by Tim Topicz, our Chief Operating Officer, and Chris Ericson, our Chief Financial Officer. For those of you who are new to GBDC, our investment strategy is focused on providing first-lien senior-secured loans to healthy, resilient middle-market companies that are backed by strong and partnership-oriented private equity sponsors. Yesterday, we issued our earnings press release for the fiscal quarter ended December 31, and we posted an earnings presentation on our website. We'll be referring to this presentation during the call today. I'm going to start, as I usually do, with headlines and a summary of performance for the quarter. Then Tim and Chris are going to walk you through our operating and financial performance for the quarter in detail. And finally, I'll wrap up with some observations on current market conditions and our outlook for the coming period.
David Golub: Hello everybody, and thanks for joining us today. I'm joined by Tim Topicz, our Chief Operating Officer, and Chris Ericson, our Chief Financial Officer. For those of you who are new to GBDC, our investment strategy is focused on providing first-lien senior-secured loans to healthy, resilient middle-market companies that are backed by strong and partnership-oriented private equity sponsors. Yesterday, we issued our earnings press release for the fiscal quarter ended December 31, and we posted an earnings presentation on our website. We'll be referring to this presentation during the call today. I'm going to start, as I usually do, with headlines and a summary of performance for the quarter. Then Tim and Chris are going to walk you through our operating and financial performance for the quarter in detail. And finally, I'll wrap up with some observations on current market conditions and our outlook for the coming period.
Speaker #2: Operating Officer, and Chris Erickson, our Chief Financial Officer. GBDC, our investment strategy is focused on providing first-line senior secured loans to healthy, resilient For those of you who are new to middle-market companies that are backed by strong and partnership-oriented private equity sponsors.
Speaker #2: Yesterday, we issued our earnings press release for the fiscal quarter ended December 31, and we posted the earnings presentation on our website. We'll be referring to this presentation during the call today.
Speaker #2: I'm going to start, as I usually do, with headlines and a summary of performance for the quarter. Then Tim and Chris are going to walk you through our operating and financial performance for the quarter in detail.
Speaker #2: And finally, I'll wrap up with some observations on current market first headline is that despite four continuing industry headwinds, GBDC had an okay quarter, not great, but solid given the environment.
David Golub: Let's start with three headlines. The first headline is that despite four continuing industry headwinds, GBDC had an okay quarter. Not great, but solid given the environment. Adjusted NII per share was $0.38, which translates to an adjusted NII ROE of 10.2%. Adjusted net income per share was $0.25 for an adjusted ROE of 6.7%. And GBDC paid a $0.39 per share distribution. So what are these headwinds? I described all four last quarter. First, lower base rates. Second, tighter spreads, not just in our market, but across almost every credit asset class other than subprime. Third, muted M&A activity, although the second half of calendar 2025 improved relative to the first half. And fourth, continued high levels of credit stress. The second headline is that we expect these headwinds to continue for some time, and we're planning for a challenging 2026.
David Golub: Let's start with three headlines. The first headline is that despite four continuing industry headwinds, GBDC had an okay quarter. Not great, but solid given the environment. Adjusted NII per share was $0.38, which translates to an adjusted NII ROE of 10.2%. Adjusted net income per share was $0.25 for an adjusted ROE of 6.7%. And GBDC paid a $0.39 per share distribution. So what are these headwinds? I described all four last quarter. First, lower base rates. Second, tighter spreads, not just in our market, but across almost every credit asset class other than subprime. Third, muted M&A activity, although the second half of calendar 2025 improved relative to the first half. And fourth, continued high levels of credit stress. The second headline is that we expect these headwinds to continue for some time, and we're planning for a challenging 2026.
Speaker #2: Adjusted NII per share was 38 cents, which translates to an adjusted NII ROE of 10.2%. Adjusted net income per share was 25 cents, for an adjusted ROE of 6.7%.
Speaker #2: And GBDC paid a 39 cent per share distribution. So what are these headwinds? I described all four last quarter. First, lower base rates. Second, tighter spreads, not just in our market, but across almost every credit asset class other than subprime.
Speaker #2: Third, muted M&A activity, although the second half of calendar '25 improved relative to the first half. And fourth, continued high levels of credit stress.
Speaker #2: The second headline is that we expect these headwinds to continue for some time, and we're planning for a challenging 2026. The third last quarter's call, is that our headline, consistent with our comments on board of directors revisited GBDC's dividend policy and after careful evaluation and in light of the headwinds I just described, the board decided to reset the company's quarterly base dividend to 33 cents per share or about 9% of NAV per share.
David Golub: The third headline, consistent with our comments on last quarter's call, is that our board of directors revisited GBDC's dividend policy. After careful evaluation and in light of the headwinds I just described, the board decided to reset the company's quarterly-based dividend to $0.33 per share, or about 9% of NAV per share. We also plan to maintain the quarterly variable supplemental dividend policy going forward. We believe this change is consistent with our four longstanding dividend priorities: maintaining a stable net asset value over time, minimizing excise taxes over time, adjusting our base distribution level infrequently, and paying as high a dividend yield on NAV as sustainable, consistent with those goals. Now I'll pass the call over to Tim Topicz to discuss operating performance in the quarter in more detail.
David Golub: The third headline, consistent with our comments on last quarter's call, is that our board of directors revisited GBDC's dividend policy. After careful evaluation and in light of the headwinds I just described, the board decided to reset the company's quarterly-based dividend to $0.33 per share, or about 9% of NAV per share. We also plan to maintain the quarterly variable supplemental dividend policy going forward. We believe this change is consistent with our four longstanding dividend priorities: maintaining a stable net asset value over time, minimizing excise taxes over time, adjusting our base distribution level infrequently, and paying as high a dividend yield on NAV as sustainable, consistent with those goals. Now I'll pass the call over to Tim Topicz to discuss operating performance in the quarter in more detail.
Speaker #2: We also plan to maintain the quarterly variable supplemental dividend policy going forward. We believe this change is consistent with our four long-standing dividend priorities: maintaining a stable net asset value over time, minimizing excise taxes over time, adjusting our base distribution infrequently, and paying as high a dividend yield on NAV as is sustainable, consistent with those goals.
Speaker #2: Now I'll pass the call over to Tim Topix to discuss operating performance in the quarter in more detail.
Speaker #3: Thanks, David. Let's begin on slide four. GBDC's $0.38 per share of adjusted net investment income and $0.25 per share of adjusted earnings were driven by four key factors this quarter.
Tim Topicz: Thanks, David. Let's begin on slide four. GBDC's $0.38 per share of adjusted net investment income and $0.25 per share of adjusted earnings were driven by four key factors this quarter. Let me walk through each of those in turn. First, overall credit performance generally remains solid. Approximately 89% of GBDC's investment portfolio at fair value remains in our highest performing internal rating categories. Investments on non-accrual status remain very low, at just 0.8% of the total investment portfolio at fair value. This level is well below that of our BDC peer industry average. And although adjusted net unrealized and realized losses increased to $0.13 per share, they were primarily related to fair value markdowns on a small tail of underperforming borrowers at GBDC, including $0.06 per share in markdowns on equity investments in these borrowers.
Tim Topicz: Thanks, David. Let's begin on slide four. GBDC's $0.38 per share of adjusted net investment income and $0.25 per share of adjusted earnings were driven by four key factors this quarter. Let me walk through each of those in turn. First, overall credit performance generally remains solid. Approximately 89% of GBDC's investment portfolio at fair value remains in our highest performing internal rating categories. Investments on non-accrual status remain very low, at just 0.8% of the total investment portfolio at fair value. This level is well below that of our BDC peer industry average. And although adjusted net unrealized and realized losses increased to $0.13 per share, they were primarily related to fair value markdowns on a small tail of underperforming borrowers at GBDC, including $0.06 per share in markdowns on equity investments in these borrowers.
Speaker #3: Let me walk through each of those in turn. First, overall credit performance generally remained solid. Approximately 89% of GBDC's investment portfolio at fair value remains in our categories.
Speaker #3: highest-performing internal rating Investments on not accrual status remained very low at just 0.8% of the total investment portfolio at fair value. This level is well below that of our BDC peer industry average.
Speaker #3: And although adjusted net unrealized and realized losses increased this $0.13 per share, they were primarily related to fair value markdowns on a small tail of underperforming borrowers at GBDC.
Speaker #3: Including 6 cents per share in markdowns on equity investments in these borrowers. The second key earnings driver, GBDC's investment income yield of 10% was down 40 basis points sequentially, mostly driven by lower base rates and, to a lesser across the extent, lower-weighted average spread portfolio.
Tim Topicz: The second key earnings driver, GBDC's investment income yield of 10%, was down 40 basis points sequentially, mostly driven by lower base rates and, to a lesser extent, lower weighted average spread across the portfolio. These negative headwinds were in part offset by the third key earnings driver, a continued decline in GBDC's borrowing costs, reflecting the impact of GBDC's predominantly floating-rate debt capital structure. And finally, GBDC's earnings continued to benefit from a market-leading fee structure and one of the lowest operating expense loads in the public BDC sector. Now shifting to investment activity. GBDC's investment portfolio decreased by a modest 1.5% quarter-over-quarter to $8.6 billion at fair value. We remained highly selective and conservative in our underwriting. We closed on just 3.1% of the deals we reviewed in the quarter, at a weighted average LTV of approximately 43%.
Tim Topicz: The second key earnings driver, GBDC's investment income yield of 10%, was down 40 basis points sequentially, mostly driven by lower base rates and, to a lesser extent, lower weighted average spread across the portfolio. These negative headwinds were in part offset by the third key earnings driver, a continued decline in GBDC's borrowing costs, reflecting the impact of GBDC's predominantly floating-rate debt capital structure. And finally, GBDC's earnings continued to benefit from a market-leading fee structure and one of the lowest operating expense loads in the public BDC sector. Now shifting to investment activity. GBDC's investment portfolio decreased by a modest 1.5% quarter-over-quarter to $8.6 billion at fair value. We remained highly selective and conservative in our underwriting. We closed on just 3.1% of the deals we reviewed in the quarter, at a weighted average LTV of approximately 43%.
Speaker #3: These negative headwinds were in part offset by the third key earnings driver, a continued decline in GBDC's borrowing costs. Reflecting the impact of GBDC's predominantly floating rate debt capital structure.
Speaker #3: And finally, GBDC's earnings continued to benefit from a market-leading fee structure. And one of the lowest operating expense loads in the public BDC sector.
Speaker #3: Now shifting to investment activity. GBDC's investment portfolio decreased by a modest 1.5% quarter-over-quarter to 8.6 billion at fair value. We remained highly selective and conservative in our underwriting.
Speaker #3: We closed on just 3.1% of the deals we were reviewed in the quarter, at a weighted average LTV of approximately 43%. We leaned on existing sponsor relationships and portfolio company incumbencies for approximately 60% of our origination volume, and made loans to 18 new borrowers.
Tim Topicz: We leaned on existing sponsor relationships and portfolio company incumbencies for approximately 60% of our origination volume and made loans to 18 new borrowers. We continued to leverage our scale-to-lead deals, acting as sole or lead lender in 96% of our transactions in the quarter. We continue to focus on the core middle market, which we believe continues to offer better risk-adjusted returns potential than the larger borrower market. The median portfolio company EBITDA for our originations in the quarter was $81 million. Continuing on slide 4, let me briefly summarize distributions paid and certain balance sheet changes in the quarter. Total distributions paid in the quarter were $0.39 per share. As David mentioned at the outset, our board of directors has updated the base distribution level to $0.33 per share.
Tim Topicz: We leaned on existing sponsor relationships and portfolio company incumbencies for approximately 60% of our origination volume and made loans to 18 new borrowers. We continued to leverage our scale-to-lead deals, acting as sole or lead lender in 96% of our transactions in the quarter. We continue to focus on the core middle market, which we believe continues to offer better risk-adjusted returns potential than the larger borrower market. The median portfolio company EBITDA for our originations in the quarter was $81 million. Continuing on slide 4, let me briefly summarize distributions paid and certain balance sheet changes in the quarter. Total distributions paid in the quarter were $0.39 per share. As David mentioned at the outset, our board of directors has updated the base distribution level to $0.33 per share.
Speaker #3: We continued to leverage our scale-to-lead deals, acting as sole or lead lender in 96% of our transactions in the quarter. And we continued to focus on the core middle market, which we believe continues to offer better risk-adjusted returns potential than the larger borrower market.
Speaker #3: portfolio company EBITDA for our originations in the The median quarter was 81 million. Continuing on slide four, let me briefly summarize distributions paid in certain balance sheet changes in the quarter.
Speaker #3: Total distributions paid in the quarter were $0.39 per share. As David mentioned at the outset, our board of directors has updated the base distribution level to $0.33 per share.
Speaker #3: And in addition, we'll evaluate on a quarterly basis a variable supplemental distribution that will seek to distribute 50% of the earnings in excess of 33 cents per share.
Tim Topicz: And in addition, we'll evaluate on a quarterly basis a variable supplemental distribution that will seek to distribute 50% of the earnings in excess of $0.33 per share. Continuing on with other balance sheet updates, net debt to equity remained stable quarter over quarter, ending at 1.23 times, within our targeted range of 0.85 to 1.25 times. During the quarter, we continued our opportunistic repurchasing of GBDC shares on an accretive basis. Total shares repurchased in calendar year 2025 grew to 5.5 million shares, or $76.5 million in aggregate value. In the quarter, these capital management transactions resulted in one penny per share of accretion to net asset value. I'm going to turn it over to Chris now to take us through our financial results in detail.
Tim Topicz: And in addition, we'll evaluate on a quarterly basis a variable supplemental distribution that will seek to distribute 50% of the earnings in excess of $0.33 per share. Continuing on with other balance sheet updates, net debt to equity remained stable quarter over quarter, ending at 1.23 times, within our targeted range of 0.85 to 1.25 times. During the quarter, we continued our opportunistic repurchasing of GBDC shares on an accretive basis. Total shares repurchased in calendar year 2025 grew to 5.5 million shares, or $76.5 million in aggregate value. In the quarter, these capital management transactions resulted in one penny per share of accretion to net asset value. I'm going to turn it over to Chris now to take us through our financial results in detail.
Speaker #3: Continuing on with other balance sheet updates, net debt to equity remained stable quarter-over-quarter, ending at 1.23 times. Within our targeted range of 0.85 to 1.25 times.
Speaker #3: During the quarter, we continued our opportunistic repurchasing of GBDC shares on an accretive basis. Total shares were purchased in calendar year 2025 grew to 5.5 million shares, or 76.5 million in aggregate value.
Speaker #3: these capital management transactions resulted In the quarter, in one penny per share of accretion to net asset value. I'm going to turn it over to Chris now to take us through our financial results in detail.
Speaker #2: Thanks, Tim. Turning to drivers Tim just described and distributions paid in the quarter translated into GBDC's December '31, 2025 NAV per share of $14.84.
Chris Ericson: Thanks, Tim. Turning to slide 7, you can see how the earnings drivers Tim just described and distributions paid in the quarter translated into GBDC's 31 December 2025 NAV per share of $14.84, Adjusted NII per share of $0.38, a $0.39 per share base distribution paid out during the quarter, adjusted net realized and unrealized losses of $0.13 per share, and a penny per share of NAV accretion from share repurchases. Together, these results drove a Net Asset Value per share decrease to $14.84. Turning to slide 10, this details our origination activity for the quarter. Net funds growth, defined as funded commitments and delayed draw term loan and net revolver draws, less exits and sales and net of market value changes in portfolio fair value, decreased by $130 million for the quarter.
Chris Ericson: Thanks, Tim. Turning to slide 7, you can see how the earnings drivers Tim just described and distributions paid in the quarter translated into GBDC's 31 December 2025 NAV per share of $14.84, Adjusted NII per share of $0.38, a $0.39 per share base distribution paid out during the quarter, adjusted net realized and unrealized losses of $0.13 per share, and a penny per share of NAV accretion from share repurchases. Together, these results drove a Net Asset Value per share decrease to $14.84. Turning to slide 10, this details our origination activity for the quarter. Net funds growth, defined as funded commitments and delayed draw term loan and net revolver draws, less exits and sales and net of market value changes in portfolio fair value, decreased by $130 million for the quarter.
Speaker #2: Adjusted NII per share of 38 cents, a 39 cent per share base distribution paid out during the quarter, adjusted net realized and unrealized losses of 13 cents per share, and a penny per share of NAV accretion from share repurchases.
Speaker #2: Together, these results drove a net asset value per share decrease to $14.84. Turning to Slide 10, this details our origination activity for the quarter.
Speaker #2: Net bonds growth, defined as funded commitments and delayed draw term loan and net revolver draws, less exits and sales and net of market value changes in portfolio fair value, decreased by 130 million for the quarter.
Speaker #2: This was primarily due to repayments and exits outpacing funded new originations and delayed draw term loans and net revolver draws. Looking at the bottom of the slide, the weighted average rate on new investments was 8.6%, prior quarter, primarily the result of lower base rates at origination.
Speaker #2: This was primarily due to repayments and exits outpacing funded new originations and delayed draw term loans and net revolver draws. Looking at the bottom of the slide, the weighted average rate on new investments was 8.6%, prior quarter, primarily the result of lower base rates at a decline of 30 basis points from the quarter were at a weighted average rate of GBDC's overall portfolio mix, 9.4%.
Chris Ericson: This was primarily due to repayments and exits outpacing funded new originations, delayed draw term loans, and net revolver draws. Looking at the bottom of the slide, the weighted average rate on new investments was 8.6%, a decline of 30 basis points from the prior quarter, primarily the result of lower base rates at origination. Investments that repaid in the quarter were at a weighted average rate of 9.4%. Slide 11 shows GBDC's overall portfolio mix. As you can see, the portfolio breakdown by investment types remained consistent quarter-over-quarter, with one-stop loans continuing to represent around 87% of the portfolio at fair value. Slide 12 shows that GBDC's portfolio remains highly diversified by portfolio company, with an average investment size of approximately 20 basis points across 420 distinct portfolio companies.
Chris Ericson: This was primarily due to repayments and exits outpacing funded new originations, delayed draw term loans, and net revolver draws. Looking at the bottom of the slide, the weighted average rate on new investments was 8.6%, a decline of 30 basis points from the prior quarter, primarily the result of lower base rates at origination. Investments that repaid in the quarter were at a weighted average rate of 9.4%. Slide 11 shows GBDC's overall portfolio mix. As you can see, the portfolio breakdown by investment types remained consistent quarter-over-quarter, with one-stop loans continuing to represent around 87% of the portfolio at fair value. Slide 12 shows that GBDC's portfolio remains highly diversified by portfolio company, with an average investment size of approximately 20 basis points across 420 distinct portfolio companies.
Speaker #2: 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.
Speaker #2: Slide 12 shows that GBDC's portfolio remains highly diversified by portfolio company, with an average investment size of approximately 20 basis points across 420 distinct portfolio companies.
Speaker #2: Additionally, our largest borrower represents just 1.6% of the debt investment Slide 11 shows portfolio, and our top 10 largest borrowers represent just 12% of the portfolio.
Chris Ericson: Additionally, our largest borrower represents just 1.6% of the debt investment portfolio, and our top 10 largest borrowers represent just 12% of the portfolio. We believe GBDC is one of the most diversified and granular portfolios in the public BDC sector, modulating credit risk through position size. As of December 31, 2025, 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. The economic analysis on slide 13 highlights the drivers of GBDC's net investment spread of 4.6%. Let's walk through the slide in detail. I'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, which decreased approximately 40 basis points sequentially to 10%.
Chris Ericson: Additionally, our largest borrower represents just 1.6% of the debt investment portfolio, and our top 10 largest borrowers represent just 12% of the portfolio. We believe GBDC is one of the most diversified and granular portfolios in the public BDC sector, modulating credit risk through position size. As of December 31, 2025, 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. The economic analysis on slide 13 highlights the drivers of GBDC's net investment spread of 4.6%. Let's walk through the slide in detail. I'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, which decreased approximately 40 basis points sequentially to 10%.
Speaker #2: believe GBDC is one of the most We diversified and granular portfolios in the public BDC sector, modulating credit risk through position size. As of December '31, 2025, 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.
Speaker #2: The economic analysis on slide 13 highlights the drivers of GBDC's net investment spread of 4.6%. Let's walk through the slide in detail. I'll start with the dark blue line, which is our investment income yield.
Speaker #2: As a reminder, the investment income yield includes the amortization of fees and discounts, which decreased approximately 40 basis points sequentially to 10%. Our cost of debt, the teal line, decreased approximately 20 reflecting our approximately 80% floating rate debt funding basis points to 5.4%, structure.
Chris Ericson: Our cost of debt, the teal line, decreased approximately 20 basis points to 5.4%, reflecting our approximately 80% floating-rate debt funding structure. Net-net, GBDC's weighted average net investment spread, the gold line, declined modestly quarter-over-quarter to 4.6%. Moving on to slides 14 and 15, let's take a closer look at our credit quality metrics. On slide 14, you can see that non-accruals increased quarter-over-quarter to 80 basis points of total investments at fair value and 1.3% of total investments at amortized cost, but remain at very low levels in absolute terms and relative to the broader BDC sector. During the quarter, the number of non-accrual investments increased to 14 investments, as the return to accrual status of one portfolio company investment following a restructuring was offset by the addition of six portfolio company investments during the quarter. Slide 15 shows the trend in internal performance ratings.
Chris Ericson: Our cost of debt, the teal line, decreased approximately 20 basis points to 5.4%, reflecting our approximately 80% floating-rate debt funding structure. Net-net, GBDC's weighted average net investment spread, the gold line, declined modestly quarter-over-quarter to 4.6%. Moving on to slides 14 and 15, let's take a closer look at our credit quality metrics. On slide 14, you can see that non-accruals increased quarter-over-quarter to 80 basis points of total investments at fair value and 1.3% of total investments at amortized cost, but remain at very low levels in absolute terms and relative to the broader BDC sector. During the quarter, the number of non-accrual investments increased to 14 investments, as the return to accrual status of one portfolio company investment following a restructuring was offset by the addition of six portfolio company investments during the quarter. Slide 15 shows the trend in internal performance ratings.
Speaker #2: Net-net GBDC's weighted average net investment spread, the gold line, declined modestly quarter-over-quarter to 4.6%. Moving on to slides 14 and 15, let's take a closer look at our credit quality metrics.
Speaker #2: On slide 14, you can see that non-accruals increased quarter-over-quarter to 80 basis points of total investments at fair value, and 1.3% of total investments at amortized cost.
Speaker #2: But remain at very low levels and absolute terms and relative to the broader BDC sector. During the quarter, the number of non-accrual investments increased to 14 investments as the return to accrual status of one portfolio company investment following a restructuring was offset by the addition of six portfolio company investments during the quarter.
Speaker #2: Slide 15 shows the trend in internal performance ratings. As Tim noted earlier, approximately 89% of the total investment portfolio remained in our top two internal performance rating categories.
Chris Ericson: As Tim noted earlier, approximately 89% of the total investment portfolio remained in our top two internal performance rating categories. And investments rated three, which signals a borrower may have the potential to or is expected to perform below expectations as compared to at underwriting, increased modestly to 10.1% of the total investment portfolio. The proportion of investments rated one and two, which are the investments we believe are most likely to see significant credit impairment, remained very low at just 1.3% of the portfolio at fair value. 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. First, let's focus on the key takeaways on slide 21.
Chris Ericson: As Tim noted earlier, approximately 89% of the total investment portfolio remained in our top two internal performance rating categories. And investments rated three, which signals a borrower may have the potential to or is expected to perform below expectations as compared to at underwriting, increased modestly to 10.1% of the total investment portfolio. The proportion of investments rated one and two, which are the investments we believe are most likely to see significant credit impairment, remained very low at just 1.3% of the portfolio at fair value. 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. First, let's focus on the key takeaways on slide 21.
Speaker #2: And investments rated three which signals a borrower may have the potential to or is expected to perform below expectations as compared to at underwriting increased modestly to 10.1% of the total investment portfolio.
Speaker #2: The proportion of investments rated one and two, which are the investments we believe are most likely to see significant credit impairment, remained very low at just 1.3% of the portfolio at fair value.
Speaker #2: 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.
Speaker #2: I'll wrap up this section by reviewing GBDC's liquidity and investment capacity on slides 20 and 21. First, let's focus on the key takeaways on slide 21.
Speaker #2: Our debt funding structure remains highly diversified and flexible. Our debt maturity profile remains well-positioned with 49% of our debt funding in the form of unsecured notes across a well-laddered maturity profile.
Chris Ericson: Our debt funding structure remains highly diversified and flexible. Our debt maturity profile remains well-positioned, with 49% of our debt funding in the form of unsecured notes across a well-laddered maturity profile. Consistent with our asset-liability matching principle, 81% of GBDC's total debt funding is floating rate or swapped to a floating rate, levels that we believe are among the highest in the sector. GBDC is well-positioned to continue to modulate the impacts of lower interest rates on investment income through offsetting lower interest expense on its borrowings. Overall, our liquidity position remains strong, and we ended the quarter with approximately $1.3 billion of liquidity from unrestricted cash, undrawn commitments on our corporate revolver, and the unused unsecured revolver provided by our advisor. Now I'll hand it back over to David for closing remarks.
Chris Ericson: Our debt funding structure remains highly diversified and flexible. Our debt maturity profile remains well-positioned, with 49% of our debt funding in the form of unsecured notes across a well-laddered maturity profile. Consistent with our asset-liability matching principle, 81% of GBDC's total debt funding is floating rate or swapped to a floating rate, levels that we believe are among the highest in the sector. GBDC is well-positioned to continue to modulate the impacts of lower interest rates on investment income through offsetting lower interest expense on its borrowings. Overall, our liquidity position remains strong, and we ended the quarter with approximately $1.3 billion of liquidity from unrestricted cash, undrawn commitments on our corporate revolver, and the unused unsecured revolver provided by our advisor. Now I'll hand it back over to David for closing remarks.
Speaker #2: asset liability matching principle, 81% of GBDC's total Consistent with our debt funding is floating rate or swapped to a floating rate. Levels that we believe are among the highest in the sector.
Speaker #2: to continue to modulate the impacts of lower GBDC is well-positioned interest rates on investment income through offsetting lower interest expense on its overall, our liquidity position remains strong and we ended the quarter with borrowings.
Speaker #2: approximately 1.3 billion of undrawn commitments on our corporate revolver, and And the unused unsecured revolver provided by our advisor. Now, I'll hand it back over to David for closing remarks.
Speaker #2: Thanks, Chris. I spoke at the beginning of this call about the four headwinds our industry has been facing: lower base rates, tighter spreads, muted M&A, and a protracted credit cycle.
David Golub: Thanks, Chris. I spoke at the beginning of this call about the 4 headwinds our industry has been facing: lower base rates, tighter spreads, muted M&A, and a protracted credit cycle. I want to shift now to talk about the impacts of these headwinds. There are likewise 4 I want to highlight. First, private credit ROEs have come down, including across the BDC space. By our estimates, public BDC net returns are on average about 4 percentage points lower year-over-year based on earnings reports through September 30. We've seen similar findings from consultants who cover the broader private credit fund space. Now, this isn't a surprise. Funds of floating-rate loans are necessarily impacted by lower base rates, lower spreads, and credit losses. Second impact, dispersion between good managers and, let's call them, not-so-good managers has increased. There's always been a lot of alpha in private credit.
David Golub: Thanks, Chris. I spoke at the beginning of this call about the 4 headwinds our industry has been facing: lower base rates, tighter spreads, muted M&A, and a protracted credit cycle. I want to shift now to talk about the impacts of these headwinds. There are likewise 4 I want to highlight. First, private credit ROEs have come down, including across the BDC space. By our estimates, public BDC net returns are on average about 4 percentage points lower year-over-year based on earnings reports through September 30. We've seen similar findings from consultants who cover the broader private credit fund space. Now, this isn't a surprise. Funds of floating-rate loans are necessarily impacted by lower base rates, lower spreads, and credit losses. Second impact, dispersion between good managers and, let's call them, not-so-good managers has increased. There's always been a lot of alpha in private credit.
Speaker #2: I want to shift now to talk about the impacts of these headwinds. There are likewise four I want to highlight. First, private credit ROEs have come down, including across the BDC space.
Speaker #2: By our estimates, public is 4 percentage points lower year over year based on earnings reports through September 30th. We've seen similar findings from consultants who cover the broader private credit fund space.
Speaker #2: Now, this isn't a surprise. Funds of floating rate, lower base rates, lower spreads, and credit loans are necessarily impacted by losses. Second impact: dispersion between good managers and, let's call them, not-so-good managers has increased.
Speaker #2: There's always been a lot of alpha in private credit. Now it's particularly high. Again, not a surprise. The overwhelming driver of alpha in private credit comes from minimizing realized credit losses.
David Golub: Now it's particularly high. Again, not a surprise. The overwhelming driver of alpha in private credit comes from minimizing realized credit losses, and periods of credit stress put this to the test. Third impact, the headwinds have generated a lot of press, maybe not as colorful as last quarter's cockroaches, but still plentiful. And fourth, we've seen shareholders respond. We've seen shareholders respond by revaluing public BDCs and by increasing redemptions from semi-liquid BDCs. So where does the puck go from here? One of the advantages that comes with age and experience is pattern recognition. Now, this moment doesn't feel exactly like prior periods, but there's some elements that rhyme. So I want to share my take. After a period of growth and new entrants, the private credit industry is maturing and will now, in my judgment, go through a Darwinian moment.
David Golub: Now it's particularly high. Again, not a surprise. The overwhelming driver of alpha in private credit comes from minimizing realized credit losses, and periods of credit stress put this to the test. Third impact, the headwinds have generated a lot of press, maybe not as colorful as last quarter's cockroaches, but still plentiful. And fourth, we've seen shareholders respond. We've seen shareholders respond by revaluing public BDCs and by increasing redemptions from semi-liquid BDCs. So where does the puck go from here? One of the advantages that comes with age and experience is pattern recognition. Now, this moment doesn't feel exactly like prior periods, but there's some elements that rhyme. So I want to share my take. After a period of growth and new entrants, the private credit industry is maturing and will now, in my judgment, go through a Darwinian moment.
Speaker #2: And periods of credit stress put this to the test. Third impact: the headwinds have generated a lot of press. Maybe not as colorful as last quarter's cockroaches, but still plentiful.
Speaker #2: And fourth, we've seen shareholders respond. We've seen shareholders respond by revaluing public BDCs and by increasing redemptions from semi-liquid BDCs. So where does the puck go from here?
Speaker #2: One of the advantages that comes with age and experience is pattern recognition. Now, this moment doesn't feel exactly like prior that rhyme. So I want to share my growth and new entrants, the private periods, but there's some elements credit industry has matured.
Speaker #2: take. through a Darwinian moment. Some After a period of firms will adapt and thrive, and some won't. This isn't a bad thing. We've been here before.
David Golub: Some firms will adapt and thrive, and some won't. This isn't a bad thing. We've been here before. In some ways, this Darwinian moment, it feels a little overdue. It's true. We're worriers, not optimists, but this doesn't mean we're pessimists either. Based on our experience through multiple cycles over the last 30+ years, this is actually the kind of environment where we and other private credit specialists outperform. We have a playbook for doing that. It's a playbook that's served us well for decades, including through a number of periods more stressful than this one. The playbook involves being very selective when making new loans, focusing on early detection of borrower underperformance, working with sponsors on early intervention, and addressing problems proactively. Our approach, it's really all about minimizing realized credit losses and being ready to play offense as opportunities arise.
David Golub: Some firms will adapt and thrive, and some won't. This isn't a bad thing. We've been here before. In some ways, this Darwinian moment, it feels a little overdue. It's true. We're worriers, not optimists, but this doesn't mean we're pessimists either. Based on our experience through multiple cycles over the last 30+ years, this is actually the kind of environment where we and other private credit specialists outperform. We have a playbook for doing that. It's a playbook that's served us well for decades, including through a number of periods more stressful than this one. The playbook involves being very selective when making new loans, focusing on early detection of borrower underperformance, working with sponsors on early intervention, and addressing problems proactively. Our approach, it's really all about minimizing realized credit losses and being ready to play offense as opportunities arise.
Speaker #2: And in some ways, this Darwinian moment feels a little overdue. And it's true. We're worriers, not optimists, but this doesn't mean we're pessimists either.
Speaker #2: Based on our experience through multiple cycles over the last 30-plus years, this has actually the kind of environment where we and other private credit specialists outperform.
Speaker #2: have a playbook for doing that. We It's a playbook that served us well for decades, including through a number of periods more stressful than this one.
Speaker #2: The playbook involves being very selective when making new loans, focusing on early detection of borrower underperformance, working with sponsors on early intervention, and addressing problems proactively.
Speaker #2: Our approach, it's really all about minimizing realized credit losses and being ready to play offense as opportunities arise. We're confident that this playbook will once again serve us well as we manage through this one.
David Golub: We're confident that this playbook will, once again, serve us well as we manage through this one. With that, operator, could you please open the line for questions?
David Golub: We're confident that this playbook will, once again, serve us well as we manage through this one. With that, operator, could you please open the line for questions?
Speaker #2: With that, operator, could you please open the line for questions?
Speaker #3: Ladies and gentlemen, we will now begin the question and answer session. As a reminder, to button followed by the number one on your telephone ask a question, please press the star keypad.
Operator: Ladies and gentlemen, we will now begin the question and answer session. As a reminder, to ask a question, please press the star button followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. One moment, please, for your first question. Your first question comes from the line of Finian O'Shea of Wells Fargo. Please go ahead.
Operator: Ladies and gentlemen, we will now begin the question and answer session. As a reminder, to ask a question, please press the star button followed by the number one on your telephone keypad. If you would like to withdraw your question, please press star one again. One moment, please, for your first question. Your first question comes from the line of Finian O'Shea of Wells Fargo. Please go ahead.
Speaker #3: If you would like to withdraw your question, please press star one again. One moment, please, for your first question. Your first question comes from the line of Fenya Noche of Wells Fargo.
Speaker #3: Please go
Speaker #3: ahead. Hey, everyone.
Finian O'Shea: Hey, everyone. Good morning. Thanks for having me on. So David, to start, the big topic, of course, is software. You're not only one of the leading private credit firms, but one of the leading early investors in software. So, of course, we'll ask you about that. I know this is a tough one, but any thoughts on the recent developments from AI firms that have spooked the software market and, of course, the private credit market? Do they give you concern in your software portfolio that's, of course, more enterprise SaaS-based? Maybe concern from what happened in the last couple of weeks, but also concern as to what the progress from AI might look like in a few years from now when a lot of these credits will still be on your books. Thanks.
Finian O'Shea: Hey, everyone. Good morning. Thanks for having me on. So David, to start, the big topic, of course, is software. You're not only one of the leading private credit firms, but one of the leading early investors in software. So, of course, we'll ask you about that. I know this is a tough one, but any thoughts on the recent developments from AI firms that have spooked the software market and, of course, the private credit market? Do they give you concern in your software portfolio that's, of course, more enterprise SaaS-based? Maybe concern from what happened in the last couple of weeks, but also concern as to what the progress from AI might look like in a few years from now when a lot of these credits will still be on your books. Thanks.
Speaker #4: Good morning. Thanks for having me on. So, David, to start, the big topic, of course, is software you're not only one of the the leading early investors in software.
Speaker #4: So, of course, we'll ask you about that. I know this is a tough one, but any thoughts leading private credit firms, but one of on the recent developments from AI firms that have spooked the software market?
Speaker #4: And, of course, the private credit market—do they give you concern in your software portfolio that's, of course, more enterprise SaaS-based? Maybe last couple of weeks, but concern from what happened, and also concern as to what AI might look like in a few years from now when a lot of these credits will still be on your books?
Speaker #4: Thanks.
Speaker #2: Thanks, Finn.
David Golub: Thanks, Tim. Yes, SaaS apocalypse. Let's talk about it. Look, there's a real issue here. This is not just a market tantrum. I think underlying the recent market action, there are two core you can call them perspectives or insights. The first is that AI is advancing more quickly than most people expected, and especially so in respect of tools that make coding easier. So this month's plot advances are the latest manifestation of this trend, but it's a trend. The second is that some software companies are vulnerable to AI disruption as a result of this. I'd say we agree with both of these perspectives, and we think the market's right that there are going to be winners and losers from AI. We also think everybody, and this is implicit in your question, everybody needs to approach what's going on with AI with a bit of humility.
David Golub: Thanks, Tim. Yes, SaaS apocalypse. Let's talk about it. Look, there's a real issue here. This is not just a market tantrum. I think underlying the recent market action, there are two core you can call them perspectives or insights. The first is that AI is advancing more quickly than most people expected, and especially so in respect of tools that make coding easier. So this month's plot advances are the latest manifestation of this trend, but it's a trend. The second is that some software companies are vulnerable to AI disruption as a result of this. I'd say we agree with both of these perspectives, and we think the market's right that there are going to be winners and losers from AI. We also think everybody, and this is implicit in your question, everybody needs to approach what's going on with AI with a bit of humility.
Speaker #2: apocalypse. Let's talk about it. Look, there's a real issue here. This is . Yes, SaaS tantrum. I think underlying the recent market action, there are two core—you can call them perspectives or insights—the first is that AI is advancing more quickly than most people expected.
Speaker #2: And especially so in respect of tools that make coding easier. So this month's plot advances are the latest manifestation of this trend, but it's a trend.
Speaker #2: The second is that some software companies are vulnerable to AI disruption as a result of this. I'd say we agree with both of these perspectives.
Speaker #2: And we think the market's right that they're going to be winners and losers from AI. We also think everybody—and this is implicit in your question—everybody needs to
Speaker #1: approach on , with with AI what's going bit of To humility . Nobody really has all the answers here . This technology , and been moving at a it's pace that experts , nobody really has even all the answers here .
David Golub: Nobody really has all the answers here. This is a new technology, and it's been moving at a pace that even experts in the field have not expected. I want to go into more depth on who we think are going to be the winners and losers. But before I do that, I want to talk about what informs our view. And you mentioned a few elements of this. Short version, we're specialists at this. We've been investing in software companies for 20 years. We've completed 1,000 software deals over that period. We're good at this. Over that 20 years, we've had only five defaults. We've had a 0.25% of our $145 billion of software commitments as defaulted. We've got a great team. We've got 25 dedicated professionals. We've got over 200 years of combined experience in this space across multiple credit and technology cycles.
David Golub: Nobody really has all the answers here. This is a new technology, and it's been moving at a pace that even experts in the field have not expected. I want to go into more depth on who we think are going to be the winners and losers. But before I do that, I want to talk about what informs our view. And you mentioned a few elements of this. Short version, we're specialists at this. We've been investing in software companies for 20 years. We've completed 1,000 software deals over that period. We're good at this. Over that 20 years, we've had only five defaults. We've had a 0.25% of our $145 billion of software commitments as defaulted. We've got a great team. We've got 25 dedicated professionals. We've got over 200 years of combined experience in this space across multiple credit and technology cycles.
Speaker #1: This is a new technology and been it's moving at a pace that even field have not expected experts in the . I into want to go depth on think are winners and going to be the more but before I want to I losers , want to what talk about informs our view .
Speaker #1: And you mentioned a elements few of this short version . this . We're been We've is a new investing specialists at 20 years .
Speaker #1: in software We've companies 1000 software deals completed over that period . We're good at this , years , we've had only five defaults .
Speaker #1: had We've of a 0.25% $145 billion of software commitments defaulted is . We've got a great team got We've 25 dedicated professionals . We've got over 200 years combined in this experience space .
David Golub: And we've approached this in a way you'd expect, a very gated way. We've developed our own underwriting approach. It starts with a proprietary risk mapping framework, and that steers us to business models that we think are attractive. It steers us away from business models that we think have various vulnerabilities. We've developed proprietary diligence templates that enable us to pressure test this resilience. And that includes AI risk. We've been looking at AI risk for years. So what does that lead us to like? Let me give you some examples. We like enterprise-critical platforms, and those platforms have some characteristics that are common to them. They have sticky embedded workflows. They have long implementation cycles. It's hard for clients to switch to alternative products. We like market leaders that have proprietary datasets. Sometimes those are customer-generated. Sometimes they're not. But AI competitors can't easily replicate proprietary datasets.
David Golub: And we've approached this in a way you'd expect, a very gated way. We've developed our own underwriting approach. It starts with a proprietary risk mapping framework, and that steers us to business models that we think are attractive. It steers us away from business models that we think have various vulnerabilities. We've developed proprietary diligence templates that enable us to pressure test this resilience. And that includes AI risk. We've been looking at AI risk for years. So what does that lead us to like? Let me give you some examples. We like enterprise-critical platforms, and those platforms have some characteristics that are common to them. They have sticky embedded workflows. They have long implementation cycles. It's hard for clients to switch to alternative products. We like market leaders that have proprietary datasets. Sometimes those are customer-generated. Sometimes they're not. But AI competitors can't easily replicate proprietary datasets.
Speaker #1: credit and multiple technology cycles . And we've approached this you'd expect a way very way . We've in a developed gullible our own underwriting It a proprietary starts framework , and that risk mapping us to steers business models that we think are attractive .
Speaker #1: It us away steers from business approach . models that various vulnerabilities have proprietary diligence templates that enable us to pressure resilience test this , and that includes AI risk .
Speaker #1: been looking We've at AI at risk for for So what does that lead years . us to ? Like ? Let me give you some examples .
Speaker #1: We like enterprise critical and those platforms have platforms some characteristics that are common to have , them . They , sticky you know embedded workflows .
Speaker #1: have long They implementation cycles . hard It's for switch clients to alternative products . like We market leaders that to proprietary sets . data Sometimes those are customer generated , sometimes have not .
David Golub: We like working with sponsors who are experts. They're leaning in early. They're themselves experts in AI. They're guiding their companies to be ahead of disruption. What don't we like? Well, we have very little exposure to software that's focused on content creation, software that's focused on analytical overlays, and software that's tool-based. We think there are going to be a lot of losers in those areas. So we are always evaluating our portfolio. We're big believers in early identification of problems. But you go through a period like we're going through right now in terms of market action, it leads to an immediate response at Golub Capital to review the portfolio. So we've been doing that in real time. And our conclusion so far is we feel quite confident in the portfolio. We're not saying that there is no AI risk.
David Golub: We like working with sponsors who are experts. They're leaning in early. They're themselves experts in AI. They're guiding their companies to be ahead of disruption. What don't we like? Well, we have very little exposure to software that's focused on content creation, software that's focused on analytical overlays, and software that's tool-based. We think there are going to be a lot of losers in those areas. So we are always evaluating our portfolio. We're big believers in early identification of problems. But you go through a period like we're going through right now in terms of market action, it leads to an immediate response at Golub Capital to review the portfolio. So we've been doing that in real time. And our conclusion so far is we feel quite confident in the portfolio. We're not saying that there is no AI risk.
Speaker #1: But AI competitors can't easily replicate data proprietary sets . We like working with sponsors who are experts . know , leaning they're They're early .
Speaker #1: Themselves as experts in AI. They're guiding their companies ahead of disruption. What is that like? We don't—we, you know, we have very little exposure to software that's focused on content creation, software that's focused on analytical overlays, software that's a tool. We think there are going to be a lot of losers in those areas.
Speaker #1: So , you know , we are always they're going evaluating our portfolio . big We're believers in early identification of problems . But you know , you go through a period going through like we're now .
Speaker #1: In terms of market It at response leads to an Gallup review . The portfolio . So we've been doing that in real time our conclusion so far is we feel quite in the portfolio .
Speaker #1: action . We confident are not saying there is no that AI We're very risk . know that knowledgeable enough to we need to stay very humble and we need to stay very vigilant in looking at AI risk .
David Golub: We're knowledgeable enough to know that we need to stay very humble, and we need to stay very vigilant in looking at AI risk. But based on where we are right now, we feel very good about where the portfolio is positioned.
David Golub: We're knowledgeable enough to know that we need to stay very humble, and we need to stay very vigilant in looking at AI risk. But based on where we are right now, we feel very good about where the portfolio is positioned.
Finian O'Shea: Very helpful. Appreciate all that color. I'll just keep my follow-up on the topic too. The sort of, a lot of the inbounds come in and sort of question the loan-to-values, what that might mean. It looks like you and peers are still investing in software at sort of normal capital structure parameters, but that's, of course, last quarter's data and all that. Has this, I guess for one, has this, what we see in the public market, is there a sort of similar pause going on, whether it be on your side or the private equity side? And then kind of more importantly, if that does happen, do you think that means does that mean the risk amplifies?
Finian O'Shea: Very helpful. Appreciate all that color. I'll just keep my follow-up on the topic too. The sort of, a lot of the inbounds come in and sort of question the loan-to-values, what that might mean. It looks like you and peers are still investing in software at sort of normal capital structure parameters, but that's, of course, last quarter's data and all that. Has this, I guess for one, has this, what we see in the public market, is there a sort of similar pause going on, whether it be on your side or the private equity side? And then kind of more importantly, if that does happen, do you think that means does that mean the risk amplifies?
Speaker #1: But based on where right now , we are where we good about where the feel very positioned .
Speaker #2: Very . Appreciate all that color . I'll just keep my up topic to on the . The the sort of a lot of the inbounds and sort of come in question the loan to values .
Speaker #2: might mean . You know , it like peers are you investing in in sort of software at normal . Normal capital parameters . But that's of course , you know , last quarter's data and that all I guess , I one has it has guess this for what we see ?
Speaker #2: public of Is there similar market a sort pause on going on your side or the it be private equity , whether side ? then , you of more know , kind importantly that in the happen does , do you think that means does that mean the risk amplifies ?
Finian O'Shea: If you compare it to healthcare services a few years ago, where those models were dependent on sort of roll-ups to achieve their EBITDA synergies and so forth, is there that sort of element in software, where higher cost of equity, higher cost of debt will itself be a problem?
Finian O'Shea: If you compare it to healthcare services a few years ago, where those models were dependent on sort of roll-ups to achieve their EBITDA synergies and so forth, is there that sort of element in software, where higher cost of equity, higher cost of debt will itself be a problem?
Speaker #2: if you Like compare it to ? A few years healthcare ago , where models were those services dependent on sort of ups to roll achieve their EBITDA synergies and so forth , like , that sort is there of element in where higher software cost of debt will equity , higher itself problem a be ?
David Golub: So I think it's early right now to reach conclusions, but let's talk about a couple of different scenarios. In one scenario, it becomes meaningfully more challenging for software companies, even good software companies, to access capital in the broadly syndicated loan market or the high-yield market. I'd argue that's actually a positive for private credit specialists like us because that will mean more opportunities. That will mean better pricing. That will mean better capital structures. But we and others will need to make choices about which transactions we think are truly resilient and which we think are not. I'm confident we can do that. So I view that scenario, Finn, as generally a positive. There's a second scenario in which this is a blip, and the market comes roaring back, and we quickly revert to where we were before this latest market action began. I think that's unlikely.
David Golub: So I think it's early right now to reach conclusions, but let's talk about a couple of different scenarios. In one scenario, it becomes meaningfully more challenging for software companies, even good software companies, to access capital in the broadly syndicated loan market or the high-yield market. I'd argue that's actually a positive for private credit specialists like us because that will mean more opportunities. That will mean better pricing. That will mean better capital structures. But we and others will need to make choices about which transactions we think are truly resilient and which we think are not. I'm confident we can do that. So I view that scenario, Finn, as generally a positive. There's a second scenario in which this is a blip, and the market comes roaring back, and we quickly revert to where we were before this latest market action began. I think that's unlikely.
Speaker #1: I think So early it's right reach now to conclusions . But let's let's talk about a couple of different . scenario In one it scenarios becomes software challenging meaningfully for more companies , even good to capital in software companies , the market yield or the high market .
Speaker #1: I'd argue that's actually a for positive private credit specialists like us that will , because more syndicated loan pricing . That will mean better , better , better capital access .
Speaker #1: But you're going to we and others will need to choices make about which which transactions we think are truly resilient and which which we think are not .
Speaker #1: I'm can do confident we that . So so I view that scenario thin a as generally a as positive . There's second scenario a which is a , this a blip market comes roaring back and and you know , we we quickly revert where we this before were market began .
David Golub: I think there are enough real aspects to the insights about AI risk that we're likely not to see a quick bounce back. And then the third scenario I'd point to is sort of in between. It's one in which the market becomes more, what's the right word, picky about which companies and which credits it likes and which ones it doesn't like. I think that third scenario is where the puck is headed longer term. But my guess is we're going to go through scenario one to get to scenario three.
David Golub: I think there are enough real aspects to the insights about AI risk that we're likely not to see a quick bounce back. And then the third scenario I'd point to is sort of in between. It's one in which the market becomes more, what's the right word, picky about which companies and which credits it likes and which ones it doesn't like. I think that third scenario is where the puck is headed longer term. But my guess is we're going to go through scenario one to get to scenario three.
Speaker #1: think that's I think there are enough real aspects to the insights action about AI risk we're we're that likely not to see to .
Speaker #1: And then the third point to I'd is , is in sort of between . scenario , It's it's one in which the market more becomes quick .
Speaker #1: And then the third point to I'd is , is in sort of between . scenario , It's it's one in which the market more becomes quick a More .
Speaker #1: word What's the ? Picky about which companies and which right which credits it likes which and ones it like ? I think that doesn't is where the puck I is headed .
Speaker #1: Longer guess , but my term going to go through scenario is we're one to get to scenario three .
Finian O'Shea: Very helpful. Thanks, David.
Finian O'Shea: Very helpful. Thanks, David.
Operator: Your next question comes from the line of Ethan Kay of Lucid Capital Markets. Please go ahead.
Operator: Your next question comes from the line of Ethan Kay of Lucid Capital Markets. Please go ahead.
Speaker #3: helpful . Thanks , David Very
Ethan Kay: Hey, guys. Thanks for taking my questions here. Firstly, in your prepared remarks, you suggested you're planning for a challenging 2026. Just hoping you can kind of dig into that a bit. Is that more broadly related to the leveraged lending sector? Do you also kind of foresee some kind of budding challenges at GBDC? And is this a commentary on both earnings and credit or one or the other? Just any expansion on that comment would be helpful.
Ethan Kay: Hey, guys. Thanks for taking my questions here. Firstly, in your prepared remarks, you suggested you're planning for a challenging 2026. Just hoping you can kind of dig into that a bit. Is that more broadly related to the leveraged lending sector? Do you also kind of foresee some kind of budding challenges at GBDC? And is this a commentary on both earnings and credit or one or the other? Just any expansion on that comment would be helpful.
Speaker #4: comes question . from the line of next of Capital Lucid Ethan Kaye go ahead Markets . Please
Speaker #5: Hey guys . Thanks for taking my here
Speaker #5: in . your prepared Firstly , remarks , you . suggested , you know , planning for a challenging 2026 . kind of dig into you can that a bit .
Speaker #5: Is that more broadly , Just hoping , you know , related more broadly to leveraged , you know , the lending sector . Do you also kind foresee some kind of budding GBTC challenges at ?
Speaker #5: And , you know , is this a commentary on earnings and credit know , one or the other , just any or , you any expansion on that comment would be helpful ?
David Golub: Sure. So as I mentioned in the prepared remarks, we think that the market environment right now is challenging. So if we're down, it's probably going to go down a little more. Spreads are at pretty much a five-year low. And while they feel like they've stabilized some, the backbook is still not at the same level that the frontbook is at. M&A, which everybody went into this year saying, "Oh, this year, it's finally going to happen. We're going to see the breaking of the dam." I'm still seeing a muted M&A environment, and I'd like to see more. I'm not saying it won't happen. I'm saying we haven't seen it yet. And finally, on credit, I think we are in a credit cycle. And I've been saying this now for many quarters.
David Golub: Sure. So as I mentioned in the prepared remarks, we think that the market environment right now is challenging. So if we're down, it's probably going to go down a little more. Spreads are at pretty much a five-year low. And while they feel like they've stabilized some, the backbook is still not at the same level that the frontbook is at. M&A, which everybody went into this year saying, "Oh, this year, it's finally going to happen. We're going to see the breaking of the dam." I'm still seeing a muted M&A environment, and I'd like to see more. I'm not saying it won't happen. I'm saying we haven't seen it yet. And finally, on credit, I think we are in a credit cycle. And I've been saying this now for many quarters.
Speaker #1: much a five year probably low . And they feel while are stabilized the the book is back still not is still not at level that the front book the same M&A , is at which everybody went into this year saying , oh , this year it's like they've finally going to happen .
Speaker #1: We're going to see breaking of the dam. Still, we are seeing a muted M&A environment. And I'd like to see, I'd see more.
Speaker #1: I'm not saying it like to saying I'm we haven't yet . And finally , on happen . , I think in a credit cycle .
Speaker #1: I'm not saying it like to saying I'm we haven't yet . And finally , on happen . , I think in a credit are And I've , you know , this for now many quarters been saying think seeing elevated levels of in both the broadly syndicated market stress private and in the market .
David Golub: I think we're seeing elevated levels of credit stress in both the broadly syndicated market and in the private credit market. And everybody's working through their issues, including us. I think we're well-positioned, Ethan, relative to the industry. But I think there's been a fair amount of happy talk in the industry. And I want to be very candid with you and with our investors that this is a challenging environment right now. It's harder for us to produce the ROEs that we want to be producing in the current environment than it's been in recent years. That doesn't mean that I'm not optimistic about GBDC's long-term prospects. I am. But I think part of our job is being very candid about when we're in an environment with headwinds and when we're in an environment with tailwinds.
David Golub: I think we're seeing elevated levels of credit stress in both the broadly syndicated market and in the private credit market. And everybody's working through their issues, including us. I think we're well-positioned, Ethan, relative to the industry. But I think there's been a fair amount of happy talk in the industry. And I want to be very candid with you and with our investors that this is a challenging environment right now. It's harder for us to produce the ROEs that we want to be producing in the current environment than it's been in recent years. That doesn't mean that I'm not optimistic about GBDC's long-term prospects. I am. But I think part of our job is being very candid about when we're in an environment with headwinds and when we're in an environment with tailwinds.
Speaker #1: . And , and everybody's You through their issues , including us . think we're well positioned . we're Ethan industry . But I think there's been a , relative to the fair amount of happy in And want talk now .
Speaker #1: it's it's it's You know , produce Rois want to be harder for years . That credit mean that doesn't I'm not optimistic Gbc's about long term prospects .
Speaker #1: I am , but the but I industry . candid job is think part being candid we're in an environment with headwinds and when we're in an about when I environment with .
Ethan Kay: Understood. I appreciate that. Then one other. I wanted to ask a bit about the deployment outlook. I know you kind of just mentioned you're not seeing a broad recovery in M&A yet. But I guess if you do see that, right, leverage is kind of towards the top of the range, and you guys are actively buying back shares here, which looks prudent, but hoping you can give a bit of color on how you're kind of weighing these competing capital allocation opportunities in the face of maybe finite capital resources.
Ethan Kay: Understood. I appreciate that. Then one other. I wanted to ask a bit about the deployment outlook. I know you kind of just mentioned you're not seeing a broad recovery in M&A yet. But I guess if you do see that, right, leverage is kind of towards the top of the range, and you guys are actively buying back shares here, which looks prudent, but hoping you can give a bit of color on how you're kind of weighing these competing capital allocation opportunities in the face of maybe finite capital resources.
Speaker #5: . I Understood appreciate then and that , So one other . to ask a bit about the deployment outlook . I know you kind of just mentioned you're seeing , you a know , I wanted broad recovery yet , but M&A in know , I guess if that right , leverage is kind of towards the top of the range .
Speaker #5: And you guys , you are actively looks which which prudent , but hoping buying back you can give here , shares weighing these , you know , competing , you know , allocation opportunities the face of finite maybe capital resources .
Speaker #5: a bit of
Speaker #5: a bit of
David Golub: So I think you said it very well. We've got to balance multiple goals in the context of sharing.
David Golub: So I think you said it very well. We've got to balance multiple goals in the context of sharing.
