Good afternoon. Welcome to Golub Capital BDC, Inc.'s September 30, 2015 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 the 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, Inc.'s filings with the Securities and Exchange Commission..

For a slide presentation that we intend to refer to on the earnings conference call, please visit the Investor Resources tab on the homepage of our website, www.golubcapitalbdc.com, and click on the Events/Presentations link to find the September 30, 2015 Investor Presentation.

Golub Capital BDC's earnings release is also available on the company's website in the Investors 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. Please go ahead. .

Thank you. Good afternoon, everybody, and thanks for joining us today. I'm joined today by our Chief Financial Officer, Ross Teune; and Managing Director, Greg Robbins. .

Tuesday evening, we issued our earnings press release for the quarter ended September 30, and we posted a supplemental earnings presentation on our website. We'll be referring to the presentation throughout this call. .

I'd like to start by providing an overview of the September 30 quarterly results. Ross is then going to take you through the results in more detail, and I'll come back at the end and provide some closing remarks. Then, we'll open the floor for questions. .

Let me start with the overview. In short, GBDC had a very solid quarter. The results, for me, are particularly gratifying in the context of the environment. I don't have to tell you that calendar Q3 was a very difficult quarter for most asset classes, and investors had few places to hide.

The BDC industry was no exception to this as many BDCs experienced significant realized and unrealized credit losses, and in some cases, very significant declines in NAV per share. .

Not true of GBDC. As you'll hear on today's call, at GBDC, our mantra continues to be the same. We're trying real hard to make boring beautiful. So with that, let's dive into the details for the quarter ended September 30. Net increase in net assets resulting from operations or net income was $19.5 million. That's $0.38 a share.

And that's compared to $18.3 million or $0.36 a share for the quarter ended June 30. GAAP net investment income or, as I told you last quarter, I'm going to begin to call it income before credit losses.

Income before credit losses was $15.5 million for the quarter ended September 30, that's $0.30 a share, excluding $0.8 million of GAAP accrual for the capital gains incentive fees. Net investment income was $16.3 million or $0.32 a share. That compares to $15.9 million or $0.32 a share for the quarter ended June 30.

Consistent with last quarter, we provided net investment income per share excluding the GAAP capital gains incentive fee accrual because the GAAP capital gains incentive fee payable as calculated under the investment advisory agreement is 0. So we think that adjusted NII is a more meaningful measure of results than NII. .

Having said this, we think that more important than NII because NII at the end of the day is only income before credit losses, is change in net asset value per share. Net asset value per share for the quarter ended September 30 was $15.80. That compares to $15.74 for the prior quarter.

So this marks the 13th consecutive quarterly increase in our net asset value per share. The $0.06 of accretion was attributable to quarterly earnings in excess of our dividend. Net realized and unrealized gains on investments and secured borrowings were $4 million or $0.08 per share for the quarter.

And this was the result of $0.9 million of net unrealized depreciation and $4.9 million of net realized gains. And the net realized gains were primarily derived from the sale of 3 equity coinvestments. This is the 11th consecutive quarter with what we call negative credit losses. .

If we flip to talking about new investment activity, I said last quarter that we anticipated that originations in the 6/30 quarter were going to prove to be higher than the September quarter, and that turned out to be the case. Originations for the quarter ended September 30 of $199.4 million were declined from June but in line with prior quarters.

This included about $12 million we invested in SLF. As in prior quarters, investing activity was heavily weighted toward existing portfolio companies and private equity sponsors with whom we've done multiple transactions.

If you look at the first 3 calendar quarters of 2015, over 80% of the deals we completed or with repeat sponsors and over 40% were with repeat borrowers. Consistent with prior quarters, we continue to focus on one stops.

The originations mix this quarter was 19% traditional senior secured; 74%, one stops; 6% in Senior Loan Fund; and 1% in equity securities. Total investments in portfolio companies at fair value decreased by $40.9 million during the quarter as a result of several large payoffs and as a result of some transfers, some sales from balance sheet to SLF. .

Turning to Slide 3 of the presentation, you can see in the table the $0.38 per share we earned from a net income perspective and the $0.32 per share we earned from a net investment income perspective before accrual for that capital gains incentive fee. You can also see our net asset value per share of $15.80.

As shown on the bottom of the slide, the portfolio remains well diversified with investments in 164 different portfolio companies, and the average size per investment remains small at $8.7 million. .

I'm going to turn it over to Ross now to provide some additional highlights on the quarter and to discuss the financial results in more detail. And then, I'll come back with some closing comments before taking questions. .

Great. Thanks, David. Beginning on slide 4, as David mentioned, we had total originations of $199.4 million and total exits and sales of investments of $237.6 million. Included in the $237.6 million is $85.9 million of sales of senior secured loans to SLF.

Overall investments at fair value on balance sheet decreased by $40.9 million or 2.6% for the quarter while investments at fair value for SLF increased by $62.1 million or 24.3%.

David also mentioned 19% of our new origination commitments were in traditional senior secured loans, 74% were in one stop loans, 6% was invested in SLF and 1% in equity coinvestments. .

Turning to Slide 5. These 4 charts provide a breakdown of the portfolio by investment type, industry classification, investment size and fixed versus floating rate. Looking first at the chart on the top left-hand side.

Overall, portfolio mix by investment type remained relatively consistent quarter-over-quarter, with one stop loans continuing to represent our largest investment category at 74%. .

In regards to industry diversification, the portfolio remains well diversified by industry, and there had been no significant changes in these classifications over the past year. .

And looking at the charts on the right-hand side, the investment portfolio remains diversified by both investment size, and the debt investment portfolio remains predominantly invested in floating rate loans. .

We continue to invest in companies we believe have sustainable revenues and EBITDA and in sectors that are typically resilient to changes and micro economic conditions. We continue to avoid industries in which there is a high degree of cyclicality or commodity price risk or vulnerability to cheap exports..

Turning to Slide 6. The weighted average weight of new middle-market investments was 6.8%. This was slightly below the weighted average rate on new investments that were sold or paid off during the quarter of 6.9%.

The weighted average rate of 6.8% of new investments was consistent with the previous quarter as the investment mix of new originations was also consistent and pricing on new middle-market investments remained stable. 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 will be calculated using the current LIBOR, the spread over LIBOR and the impact of any LIBOR floor..

Shifting to the graph on the right-hand side. This graph summarizes investment portfolio spreads for the quarter. Focusing first on the gray line, this line represent the income yield or the actual amount earned on the investments, including interest and fee income, but excluding the amortization of discounts and other upfront fees. .

Primarily due to an increase in prepayment fees of $1.3 million, the income yield increased by 40 basis points from 7.6% to 8% for the quarter ended September 30. The investment income yield or the dark blue line, this includes the amortization of fees and discounts.

This also increased by 40 basis points to 8.8% due to the increase in prepayment fees. The green line, the weighted average cost of debt remains stable at 3.2%..

Flipping to the next slide. Overall credit quality continues to remain strong although we did experience a slight increase in our nonaccrual percentage to 0.4% of investments at fair value due to the addition of 1 nonearning investment..

Turning to Slide 8. The percentage of investments risk-rated of 5 or 4. Our 2 highest categories remain stable quarter-over-quarter and continues to represent over 90% of our portfolio. The percentage of investments risk-rated to 1 through 3 increased slightly but still remains very low.

As a reminder, independent valuation firms value approximately 25% of our investments each quarter. .

In review of the more detailed balance sheet and income statements in the following 2 slides, we ended the quarter with total investments of $1.53 billion at fair value, total cash and restricted cash of $97.5 million, and total assets of $1.64 billion. Total debt was $813.3 million.

This includes $461 million of floating rate debt issued through our securitization vehicles, $225 million of fixed rate debentures, and $127.3 million of debt outstanding in our revolving credit facilities. .

Total net asset value on a per share basis increased to $15.80. Our GAAP debt-to-equity ratio was 1.01x at September 30, while our regulatory debt-to-equity ratio was 0.73x. These are both consistent with our targets that we've previously disclosed. .

Flipping to the statement of operations. Total investment income for the quarter ended September 30, that was $33.6 million. This is up $3.1 million from their prior quarter due to higher average investments as well as higher prepayment fee income that I previously mentioned. .

On the expense side, total expenses of $18.1 million increased by $2.9 million during the quarter, primarily due to an increase in incentive fee expense due to higher net investment income and an increase in interest expense caused by higher average debt outstanding.

As David highlighted earlier, we had net realized and unrealized gains of investments of $4 million during the quarter. Net income for the quarter totaled $19.5 million. .

Turning to the following slide. The tables on the top provide a summary of our EPS and ROE, both from a net investment income perspective and a net income perspective for the past 5 quarters.

Excluding the GAAP accrual for the GAAP capital gains incentive fee, NII on a per share basis has remained stable at $0.31 to $0.32 a share for the past 5 quarters. This is a return of about 8%. .

Due to strong credit performance and strong equity gains, we have been generating positive realized and unrealized gains, which has resulted in an ROE of over 5 -- of over 9.5% on average over the past 5 quarters.

Furthermore, as shown in the table at the bottom of the page, we have steadily increased our net asset value per share for 13 consecutive quarters..

Turn to Slide 12. This slide provides some financial highlights for our investment in SLF. In conjunction with our partner, we continue to focus on growing investments in this fund. And during the quarter ended September 30, net growth in investments at fair value was $62.1 million, a 24.3% increase from the prior quarter.

The annualized return for the quarter ended September 30 of 4.8% declined from the previous quarter due to some mark-to-market unrealized losses on some broadly syndicated loans and middle-market loans. .

Turning to the next slide. As of September 30, we had approximately $140.5 million of capital for new investments. This consists of restricted and unrestricted cash as well as availability on our revolving credit facilities.

Subsequent to quarter end, on October 21, we terminated our revolving credit facility with PrivateBank as its small size and limited borrowing capacity did not provide a lot of economic benefit. .

Turning to Slide 14. We've summarized the terms of our debt financings. And finally, on Slide 15, our board declared a distribution of $0.32 a share payable on December 29 to shareholders as of record as of December 11. .

I'll now turn it back to David who will talk about our strategy in the current market as well as some other closing remarks. .

Thanks, Ross. So to summarize, despite a challenging and volatile environment for most asset classes, the quarter ended September 30 was another solid steady performance here at GBDC. There is no shortage of excitement out there right now, both inside and outside the BDC space.

But we're working hard to make it so that if you want excitement, you're on the wrong earnings call. .

Like our results, our strategy remains boringly consistent. We continue to be focused on using our competitive advantages that arise from our market-leading $15 billion credit platform to make investments in solid, resilient companies backed by high-quality, partnership-oriented, private equity firms.

We continue to see the best risk-reward in first lien senior secured loans, and we continue to avoid junior debt and other riskier asset classes like CLO equity or energy just to name a few. And if all that sounds really familiar, it should, because it's what's we've been saying now for years and years. .

So that concludes our prepared remarks today. As always, thank you for your time and continued support. And operator, if you'd please open the line for questions. .

[Operator Instructions] And our first question comes from the line of Troy Ward with KBW. .

David, just real quick. As we look at the portfolio, the exits from the balance sheet portfolio and the new investments in the SLF. As you noted in your remarks, some stuff move from the balance sheet again into SLF. Is there a reason -- I thought we would see that kind of in the initial stages of building the SLF.

But many of those investments were originated last quarter on the balance sheet, and then move to this quarter? Is there a reason why they make that pit stop on the balance sheet? And is that something we should expect to continue?.

Well, we're going to continue to manage the balance sheet.

So what we've said in prior quarters is that based on the market conditions we've got right now and the portfolio that we've got right now, we're aiming to titrate the balance sheet so that we're in a roughly 1x debt-to-equity ratio for GAAP purposes, roughly 0.75x for regulatory capital purposes. We think that's the right place to be.

And we see the ability with our partners agreement on each of these sales, our ability to move assets from balance sheet to SLF as a way for us to maintain those kinds of target leverage levels while also managing what's inevitably an origination pipeline that moves up and down over the time.

So as we kind of think about all the different goals we've got, one goal being grow SLF, the second goal being maintain the leverage at targeted levels. Our third goal being have an appropriate degree of diversification in both our balance sheet and nonbalance sheet portfolios.

The use of sales has proved to be very valuable, and I anticipate we'll continue to use that as one of the techniques that we use to grow SLF. .

So as we look in last 3 quarters, the regulatory -- I'm sorry, the total leverage was 1.01x, 1.02x, 1.03x. That's a point in time, right? That's the last day of the quarter.

Should we -- what do you think the average leverage was during the quarter? Or better asked question maybe is just when were these assets moved and how much income from those assets is currently in the SLF or actually came to the balance sheet this quarter?.

I'll answer the question philosophically, and I'm not sure I have the information, and Ross will take a look for it as I'm talking to give you more detail on the answer. But philosophically, we're not in the business of creating window-dressing, end-of-quarter numbers. We're in the business of managing to the targets that we set.

So we're obviously, managing a number of different elements of this picture that aren't always entirely in our control. So we can't manage it to a 1.03x every single day. But our goal is to maintain our targeted levels.

And we're going to look as we've got some competing goals that go with that, so we may, from time to time, deviate from the leverage goal. But all things being equal, we're going to seek to have that leverage through the quarter. .

Okay, that answers the question. That's what I was driving at. And then a couple more modeling kind of clarifications on the SLF. Can you remind us -- your current leverage is 1.88x. Can you remind us kind of what your targeted leverage is on the SLF? And then similarity -- and also on the yields, you're at 5.8%.

Do you feel like, given the current environment, that that's representative of the opportunities from a yield perspective that are available in the market today?.

I'm going to let Gregory Robbins, who's in charge of SLF from a Golub Capital side, address both those questions. .

So in terms of targeted leverage for SLF, about 2:1 is our long-term target with the facility we currently have in place with Wells. So we're very close to achieving that level. It's taken us some time to build up the portfolio. So we have diversification and scale to get there. But we feel very good that we've reached that goal. .

In terms of yield, I think the yields that you're seeing are very consistent with the yields that we would expect on a go-forward basis. Certainly, this quarter, as Ross mentioned, we had some impact from spreads widening in the market, which we're not immune from.

So if that happens, we do take writedowns in our portfolio, that if things go well and we certainly expect that to happen, would reverse themselves in subsequent quarters. As we think about SLF on a run rate basis, we still believe that this entity should generate low-teens-type returns. .

Great. That's very helpful. And then David, one last one. Kind of a bigger picture, obviously, you've enjoyed and well deserved institutional shareholder support since your IPO and long before, I'm sure.

How do you think -- what do you make of the current activism we're seeing in the BDC sector? And how do you view kind of what's going on with regard to the long-term prospects for the BDC sector in general?.

I was waiting for someone to ask that question. So thank you, Troy. Not a surprise. It's something everybody is interested in and talking about. The average BDC today is trading at approximately 81% of NAV. And quite to your point, we're happy not to be in that category. We traded at a meaningful premium.

But if you think about the average BDC and where it's trading, Mr. Market is saying one of 2 things to the management teams of your average BDC. Mr. Market is either saying -- and both of these, by the way, are bad. Mr. Market is either saying, "We don't believe you. We don't think your NAV is really 100%. We think it's really 81%.

We think you're a liar." That's pretty bad. That's the good case scenario. The bad case scenario is that Mr. Market is saying to the BDC, "Well, we believe you. We think your NAV really is 100%, but not when you're managing it." That's the bad case scenario, and I think that is probably more of what's happening right now.

I don't think that the crisis of confidence that we're seeing in our space is a result of investor disbelief in marks. I think it's principally the result of investor fatigue and lost confidence in management teams. So the way capitalism is responding to this problem, and the good thing about capitalism is it's kind of a self-curing system, is 2 ways.

There's the slow way and the fast way. The slow way is that Mr. Market is putting the BDCs that aren't performing, that don't have the right kind of fee structures, that aren't acting in a way that's shareholder friendly. Mr. Market is putting those BDCs in the penalty box, and in the penalty box it's really hard to raise capital.

So they're either staying the same size or they have losses shrinking and becoming less relevant. The fast way is activism is at some point, discounts become so wide that they attract investors who want to try to catalyze a change. I don't know how the recent letters that have gone in to American Capital and Fifth Street are going to work out.

This is new territory for our industry. It's new territory for all of us. But I think that the effort on Mr. Market's part to make distinctions between who's doing good job for shareholders and who's not, I think that's good for our industry.

And I think if we come out of this period of activism with a better neighborhood, an industry that's more focused on shareholder value, that's more focused on doing things that are fair and good for everybody and not just good for managers, I think that's good for everybody. .

Our next question comes from the line of Robert Dodd from Raymond James. .

First of all, I really appreciate the use of the word titration or titrate in the context here, as a chemist from years ago. So I appreciate that. But anyway, onto the questions.

First of all, the market data tends to indicate that some of the unitranche, not one stop necessary, but unitranche loans that are getting done that in the market in the third quarter were at pretty high leverage levels. I mean, north of 6x.

I mean could you give us kind of an update on your approach there and your willingness to relative -- higher leverage, if any willingness, to do higher leverage deals on the one stop side?.

Sure. Let me take a step back, Robert, first and just clarify one thing because it is really important and it's something that people don't often focus on. And the issue is, what do we mean when we say unitranche.

So what we mean when we talk about unitranche is this we mean loans that start with an attachment point of 0 and go through an ending attachment point that may be in the 4s, 5s, 6s. I think, increasingly, we're unusual in describing unitranches that way.

More and more, we're seeing other lenders and in particular, other BDCs call unitranche something that we call a last-out.

So if a loan is initially constructed as a single loan, but then there's an agreement amongst lenders that creates a first-out position on that loan and you're actually holding the last-out position, so your starting attachment point may be 2x, 3x, 4x EBITDA and then you go all the way to the end, that doesn't have the same risk characteristics as our unitranche loans that start with an attachment point of 0.

And so as you as analyst think about risk in portfolios, I think, one of the things you need to really hone in on, and it may require you to ask questions to management teams because sometimes these issues are not described in financial statements, which amazes me because to me, it's enormously material point.

But many things that are being called unitranche out there in the marketplace, in other firms, in other BDCs, are what we would call junior debt. .

No, no, I agree 100%, David. I mean, last-out has a lot of the characteristics of second lien, which recovery has more characteristics of mez or sub debt than it does first lien. And true unitranche going in first or 0 is a first lien with a slightly higher last-out dollar. So I agree 100%, and we totally take that into account.

Is that -- Sorry, go ahead. .

I think was just in answer to your question, which is what are we seeing in the marketplace? Are we seeing more competition in unitranche? And the answer is a bit of yes and no. And let me explain what I mean by that.

On the one hand, we are temporarily being helped by the breakup of GE and Ares, and the dismantling of what was our most formidable unitranche competitor, the GE-Ares unitranche client. And this is not to say that we don't have competition now. It's not to say Ares is not still a formidable competitor.

It's not to say that Antares isn't trying to get into the unitranche business. All those things are true. But if you look at the period ended September 30, I think, as we look at our competitive position in our unitranche product, it was a period we felt we were particularly well positioned.

Probably frankly better positioned than we will be once Ares and Varagon and CIT and PMC work out their various intercreditor relationships and create a better unitranche product. Having said that, there were deals that were done, including some deals that we were involved with, with high levels of leverage.

We're very picky about which credits we're prepared to go to those kinds of high levels of leverage on. They tend to be businesses where there are a lot of tailwinds. And the tailwinds are reflected in quite high-acquisition multiples. So again, I'm going to give you just a hypothetical to illustrate the point.

Would you rather be a unitranche lender through 6x in a mission-critical business-to-business software company with 95% recurring revenues and a 20% revenue growth rate that's sold for 15x EBITDA? Or would you rather be at 5x in a unitranche in a business that is a prosaic manufacturing business that competes with China and other parts of the world and was recently sold for 7.5x EBITDA? I know what my answer to that question is, and we -- that's what we've been doing.

We've been focused on the more resilient, better companies. .

And if I can try -- I think I get your point. I agree with you. If I can try and paraphrase that.

I mean, in a sense, hypothetically, a 6x leverage business in -- or a 6x leverage unitranche loan in the business that is a 12x enterprise-value business, is a 50% loan-to-value kind of on an enterprise value basis, would you rather do that? Or a 5x leverage loan, which has a lower attachment point, obviously, in a business that's an 8x enterprise-value business, which is north of 60% loan-to-value.

One of those seems worth loan-to-value protection to me than the other. The higher leverage for high-multiple business is probably a better security position than the other.

Is that fair to say what -- to summarize what you're saying?.

Yes. I'd add one more element to it, which is in today's M&A environment, one can't just blandly assume that higher price means more value. It's an indicator, but we don't make investment decisions based on loan-to-value. We make investment decisions based on loan-to-distressed, beaten-up value. And sooner or later... .

Fair enough.

Because the loan-to-value today is not loan-to-value 3 years from now?.

It's not the loan-to-value when things go wrong, exactly. .

Right, right. Got it. If I can -- second question. Just on the SLF. The dividend strategy there. Obviously, a lot of return comes from the sub notes, which, obviously, a very, very good return comes from the sub note. What is your plan, if any, to dividend up proceeds that -- I mean, obviously, BDC comparable, NII was about $2.9 million this year.

Obviously, GAAP income on a comparable basis was about $700,000-ish this year.

What's your kind of approach as to viewing whether you should dividend up equity proceeds, obviously, after the sub note interest has been paid, and obviously, the senior interest and the other expenses?.

So we want to, over time, be dividending -- after the sub notes expenses, be dividending something approximating net income. And we're going to, obviously, be discussing this with our partner. It's not just our decision.

But philosophically, the approach we've been taking so far is to have a dividend strategy here that keeps the dividend reasonably steady over time and have it approximate net income over time. .

And just to clarify.

On net income, your NII, before or after credit losses, I guess, or mark-to-market valuations is more of the development metric?.

After. Count me among the credit managers who think that income before credit losses isn't a particularly important measure. .

We have a question from the line of Jon Bock from Wells Fargo. .

David, I'm curious as your thought, there was a recent legislative development as it relates to the BDC bill. And I'd imagine a number of folks thought it was going to go one way, but it went a dramatically different one.

And so my question for you is, what's your view on the BDC bill in light of the fact that we've received a significant win in Congress? And do you believe that there may be further wins to come as it moves down the -- Congressional understanding that it's a difficult process, but one that appears to have clear bipartisan support?.

So for those of you aren't perhaps as up-to-date on this, let me just provide some context around Jonathan's question.

H.R.1800, which is sometimes called the BDC reform bill, it's sometimes referred to as the bill that increases the leverage that BDCs can use to 2:1, it was passed by the House committee that governs this area last month, in early November. And it was passed by an overwhelming margin. I think the margin was 54 to 3.

My view on the legislation is that it's not well timed. We are, as I mentioned earlier in this discussion, we are in the midst of what I'd characterize as a crisis of confidence in the BDC industry. Investors, generally, are skeptical about too many of the members of the BDC universe.

And I don't think this legislation advances the cause of improving the neighborhood. I'm in favor of many elements of the legislation. I'm not in favor of some of the elements of the legislation. I don't think that it's got a lot of momentum because so little is being passed of any kind in Congress.

So there's been some statements that I think are perhaps overly optimistic about the prospects of this legislation passing.

I don't have the capacity to give you a probability assessment on it, but I can tell you that friends who are very closely connected to things in Washington talk endlessly these days about how next year is going to be a lame-duck session and ain't nothing getting done, but we'll see. .

Let me also address the question you didn't ask, Jonathan, which is what I wish had happened.

What I wish had happened is that the industry and investors and regulators came together in some kind of task force and had an open discussion about what's right, what's wrong, and how do we fix it, and that the bill reflected the results that would come from that kind of task force. I'm sad that, that didn't happen.

And I think perhaps there's still an opportunity for something like that to happen. .

Got it. I appreciate that. And then one additional question as it relates to portfolio velocity, right? And you touched a bit on it earlier in terms of the competitive dynamic.

But as we look forward, how would you characterize the potential repayments maybe perhaps to date and then as you're looking and heading into the end of the year? Do you expect to see an enormous amount of repayments? Or would you expect that to -- again, I'm just excluding the SLF sales.

Would you expect that to die down or pick up as a result of more competitors, each hungry, some -- and Antares's perspective or case, a bit less shackled with leadening guidance? Talk about the ability for assets that might travel out of your portfolio as opposed to investing and dropping something in it. .

If you look over time, the rate of repayment of our middle-market loans has been pretty consistent. On average, they get repaid between year 2.5 and year 3. And that's been true during most periods for many, many years. But if you look at any 1 quarter, you can get spikes, you can get dips. And I don't have a crystal ball.

I don't have a good way to be able to help you assess whether this coming quarter is going to be particularly high or particularly low. One of the factors that tends to make things particularly high is when credit spreads narrow because that creates an incentive for borrowers to refinance. We don't really have that situation now.

We've had an extended period where spreads have been reasonably stable. In fact, I'd say in the last 90 days or so, we've seen a little bit of spread widening. So that would argue for some short-term slowdown in repayments.

But before you get all excited about that, I'd also tell you there's idiosyncratic deal activity that leads to repayments that makes this a very, very challenging thing to predict on a quarter-to-quarter basis. .

We have a question from the line of Doug Mewhirter with SunTrust. .

My first question, which investment was the one you put on nonaccrual? And can you give any sort of details around that or plans to deal with it?.

Hang on one second. So the investment is a company called Avatar, A-V-A-T-A-R. And it's a company that we've been working with and with a sponsor on for some time. So we just made the determination that it was appropriate to move it from accrual to nonaccrual. It actually continues to pay interest.

And we anticipate that it will, as all watch list workout credits that we work on do it, it will go through a process where we work collaboratively with the company and with the sponsor. Key point I'd make on this is we went from 0.2% nonaccruals to 0.4% nonaccruals.

If in future quarters we're talking about nonaccruals at these levels, I'll be really happy. .

Okay. Maybe a broader question. Over the years, you've developed a pretty big expertise in retail, consumer-oriented restaurant, foodservice industries. I'm hearing, I guess, a mixed signal in general about the health of these industries. And I know that's a very broad category.

I was wondering if, based on your observations of your portfolio of companies or maybe potential deals out there, what kind of macro signals that you're getting from those areas regarding how it relates to the rest of the economy?.

I think you put it really well. It's confusing right now. We published in our Golub Capital middle-market index, we published data for the first 2 months of the quarter ended September 30, which showed for our overall portfolio about 8% revenue growth, 4% EBITDA growth.

We saw weakness in manufacturing, and we saw consumer businesses looking pretty good. If you look at data that has come out since then, certainly, the department store data is really concerning. Happily, we don't have department store exposure within the GBDC portfolio.

The news a couple of days ago that the home improvement store results are dramatically different from what's going on in the department store results is intriguing. I'm not sure what to make of that right now. Maybe everybody is remodeling their kitchen and cooking at home. But it's -- I think you put it well.

It's confusing right now, and I don't think we have a clear idea what to make of it either. .

Okay. My last question, regarding your portfolio. And I second the positive comment on use of titration. Obviously, you seem to have a lot of opportunities out there.

And it seems like you're able to sort of push some of that, that sort of excess deal flow, if you want to call it that, into your SLF, which is a good place for your capital getting good returns.

Is there enough of an opportunity though where you could actually -- your stock price and valuation permitting, next year actually see where you would want to raise another round of equity.

And I know it's very hard to call, but is that -- is the opportunity that big to grow your portfolio? Or are you sort of content to sort of keep your aggregate portfolio in terms of the GBDC balance sheet and the SLF sort of max it out and then sort of recycle it with exits?.

So that's a great question. And I guess, I'd talk about this in terms of priorities. So priority one is keep earning a really good return for our existing GBDC shareholders on a risk-adjusted basis. And I guess I didn't realize how much of a nerd I sounded like when I use the word titration. I'll know better in future quarters.

It does come naturally to me. But maintaining the right leverage balance is a key element in achieving that goal #1, that good solid return for existing GBDC shareholders with appropriate risk. .

The second goal is to continue to grow SLF. And I think there will be, there are opportunities for us to be able to achieve both goal #1 and goal #2. .

The third goal, and it comes after the first 2, would be to look at growing the equity base. As I've said on prior quarters, we're only going to do that if it's good for existing shareholders, good for new shareholders and good for the company.

So the circumstances under which that might turn out to be the case would be circumstances where we don't have a lot of firepower within the company; we have a good strong pipeline of new investments, so we anticipate being able to deploy a significant amount of capital quickly; and the stock is trading at a meaningful premium to book so that we could have the new capital be nondilutive, be accretive for everybody.

We've done that a whole bunch of times in the past. We haven't done it since early this year. And I think, "we'll see" is the answer to the question is it going to happen in 2016? I hope so, but it's priority 3. It comes after priority 1 and priority 2. .

[Operator Instructions] We do have a question from the line of David Chiaverini with Cantor Fitzgerald. .

My question relates to the deal environment. To what extent has the deal environment improved with all the competitors pulling back from the market, being either fully levered or nearly fully levered? And you referenced Ares and GE breaking up.

I'm just curious because the yields in the quarter really didn't change all that much on the new investments, so I'm curious as to what you're seeing now. .

Well, our main competitors are not other BDCs. With the exception of Ares, they're really -- our main competitors are not other BDCs. Our main competitors are Ares and Antares. And both of them are active, formidable competitors. We like them both. We think they're both very well managed. We think they both have real strength in credit.

We've worked very frequently with them collaboratively on deals. The big pullback over the course of 2015 hasn't been -- as it affects us, hasn't been other BDCs. It's been banks.

It's been the Crédit Suisses, the Deutsche Banks, the UBSs, the JPMorgans who have chosen -- where they're doing leverage lending, have chosen to focus on larger-sized transactions. We've continued to see that pattern as we've kind of crossed the September 30 quarter and into calendar Q4. But we're also seeing one other trend.

And that other trend is the typical response to the kind of volatility that we all experienced in calendar Q3. And the typical response to a lot of equity market volatility is it tends to lead to a slowdown of middle-market M&A activity.

Buyers and sellers have trouble agreeing on what are appropriate values, what prospects are, what's going to happen to revenues and income during periods when there's a lot of volatility. So what I indicated earlier in the call was that we're expecting that calendar Q4 origination volumes are probably going to be a bit lighter than calendar Q3.

Calendar Q3 was pretty good, but it was lighter than calendar Q2. And my expectation would be that it will probably pick up in 2016 because again, the typical pattern is that volatility leads to some slowdown but that slowdown is temporary. .

And in terms of the deal terms, are you expecting some of the yields to widen out a little bit in the middle market? Or are you not seeing that yet?.

Yes and yes. I'm hoping that we see some spread widening in middle-market land, that typically we talk about how we're insulated but not immune in middle-marketland from trends in the broadly syndicated and high-yield markets. Clearly, the broadly syndicated and high-yield markets have seen some spread widening.

We've seen a little in middle-marketland, but not as much. So I hope we'll see a little bit more. But in answer to your second question, am I seeing it yet? Not so much. No. We're seeing more stability than widening. .

[Operator Instructions].

Well, thanks, everyone. I appreciate your questions and your joining us today, and look forward to talking again next quarter. As always, if you have any questions or concerns, please feel free to reach out to us at any time. .

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your line..