GBDC - NASDAQ

Hello, everyone, and welcome to GBDC's earnings call for the fiscal quarter ended June 30, 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. 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.

Hello, everybody, and thanks for joining us today. I'm joined by Matt Benton, 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 partnership-oriented private equity sponsors. Yesterday, we issued our earnings press release for the quarter ended June 30, and we posted an earnings presentation on our website. We're going to be referring to this presentation over the course of today's call. I'm going to start with headlines, and then Matt and Chris are going to go through our operating and financial performance for the quarter in more detail. And finally, I'll wrap up with our outlook for the coming period, and we'll take some questions. The headline is that GBDC had another good boring quarter. Here are the highlights. Adjusted NII per share was $0.39. This corresponds to an adjusted NII return on equity of 10.4%. Adjusted net income per share was $0.34, and that's an adjusted return on equity of 9.1%. This brings the since IPO internal rate of return for GBDC shareholders to 9.6% over 15 years. Adjusted net income per share included $0.05 per share of adjusted net realized and unrealized losses, primarily unrealized losses in the small tail of underperforming borrowers that you've heard us speak about previously. Our new investment activity increased from prior quarters, but the overall M&A environment remained muted. And we continue to see an encouraging level of resilience across our borrowers with internal performance ratings remaining strong and generally consistent quarter-over-quarter. With that, I'll pass the call over to Matt Benton to discuss the quarter in more detail.

Thanks, David. I'm going to start on Slide 4. GBDC's $0.39 per share of adjusted NII and $0.34 per share of adjusted earnings were driven by 4 key factors. First, overall credit performance remains solid. Nearly 90% of GBDC's investment portfolio at fair value remains in our highest performing internal rating categories. The $0.05 of adjusted net unrealized and realized losses were primarily related to fair value markdowns on a small number of underperforming investments, the majority of which were in equity investments in these portfolio companies. Investments on nonaccrual status remained very low at 60 basis points of the total investment portfolio at fair value. This level is well below the BDC peer industry average. Second, earnings were supported by historically high base rates and attractive spreads consistent with recent quarters. GBDC's investment income yield was 10.6%, a sequential decline of about 20 basis points, primarily driven by: one, modestly lower base rates, mostly related to a greater mix of loans tied to lower non-SOFR reference rates; and two, modest spread compression during the quarter. Third, a decline in GBDC's borrowing costs largely offset the sequential decline in investment income yield. The repricing of GBDC's syndicated corporate revolver, which took effect in mid-May, reduced effective borrowing costs during the quarter. And fourth, earnings benefited from lower operating expenses due to GBDC's market-leading fee structure. GBDC's investment portfolio grew modestly quarter-over-quarter, an increase of 4% to just under $9 billion at fair value. The increase was the result of $557 million of new investment commitments in the quarter, $411 million of which funded in the quarter and net of $306 million in repayments. We continue to remain highly selective and conservative in our underwriting, closing on just 3.1% of deals reviewed in the quarter at a weighted average LTV of approximately 34%. We continue to lean in on existing sponsor relationships and portfolio company incumbencies for approximately half of our origination volume and delivered an uptick in deal activity with new borrowers. We continue to leverage our scale to lead deals, acting as the sole or lead lender in 88% of our transactions. We focused on the core middle market, which we believe continues to offer better risk-adjusted return potential than the large borrower market. The median EBITDA for our calendar Q2 2025 originations was $79 million. We believe our ability to play across the size spectrum is a particularly valuable differentiator today versus many of our peers that are limited to the large borrower market. 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. NAV per share decreased by $0.04 on a sequential basis to $15, primarily because of net unrealized losses. Net debt to equity increased modestly quarter-over-quarter, ending at 1.26 turns. On average, throughout the quarter, GBDC's net leverage was 1.21 turns, well within our targeted range of 0.85 to 1.25 turns. During the quarter, we opportunistically repurchased common stock on an accretive basis. GBDC's Board declared a regular quarterly distribution of $0.39 per share, representing an annualized dividend yield of 10.4% based on GBDC's NAV per share as of June 30, 2025. I'm going to turn it over to Chris now to take us through our financial results in more detail. Chris?

Thanks, Matt. Turning to Slide 7. You can see how the earnings drivers Matt just described and distributions paid in the quarter translated into GBDC's June 30, 2025 NAV per share of $15. Adjusted NII per share of $0.39 was in line with the $0.39 per share base distribution paid out during the quarter. Adjusted net realized and unrealized losses were $0.05 per share and repurchases of common stock during the quarter resulted in $0.01 per share of NAV accretion. Together, these results drove a net asset value per share decrease to $15. We will turn to Slide 10, which details our origination activity for the quarter. Net funds quarter-over-quarter increased modestly by $340 million as the combination of funded new originations and DDTL and revolver draws outpaced repayments in the quarter. Looking at the bottom of the slide, the weighted average rate on new investments was 9.2%. Investments that repaid in the quarter were at a weighted average rate of 9.8%. We did see some spread widening immediately after Liberation Day that was followed by some spread tightening over the remainder of the quarter. Slide 11 shows GBDC's overall portfolio mix. And 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. Slide 12 shows that GBDC's portfolio remains highly diversified by portfolio company with an average investment size of approximately 20 basis points, consistent with prior quarters. Additionally, our largest borrower represents just 1.5% of the debt investment portfolio and our top 10 largest borrowers represent below 12% of the portfolio. We are big believers in modulating credit risk through position size, which we believe has served GBDC well in previous credit cycles. And as of June 30, 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 4.9%. Let's walk through this slide in detail. We'll start with the dark blue line, which is our investment income yield. As a reminder, the investment income yield includes the amortization of fees and discounts. GBDC's investment income yield fell 20 basis points sequentially to 10.6%. The decline was primarily the result of a lower weighted average spread on debt investments in the portfolio and the result of a portion of GBDC's 99% floating rate investment portfolio re-indexing in the quarter to lower reference rates. Our cost of debt, the teal line, decreased 20 basis points to 5.7%, reflecting our approximately 80% floating rate debt funding structure and the partial quarter contribution of the amendment of our syndicated corporate revolver. Net-net, GBDC's weighted average net investment spread, the gold line, remained stable quarter-over-quarter at 4.9%. Moving on to Slides 14 and 15 as we take a closer look at our credit quality metrics. On Slide 14, you can see that nonaccruals decreased slightly to 60 basis points of total investments at fair value. The number of investments on nonaccrual status remained at 9. Slide 15 shows the trend in internal performance ratings. As Matt noted earlier, nearly 90% of the total investment portfolio remained in our top 2 internal performance rating categories and investments rated 3, signaling a borrower is or has the potential to be performing below expectations at underwriting remained low at just 9% of the total investment portfolio. The proportion of loans rated 1 and 2, which are the loans we believe are most likely to see significant credit impairment, remain very low at just 1.3% of the portfolio at fair value. As we usually do, we're going to skip past Slide 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 to 21. First, let's focus on the key takeaways on Slide 21. Our debt funding structure remains highly diversified and flexible. Our debt maturity profile remains well positioned with 42% of our debt funding in the form of unsecured notes with no near-term maturities. The April 2025 corporate revolver amendment further enhanced our debt maturity profile, extending final maturity on the nearly $2 billion of total commitments under the facility through 2030, and we expect to operate at the lowest pricing tier of 1.525% over 1 month SOFR given the level of overcollateralization in the facility. And following quarter end, we elected to repay in full the outstanding notes under the GBDC 3 2022 debt securitization with available borrowing capacity under GBDC's corporate revolver. This action represented the final step in transitioning the post-GBDC 3 merger debt funding structure, and we expect it to result in a modest borrowing cost reduction beginning in the quarter ended 9/30/2025. Consistent with our asset liability matching principle, 82% of GBDC's total debt funding is floating rate or swapped to a floating rate. The portion of the debt funding that remains fixed rate are the 2026 and 2027 notes that were issued with a weighted average coupon of 2.3%. And as you've heard us say on prior occasions, we did not swap them out for floating rate exposure. Overall, our liquidity position remains strong, and we ended the quarter with approximately $950 million of liquidity from unrestricted cash, undrawn commitments on our corporate revolver and the unused unsecured revolver provided by our adviser. We're well positioned with the level of capital and significant amount of liquidity for the period ahead. Now I'll hand it back over to David for closing remarks.

Thanks, Chris. So to sum up, GBDC posted another quarter of good boring results. But these results happened in a quarter that from a macro perspective, wasn't boring at all. It saw big market swings, and it saw another example of a bad consensus forecast. You'll recall in prior quarters, I've talked about how many bad consensus forecasts we've seen since the beginning of COVID. At the beginning of calendar Q2, the strong consensus view was that tariff-related uncertainty would be a big drag on the U.S. economy and that would probably result in slowing growth. But that's not what happened. Instead, the U.S. economy has at least so far demonstrated considerable resilience. So I'm now going to offer up some observations and some predictions about the future, but I want to acknowledge in doing so that we're in a period that's proved very difficult for forecasters. I advised last quarter, given this that we should all stay humble, we should all choose resilient strategies, and we should prepare for multiple scenarios. I think that was good advice then, and it's good advice now. With that context, let me touch briefly on 2 topics on our outlook for credit performance and our outlook for the deal environment. First, credit performance. I expect what is already a protracted credit cycle to become even more protracted. Traditionally, credit cycles, they're typically spiked. Something bad happens, there's a collapse in confidence or there's too much inventory or there's a geopolitical shock, and you get a spike in credit defaults where defaults rise to an unusual height and then quickly fall. That's not what we've seen in this credit cycle. In 2022, when we saw the dramatic increase in interest rates, a lot of smart people, including us, expected that we'd see a sudden significant increase in defaults in response to that increase in rates, but that didn't happen. Instead, almost 2 years later, we started to see a slow increase in defaults, and we saw it across the broadly syndicated market, the high-yield market and private credit markets. And we continue to see that slow increase, sustained increase today. Defaults in the broadly syndicated market, a place where the data is reasonably clean once you factor in liability management exercises, they've been running at about 4.5% for about 18 months. That's about 2x historical average levels. We think this elevated level of credit stress across public and private credit markets is likely to continue for a considerable period with apologies to Tolstoy who famously wrote that every unhappy family is unhappy in its own way. Every unhappy credit is unhappy in its own way. But there are a few common themes that cover a large number of the stressed companies that we see today. 3 examples. Some haven't grown into aggressive capital structures that were put in place in 2021. Some are on the wrong side of some changing post-COVID consumer taste. And for some, the adjustments in their original business plans haven't played out the way that they were expected to play out. Our observation is that many of these companies have not yet gone through restructurings and fixed their balance sheets. Some have done liability management exercises, but those LMEs haven't solved their issues. They've just kicked the can. So we expect high-yield BSL and private credit default rates to stay elevated for some time from here. We also anticipate that there will continue to be very substantial dispersion in credit manager performance. We call these winners and whiners. Some firms are going to continue to produce really solid ROEs and some won't. We think this will be directly related to whether the firms have solid competitive advantages. So accordingly, we expect the same winners to keep winning and the same whiners to keep, well, you get the idea. So that's topic one. We expect a protracted credit cycle to become even more protracted. Second topic, let me give you my view on when the muted M&A environment is going to get less muted. Now here, there are some reasons for optimism. The recent enactment of the big beautiful bill provides a significant degree of clarity on tax and spending changes. The regulatory environment is also becoming clearer. And there remains, as we've talked about in prior quarters, there remains very significant pressure on private equity firms to be sellers in order to make distributions to LPs and to be buyers to deploy the very significant amounts of dry powder that they're behind schedule in deploying. So all that's positive. On the other hand, there's still a lot of tariff uncertainty, and there's still a lot of global macro issues. On balance, I expect the M&A environment to improve. I think it's going to improve slowly in the rest of this year and then more quickly next year. But I also want to go back to my theme of humility. I'm humble about this prediction. We have all been pretty consistently wrong on this. No matter whether the deal markets heat up or not, our playbook at Golub Capital is going to remain the same as it's been for decades. We're going to continue to be very selective when we make new loans. We're going to continue to focus on early detection of borrower underperformance, and we're going to continue to work with our sponsor friends to address problems proactively. Our approach is all about minimizing realized credit losses and being ready to play offense when opportunities arise. With that, operator, please open the line for questions.

[Operator Instructions] Your first question comes from the line of Heli Sheth with Raymond James.

So a quick one on leverage. So this quarter, you guys ended with net leverage of 1.26, which is quite high by historical standards. So is it fair to say that you're expecting a significant wave of repayments to eventually lever down?

Yes and no. You're correct that we have some repayments in the pipeline and that we think the quarter end leverage was a little bit higher than if you were looking at it over time. And Matt alluded to this in his comments, he alluded to the fact that average leverage over the quarter was about 1.2. We've always thought about leverage as being appropriate in the context of a target range rather than being too religious on one specific point within the range and 1.25 is the high end of our range. So you indicated in your question, are we anticipating a deleveraging? No. But likewise, we're not anticipating further leveraging either.

Got it. And a quick follow-up, maybe a more philosophical question, but spreads across the floating rate markets are quite tight right now, not just with BDCs, but with syndicated loan spreads as well, which tend to widen when rates go down. So with BDCs spreads having lagged these movements upwards of 6 months, do you think this lag time between liquid loan markets and BDCs is going to remain the same? Or is it more likely to respond more quickly going forward?

I'm not sure I understand your question. When you say BDCs have lagged, can you elaborate on what you mean by that?

Yes. lagging like loan spread movements with the syndicated loan market.

So you're saying that the syndicated loan market has seen more spread compression than we've seen in our reported spreads on our new loans?

Yes.

Is that what -- yes. You're right. I think that is an appropriate description of the pattern that we've seen. We've seen quite significant spread compression in the broadly syndicated market. It's been a pattern for some time. So if you think back to the summer of 2022 when rates went up and the broadly syndicated market dislocated and we saw very significant spread widening since 2023, we've been on a trend toward a more borrower-friendly, tighter spread environment in both private credit and the broadly syndicated market. I do think you're right that private credit spreads are a little stickier, especially middle market private spreads. But we've seen a significant degree of spread compression in our markets as well. And I don't think we're immune to those trends. I think the right way to look at it is, especially in the core middle market as opposed to the larger market, the core middle market is insulated, but not immune from spread trends that are happening in the broadly syndicated market. The larger end of the private credit market is less insulated because BSL is a replacement. So we've seen a number of transactions. Finastra is a good example recently where credits that were in the private credit market are being refinanced at lower spreads in the broadly syndicated market. So because of that phenomenon, the larger end of the market tends to respond more quickly to changes in spreads than the core middle market.

[Operator Instructions] I will now turn the call back over to David Golub for closing remarks. Please go ahead.

Gosh, it seems today, the report is so good boring. We don't have the usual number of questions, which is fine. Thank you all for listening. As always, if you have questions after today, please feel free to get in touch, and we look forward to being back in front of you next quarter. Thank you.