Q3 2019 Earnings Call
Ladies and gentlemen, please standby your conference will begin momentarily. We thank you for your patients and ask a bunch of police continued to somebody.
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Welcome to Golub capital BDC Incs June 32019 coil quarterly earnings conference call.
Before we begin I would 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 Golub capital BDC Incs filings with the Securities and Exchange Commission for materials. The company intends to refer to on today's earnings conference call.
Please visit the Investor resources staff on the home page of the company's website Www Dot Golub capital BDC Dot com and click on the events <unk> presentations link.
Golub capital Bdcs earnings release is also available on the company's website in the Investor resources section.
As a reminder, this call is being recorded for replay purposes, I will now turn the call over to David Golub, Chief Executive Officer of Golub capital BDC.
Thank you Hello, everybody and thanks for joining us today I'm joined by Ross Journey, Our Chief Financial Officer, Greg Robbins, and Jon Simmons, both managing directors your capital yesterday afternoon, We issued our earnings press release for the quarter ended June Thirtyth and we posted an earnings presentation on our website were going to be referring to that presentation throughout the call today.
Gregory is going to start with an overview of Gbdcs results for the third quarter of 2019. Ross is then going to take you through the results in more detail and I'm going to come back at the end for an update on the proposed merger with Cole capital investment Corporation or DC.
Let's start with with results for the quarter ended June Thirtyth and I'll start with some some headlines that the main headline is that GBDC had another very solid quarter driven by consistent net investment income and strong credit results for those of you who are new to GBDC, our investment strategy is and since inception has been.
Our focus on providing first lien senior secured loans to healthy resilient middle market companies backed by strong partnership oriented private equity firms.
With that I'll turn the call over to Greg.
Thank you David.
Let's look at the details for the quarter net increase and net assets, resulting from operations or net income for the quarter ended June thirtyth was $19.2 million or 32 cents per share as compared to $17.8 million or 29 cents per share for the quarter ended March 31st.
Net investment income or as we call. It income before credit losses for the quarter ended June Thirtyth was 19.4 million or 32 cents per share as compared to 20.1 million or 33 cents per share for the quarter ended March 31.
Excluding an approximately $20000 accrual for the capital gains incentive fee net investment income for the quarter ended June Thirtyth remained unchanged at $90.4 million or 32 cents per share.
As compared to $19.4 million or 32 cents per share for the prior quarter.
Consistent with previous quarters, we have provided net investment income per share excluding the capital gains incentive fee accrual as we think this adjusted NII is a more meaningful measure.
Net realized and unrealized loss on investments in foreign currency of $200000 or less than a penny per share for the quarter ended June Thirtyth was the results of 700000 of net realized losses and half a million of net unrealized depreciation.
This compares to a net realized and unrealized loss on investments and foreign currency of $2.3 million or four cents per share for the prior quarter.
New middle market investment commitments totaled $157.1 million for the quarter ended June thirtyth.
Approximately 80 40, 84% of the new investment commitments were one stop loans, 14% were senior secured loans, 1% were second lien loans and approximately 1% were investments in equity securities.
Overall total investments in portfolio companies at fair value decreased by approximately 1.6% or $32.2 million during the quarter.
Turning to the column on the right at the top of Slide four you can see our net income per share or 32 cents core net investment income per share before the accrual for the capital gains incentive fee of 32 cents and our net asset value per share of $15.95 as of June thirtyth.
As shown on the bottom of the slide the portfolio remains well diversified with investments in 225 different portfolio companies and average size of less than 0.5% of total portfolio company investments.
With that I will now turn it over to Ross, who will provide some additional portfolio highlights and discuss the financial results in more detail.
Great. Thanks, Greg starting on slide five this slide highlights our total originations of $157.1 million and total exits and sales of investments of $179.5 million.
As shown on the bottom table the weighted average rate of 8.1% a new investments this quarter was down from 8.7% in the previous quarter.
Primarily due to a declining LIBOR rate and a modest increase in the percentage of lower yielding senior secured originations.
The rate on loans that paid off increased slightly to 8.8% from 8.7% the prior quarter.
And as a reminder, the weighted average interest rate on new investments is based on the contractual interest rate at the time of funding.
For variable rate loans, the contractual rate would be calculated using current LIBOR.
The spread of spread over LIBOR and the impact of any LIBOR floor.
Turning to slide six this slide shows the overall portfolio mix by investment type has remained consistent quarter over quarter with one stop loans continuing to represent our largest investment category at 79%.
Turning to slide seven this slide illustrates that the portfolio remains well diversified with an average investment size of less than 2.5%.
Our debt investment portfolio remains predominantly invested invested in floating rate loans.
But no significant changes in the industry classification percentages over the past year.
Turning to slide eight this graph summarizes portfolio yield and net investment spreads for the quarter.
Focusing first on the light Blue line. This line represents the income yield or the actual amount earned on the investments, including interest and fee income.
But excluding the amortization of discounts and upfront origination fees.
The income yield decreased by 20 basis points to 8.6% for the quarter ended June thirtyth.
Primarily due to a decrease in LIBOR over the past two quarters.
The investment income yield or the dark Blue line, which includes amortization of fees and discounts remained stable at 9.2% during the quarter due to an increase in prepayments fees and other fee income.
Weighted average cost of debt for the October line remained flat at 4.2%.
Despite the decreasing LIBOR rate, primarily due to the timing of 90 day LIBOR reset dates on our CLO liability.
Moving to the next two slides the number of non accrual investments increased from four to three investments.
One of which was fully repaid with a 100% recovery on our remaining principal balance subsequent to quarter end.
As of June Thirtyth, nonaccrual investments as a percentage of total investments at cost and fair value, we're 0.7% and 0.4% respectively.
Fundamental credit quality or June Thirtyth remains strong.
With over 90% of the investments in our portfolio, having an internal performance rating of four higher as of June Thirtyth as shown on slide 10.
As a reminder, independent valuation firms value approximately 25% of our investments each quarter.
Moving to the balance sheet and income statement on slides 11, and 12, we ended the quarter with total investments at fair value of 1.9 billion total cash and restricted cash of $110.7 million.
And total assets of just over $2 billion.
Total debt was 1 billion, which includes $562.9 million in floating rate debt. This month through our securitization vehicles.
$299.5 million of fixed rate debentures.
And $184.7 million of debt outstanding in our revolving credit facility.
Total net asset value per share remain at $15.95.
Our regulatory debt to equity ratio was 0.78 times below our GAAP debt to equity ratio was 1.09 times.
Slightly above our target of about one times GAAP leverage.
Flipping to the statement of operations total investment income for the quarter ended June Thirtyth. It was $42.1 million, an increase of $2.3 million from the prior quarter, primarily due to higher fee income.
On the expense side total expenses were $22.7 million, an increase of $1 million from the prior quarter.
Excluding the 700000 reversal in the capital gains incentive fee expense in the prior quarter expenses were relatively flat quarter over quarter.
Flipping to the following slide the charts on the top provide a summary of our quarterly distributions and return on average equity over the past five quarters.
A regular quarterly quarterly distributions have remained stable at 32 cents per share.
Which is consistent with our net investment income per share when excluding the GAAP accrual for the capital gains incentive fee.
The annualized quarterly return based on net income has averaged 7.7% for the past five quarters.
The bottom of the page illustrates our long history of study and.
Increases in energy per share over time.
For historical comparison purposes, we have presented NAV per share, both including and excluding special distributions.
Turn to slide 14. This slide provides some financial highlights for our investment in senior loan fund.
The annualized return for the quarter was zero as net investment income at SLF was offset by unrealized losses on a few portfolio company investments.
SLF invest meant that fair value thirtyth declined by 9.3% to $153.8 million from March 31.
The next slide summarizes our liquidity and investment capacity as of June thirtyth in the form of restricted and unrestricted cash.
Availability on our revolving credit facilities and debentures available through our Sps see subsidiaries.
Slide 16 summarizes the terms of our debt facilities.
And lastly on slide 17, our board declared a distribution of 32 cents a share payable on September 27 to shareholders of record as of August 19.
We move the record date for this distribution only to be a bit earlier.
We perceive the shareholder meeting date and anticipated closing of the merger in September .
No other changes are being made to the distribution, including the payment date.
We expect to resume our normal kind of record dates with our next distribution in December .
I'll now turn the call back to David who will provide some closing remarks.
Thanks, Ross so to sum up GBDC had a strong third fiscal quarter of 2019 net investment income was very consistent credit was good borrower diversification increased further and our balance sheet remained finely tuned I want to close with a quick update on the proposed merger with GCI see first where where does the merger Stan let the process achieved an important milestone in mid July when the joint proxy statement to GBDC NGC IC was declared effective by the SEC on July 15th.
GBDC NGC IC filed their joint definitive proxy statement of boots are currently being collected from stockholders of both companies and are due by the special stockholders meeting of each company, which are both scheduled for September 4th subject to stockholder approvals and satisfaction of all other conditions precedent. Our current expectation is that the transaction will close in September .
As a reminder, the GBDC board of directors myself included has unanimously recommended that stockholders vote in favor of the transaction related proposals. So a note for stockholders who have not already done so please vote.
Next I want to.
Highlight why we believe the merger with GE is compelling first for GBDC shareholders.
Seven reasons I'll be quick first the transaction is expected to be immediately accretive to gbdcs NAV per share based on Gbdcs NAV per share as of June Thirtyth and GC is estimated NAV per share up $15 as of June thirtyth, the accretion to Gbdcs NAV would be approximately 72 cents per share or about 4.5%. So that equates to roughly two quarters of historical net income per share for GBDC.
Second because the transaction will be accretive to gbdcs NAV per share. The transaction offers the potential for some additional value creation, assuming GBDC continues to trade at the approximately 16% premium to NAV that GBDC GBDC is treated at on average over the past three years.
Third the combination of GBDC NGC Ifyou would create the fifth largest externally managed publicly traded BDC by by assets based on the fair value of the holdings of each company as of June Thirtyth.
Fourth the increased market cap following the merger is anticipated to improve trading liquidity and lead to broader analyst coverage up fifth we expect the portfolio of the combined companies to look familiar though it will look a lot like standalone gbdcs, given the 98% overlap between the two portfolios.
Six we expect the combined company to have better access to the securitization market given the combined companies greater opportunities to optimize its debt capital as a consequence of its increased scale and seven we expect some operational synergies from eliminating redundant expenses.
In short we believe the combined GBDC GC IC maintains all the elements that have made GBDC successful and gives it a number of additional advantages in particular, we think decrease scale of the combined company will deliver benefits, including incremental earnings power to support the GBDC boards announced intention to increase Gbdcs quarterly dividend to 33 cents per share. After the closing of the merger provided that Gbdcs born reserves the right to revisit this intention if market conditions or gbdcs prospects meaningfully change.
A final note. In addition to the expected direct benefits to Gbdcs shareholders associated with the proposed merger. There's also the continuation of a benefit that I don't think we highlight enough and thats access to the competitive advantages of the golf capital platform.
I'm, taking advantages that include scale and not just talking size a big balance sheet today is not enough I'm talking about a platform with 25 years of operating history in the us middle market over 450 employees over 130 investment professionals and over $30 billion of capital under management.
Talking about relationships golf capitals done repeat business with over 180 different private equity sponsors and in recent periods repeat sponsors have accounted for 80, 80% or more of the firm's origination volume.
I'm talking about incumbency scholars capital today lens to about 250 middle market Obligors and more than 50% of the firm's origination volume has typically come from these repeat borrowers.
Talking about distinctiveness of our product suite.
We believe golub capitals, the market leader in one stops and our ability to offer buy and hold solutions up to $600 million and provide underwrites of up to $1 billion is is is quite distinctive.
And finally, I'm talking about industry expertise, we believe God capital seen by the market as expert in our key verticals, including software health care and consumer businesses.
So post merger merger, we believe GBDC will be better positioned than ever to benefit from the advantages of the golub capital platform and to continue its longstanding track record of delivering consistent premium returns for shareholders.
With that let me. Thank you for your time today, and your and your partnership and let's open up the floor for questions.
Thank you.
If you would like to register a question. Please press the one followed by the four on your telephone or you will hear us three Tom from to acknowledge your request.
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Again it is the one followed by the four to register for a question.
And our first question is from the line of Fin O'shea with Wells Fargo Securities. Please go ahead.
Okay.
Hi, guys good afternoon.
First question on the.
Large versus core middle market.
You've been highlighting the view of a more favorable risk adjusted return and in the core middle market recently.
And seeing some of the larger unitranche positions is.
Are you shifting here in terms of what's more available, what's better and available or is the.
Recent volatility sort of opening up.
The larger side.
So.
Great, but I actually think about it in terms of to June .
Segments in the market I tend to think about in terms of three so let's just talk about victories in the first would be traditional middle market companies, which would range in size from $20 million to $25 million of EBITDA.
That market, we've historically been very active and we continue to be active in I would describe it as the most competitive segment of our market right now.
The portion of the market, where new entrant activity has been most significant and that's driven down.
What historically were.
Better better spreads and better documentation terms.
The second segment would be traditional middle market, which would range from $25 million EBITDA up to up to $50 million in EBITDA.
And that.
He is the segment that we are most active in I would say that's the segment that we typically been most active in.
And market conditions, they're pretty consistent with how they've been for the last three or four years.
And in that market, we are continuing our strategy.
Which is to really focus on transactions, where we're where we have competitive advantages that we can bring to bear.
The last segment would be upper middle market, so $50 million to $80 million EBITDA companies.
Where we as direct lenders compete with the syndication market because those those borrowers have.
The ability to choose whether they prefer to go with a buy and hold lender or with a syndicated solution.
As you point out Finn in that last category, we tend to see.
Benefits from market volatility when when the syndication market is choppy.
Borrowers tend to be more receptive to buy and hold solutions and when the syndication market is hot.
It tends to be harder to compete with with with the syndication market.
Right now I'd say, we're we're neither in the hot or cold phase.
I'd say it's a.
The syndication market is.
Is is active but.
The syndication market is selective we've seen a period, where we are.
See a low investors have been picky about about which kinds of credits they like in which they don't like.
So as a consequence of all that our activity has.
Tended to be focused in the recent period in that $25 million to $50 million EBITDA size range company and my expectation would be that that's going to continue.
Got it thank you and just a follow on.
Upon origination of a new loan does the advisor goal of retain any of the upfront economics prior to allocation.
So so in a typical transaction there is a number of different upfront fees. There's a there's a so I'd or original issue discount.
There is also a structuring fee.
Involved and and as we disclosed in all of our documentation, we treat the BDC in a manner very similar to how we treat our private funds and that means that the advisor does in some cases retain a portion of the structuring fee.
Sure appreciate.
The color and just generally on the the parameters of the fees it generally.
You know a third a half.
On the upfront amount of say two points.
Just some general figures.
Rather than rather than speculate I'd, rather get back to you with specifics so let us let us do some work and come back.
Sure. Thanks for taking my questions.
Thank you. Our next question is from the line of Ray Cheesman with Anfield capital. Please go ahead.
I'm wondering if you could give us what you're seeing out in the marketplace on LIBOR floors.
I see your charts in your presentation with LIBOR declining.
I'm also seeing the floor that protected us in the past as.
Not being included in as many deals as it used to be what are you seeing.
I think that's accurate.
We're we're pushing for LIBOR floors were where we can.
I think as LIBOR goes down, we'll we'll probably see the reemergence of reasonably standard 1% Mike were floor.
But in the period when LIBOR rose to.
Meaningfully higher than than the 1%, formerly standard level that started to fade as the standard.
So I am I think your observation is right on that if you looked at.
At the universe today, we see a smaller portion of the universe, having LIBOR floors, but I think if we have a sustained period of decreasing lives will will very likely see the reemergence of both standard 1% LIBOR floor.
On a kind of parallel topic with.
With the happy days of the last 122 months of recovery.
And all of our indentures faded away and nothing else than we all did covenant light loans do you think that the stress that's returned it to some of the markets will lead people to for lack of a technical term wise up and request a little bit of protection looking forward into what could be refer waters in the next.
A set of deals.
Yes, and no so.
If you look at the.
Situation in documentation land I would characterize it is falling into two buckets. There is there's one there's one bucket that.
We could call financial covenants and there is one second bucket that we could call leakage related provisions.
We're seeing let me describe what I mean by each of those so.
Financial covenants as the name implies would be.
Tests that if a borrower were fails would enable a lender to come to the table with the borrower and have a have a discussion and these tests would be.
Debt to EBITDA or absolute level of EBITDA or fixed charge coverage.
The second category leakage provisions have to do with.
Restrictions on the company's ability to take assets out of the box that lenders are lending to so that might be for example restrictions on on dividends, so called restricted payments or it might be.
Our restrictions on the company's ability to repurchase debt or restrictions on the ability to have the company to put in place debt that is that is actually are structurally senior to the the existing debt.
I think we're seeing a lot of signs that the market is getting smarter about leakage provisions and I'm pleased to see that because I think I think the.
Documentation drums in the broadly syndicated market in particular around leakage provisions were.
We're under very significant pressure.
Earlier this year and we're moving in a direction that that was bad for the industry.
So I'm pleased to see that in the last.
60 to 90 days, we're seeing more and more pressure on on a Rangers Q.
Mixture that documentation terms related to leakage are improved.
I don't see the same phenomenon on the financial covenants front and I don't anticipate that we're going to see it for larger size transactions in the broadly syndicated market can be life has become a norm.
In the middle market less so and we.
Have have retained.
The predominant number of our transactions, including.
One or several financial covenants.
The good news is I I don't see as much pressure on.
Documentation terms related to financial covenants in middle market transactions, but the flip side is I I don't I don't anticipate that we're going to see.
We're going to see a return to 2011 style documentation germs anytime soon.
Keep fighting the good fight thank you.
Our next question is from the line of bearer Weisbrod waste that's why our please go ahead.
Hey, guys. Thanks for taking the call.
Wanted to I saw the change to the Mark and the addition of a pik component to all of our street dermatology costs. So when it too.
Ask what's going on there.
Thanks for your question, Bill, but I'm going to I'm going to deferred discussing UHS specific situation.
Like like Oliver Street on.
I don't I don't think it's I only as appropriate topic for this call.
Correct.
As a reminder, if you would like to ask a question. Please press the one followed by the four one moment. Please for the next question.
There are no further questions at this time Sir.
Okay, great well.
Thanks, everyone again for your time today and.
Have any questions that come up after today's discussion please feel free to reach out to any of myself or or or Ross or Gregory or John and we look forward to talking to you again next quarter.
That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your line.