GSBD - NYSE

Good morning. This is Austin Neri, a member of the Investor Relations team for Goldman Sachs BDC, Inc., and I would like to welcome everyone to the Goldman Sachs BDC, Inc. Second Quarter 2024 Earnings Conference Call. Please note that all participants will be in listen-only mode until the end of the call when we will open up the line for questions. Before we begin today's call, I would like to remind our listeners that today's remarks may include forward-looking statements. These statements represent the Company's belief regarding future events that by their nature are uncertain and outside of the Company’s control. The Company's actual results and financial condition may differ, possibly materially from what is indicated in those forward-looking statements as a result of a number of factors, including those described from time to time in the Company's SEC filings. This audio cast is copyrighted material of Goldman Sachs BDC, Inc. and may not be duplicated, reproduced or rebroadcast without our consent. Yesterday, after the market closed, the Company issued an earnings press release and posted a supplemental earnings presentation, both of which can be found on the homepage of our website at www.goldmansachsbdc.com under the Investor Resources section, and, which include reconciliations of non-GAAP measures to the most directly comparable GAAP measures. These documents should be reviewed in conjunction with the Company's quarterly report on Form 10-Q filed yesterday with the SEC. This conference call is being recorded today, Friday, August 09, 2024 for replay purposes. I will now turn the call over to Alex Chi, Co-Chief Executive Officer of Goldman Sachs BDC, Inc.

Thank you Austin. Good morning, everyone and thank you for joining us for our second quarter 2024 earnings conference call. I'm here today with David Miller, our Co-Chief Executive Officer; Tucker Green, our Chief Operating Officer; and Stan Medishevsky, our Chief Financial Officer. I'll begin the call by providing an overview of our second quarter results and then discuss the current market environment. I'll then turn the call over to Tucker to describe our portfolio activity and performance before handing it off to Stan to take us through our financial results. And then finally, we'll open the line for Q&A. With that, let's get to our second quarter results. Our net investment income per share for the quarter was $0.59 up 7.3% from the previous quarter. Net asset value per share was $13.67, a decrease of approximately 6%. Our net investment income, again, exceeded our quarterly dividend, but the excess was offset by net realized and unrealized losses during the quarter, which led to the decrease in NAV. More than 70% of the unrealized losses in the quarter were related to markdowns in three investments within the portfolio; Lithium Technologies, Pluralsight, and

Thanks, Alex. During the quarter, we originated 440 million new investment commitments to 10 new and 15 existing portfolio companies. And as Alex mentioned, this is indeed the highest level of originations for GSBD during the fiscal quarter since the integration of our platform in early 2022. Through the first half of 2024, investment activity across Goldman Sachs direct lending Americas platform is up nearly four times on a dollar basis, and two times on a deal basis versus the first half of 2023 despite relatively flat M&A activity. Sales and repayment activity totaled $226.5 million, primarily driven by the full repayment and restructuring of our investments in six portfolio companies. Turning to portfolio composition, as of June 30, 2024, total investments in our portfolio were $3.52 billion at fair value comprised of 98% in senior secured loans, including 92.3% in first lien, 4.6% in first lien last-out unitranche, and 1.1% in second lien debt as well as a negligible amount in unsecured debt, and 1.8% in a combination of preferred and common stock. As of June 30, 2024 the company held investments in 155 portfolio companies operating across 38 different industries. The weighted average yield of our investment portfolio to amortized cost at the end of the second quarter was 11% as compared to 11.9% from the prior quarter. The weighted average yield of our total debt and income-producing investments at amortized cost at the end of the second quarter was 12.3% as compared to 12.7% at the end of Q1. The weighted average net debt-to-EBITDA of the companies in our investment portfolio remained flat at 6.1 times during the second quarter as compared to the first quarter. Importantly, our portfolio companies had both top line growth and EBITDA growth quarter-over-quarter and year-over-year on a weighted average basis. The current weighted average interest coverage of the companies in our investment portfolio at quarter end remained flat at 1.5 times in the second quarter as compared to the first quarter. And finally, turning to asset quality. During the quarter and as Alex mentioned earlier, Lithium and Pluralsight were both placed on nonaccrual status. In addition, the Thrasio first lien deposition, which was on nonaccrual was restructured into a first lien second-out term loan and a common equity position. The restructured second half term loan remain on nonaccrual. As of June 30, 2024 investments on nonaccrual status increased to 3.4% of the total investment portfolio at fair value from 1.6% as of March 31, 2024 and 7.6% of the total investment portfolio at amortized cost from 3.3% as of March 31, 2024. I will now turn the call over to Stan Matuszewski to walk through our financial results.

Thank you, Tucker. We ended the second quarter of 2024 with total portfolio investments at fair value of $3.5 billion, outstanding debt of $2 billion, and net assets of $1.6 billion. Our ending net debt to equity ratio as of the end of the second quarter was 1.19 times, which continues to be below our target leverage of 1.25 times. At quarter end, approximately 64.4% of the company's total principal amount of debt outstanding was in unsecured debt, and we had $1 billion of capacity available under our secured revolving credit facility. Before continuing to the income statement, as a reminder, in addition to GAAP financial measures, we will also reference certain non-GAAP or adjusted measures. This is intended to make the company's financial results easier to compare to the results prior to our October 2020 merger with Goldman Sachs Middle Market Lending Corp., or MMLC. These non-GAAP measures remove the purchase discount amortization impact from our financial results. For the second quarter, GAAP and adjusted after-tax net investment income were $67 million and $65.2 million, respectively, as compared to $60.8 million and $59.5 million, respectively, in the prior quarter. On a per share basis, GAAP net investment income was $0.59. Excluding the impact of asset acquisition accounting in connection with the merger with MMLC, adjusted net investment income for the quarter was $0.57 per share, equating to an annualized net investment income yield on book value of 16.7%. Total investment income for the three months ended June 30, 2024 and March 31, 2024 was $108.6 million and $111.5 million, respectively. The decrease in total investment income was primarily due to our investments being placed on nonaccrual status as a result of underperformance during the quarter. We would also note that we saw a slight decrease in PIK income as a percentage of total investment income quarter-over-quarter. Distributions during the quarter remained consistent at $0.45 per share, our spillover taxable income is approximately $143.3 million or $1.23 on a per share basis, which we believe provides continued stability on our consistent dividend since inception. With that, I'll turn it back to Alex for closing remarks.

Thanks, Stan and thanks everyone for joining our earnings call. While we're disappointed by this quarter's markdowns, we remain determined and optimistic about maximizing shareholder value in the quarters ahead, all while continuing to recycle capital to bolster the quality of the portfolio by deploying capital into the most attractive opportunities using the full breadth of the Goldman Sachs platform. With that, let's open the line for Q&A.

We'll take our next question from Mark Hughes with Truist. Please go ahead.

Yes, thank you, good morning. Maybe a high-level question on the recurring revenue loans. Is there -- are you perhaps looking at those differently on a go-forward basis and anything in the Pluralsight, their business model that you might incorporate into future underwriting is kind of something to be cautious about or do you think this is just unique to that company?

Yes, thanks for the question. So in terms of how we approach recurring revenue loans, that has not changed since we've started managing the platform more than a couple of years ago. So we continue to look at because I mentioned companies that have best-in-class technology, mission-critical to their customers. But we also look at margins, we want to make sure that these companies are highly profitable, and also have sustainable growth. So if you look at the loans that we've made more recently in the recurring revenue space, and again we are very selective about where we choose to do it, it fits all those different profiles. If you look at Pluralsight, at the time of investment the company was at negative margins and also the product is a good product. But at the same time, what we've seen is that as their customers have pulled back on spending, this company has seen some underperformance as a result.

Understood. You had mentioned the deal flow, I think the deal flow up four times even as M&A was relatively steady. Could you expand on that or to clarify what that -- what the four times was and then maybe comment on the context of that on selectivity, this quarter was your success more a function of the deal flow or do you just see more that you liked in this case?

So we certainly saw a healthy amount of flow, the number of originations that we've seen this year-to-date has been up significantly versus the same period last year. But also the quality of the businesses that we've seen has also increased. We've talked about how, in the last couple of quarters, we've seen EBITDA growth tick higher than top line growth, and we saw that again this past quarter. So there's been more flow. So as Tucker mentioned, the number of deals in terms of deal comp that we've had is of double, but also just as a function of the capital that we have, it's been up four times. And so we're clearly taking care. But if you look at it as a percentage in terms of the deals that we've done versus the number of originations, it's still a mid-single-digit percentage, which again just shows how selective we are and how broad our funnel is with respect to the originations that we see.

Understood. And then you mentioned the overall interest coverage steady 1.5 times. Any sense of the proportion that are at 1 or below, has there been any change in that ratio out on the tail?

No, there's been no change to that and still remains in the mid-single digit percentage.

Okay. Thank you very much.

Thank you.

We'll move next to Derek Hewett with Bank of America. Your line is open.

Good morning. So you had mentioned that PIK was slightly lower on a quarter-over-quarter basis, but it's still roughly 11% of revenue, which is moderately above the BDC peer average. So could you talk about your comfort level with PIK at current levels and could we see it potentially drift higher over the next 12 to 18 months?

Yes, certainly, this is Stan speaking. So we've been monitoring that we always monitor the PIK as a percentage of the total investment income in the portfolio. Certainly, I think we saw about a 50 bp decline period-over-period. We had some onetime PIK items in the Q1 period, some due to restructures or other onetime items. And again, this quarter, we did see a onetime item. So I'd say, normalized for that PIK would have been sub-10%. And we think that we're comfortable with that, and we continue to monitor it.

Okay. And then in terms of the portfolio yield on a cost basis, looked like it was down 30, 40 basis points. Was there anything in particular that caused that decline on a quarter-over-quarter basis?

No, I'd say for the most part, it's due to the yield on burn nonaccruals coming out of the portfolio, the reduction in income. So that's the primary driver.

Okay, thank you.

Thank you.

At this time, we have no further questions. I'd like to turn it back to Alex Chi for any additional or closing remarks.

Great. Well, thank you everyone for joining our call. Please enjoy the rest of your summer, and we look forward to speaking with you again after our next quarter.