David Golub - CEO Ross Teune - CFO Greg Robbins - Managing Director.

Joel Mazzoli - Wells Fargo Securities Michel Rosenberg - SunTrust Robinson Humphrey Leslie Vandegrift - Raymond James.

Good morning. And welcome to the Golub Capital BDC Inc March 31, 2016 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 the call may constitute forward-looking statements and are not guarantees of future performance or results and involve any number of risks and uncertainties.

Actual results may differ materially from those in the forward-looking statements as 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 the company intends to refer to on today's earnings conference call, please revisit the Investor Resources tab on the homepage of the company's website, www.golubcapitalbdc.com and click on the Events Presentation link to find the March 31, 2016 investor presentation.

Golub Capital BDC’s 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 would now like to turn the conference over to David Golub, Chief Executive Officer of Golub Capital BDC. .

Thank you, operator. And good morning, everybody. Thanks for joining us today. I am joined here by Ross Teune, Chief Financial Officer; and Greg Robbins, Managing Director at Golub Capital. Yesterday, we issued our earnings press release for the quarter ended March 31 and we posted a supplemental earnings presentation on our website.

We are going to refer to the presentation throughout the call. I am going to start by providing an overview of the quarter. Then I'm going to give the floor to Ross who is going to take you through the results in more detail, and then I'll come back and provide some closing remarks and open the floor for questions.

Headline for the quarter is we have a lot of dramatic twist and turns in liquid credit markets in calendar Q1 but GBDC's performance remain pretty well or pretty boring. In many respects the quarter was a tale of two quarters. At the beginning of the quarter we saw very significant down draft in liquid credit markets.

And this led to slowdown in deal activity and a widening of spreads on new loans. And then over the last couple of weeks to the quarter there was a very significant recovery. The stabilization that we saw in those last several weeks is continued into calendar Q2. And it's led to a narrowing of spreads on new loans and an increase pace of deal activity.

Amidst this noise, GBDC enjoyed another solid quarter in calendar Q1. I am going to highlight -- Ross and I are going to highlight six settlements on this call. First, a stable net investment income per share. Second, solid originations. Third, continued focus in our originations on one- stops, forth some improvement in yields and new loans.

Fifth an improved return on investment in our Senior Loan Fund or SLF. And six continued solid credit quality across the portfolio. We did have one negative surprise in calendar Q1. In the December quarter we'd written up the fair value of one of our watch list investments Avatar. We believe the sale of this company was imminent.

There was letter of intent for that sale that was in hand. Unfortunately, there were some negative development at the company in the early part of Q1 that caused that sale to fall through. The company subsequently entered into some negotiations that led to a new sale agreement at a lower value.

We marked the position up in Q4 in recognition of the letter of intent in Q4, only to mark it down in calendar Q1. The good news is that the sale closed earlier this week at a value modestly above our 331 mark. So we won't have to talk about Avatar anymore. The impact of the Avatar reversal in fair value in calendar Q1 was about a nickel a share.

With that context, let's dive into the details. So for the quarter ended March 31, net increase in net assets resulting from operations or net income was $14.2 million or $0.28 a share that compares to $20.6 million or $0.40 a share for the quarter ended December 31.

GAAP net investment income or as I call it income before credit losses was $16.9 million for the quarter, or $0.33 a share, excluding a $0.5 million reversal in the GAAP accrual for capital gains incentive fees. Net investment income was $16.4 million or $0.32 a share.

This compares to $16.4 million or $0.32 a share when excluding the accrual for capital gains incentive fee for the quarter ended December 31, 2015.

You recall, consistent with previous quarters, we provide t this information on net investment income per share excluding the GAAP capital gains incentive fee accrual because we think that this measure is an important one meaningful -- more meaningful one for investors.

Per GAAP we're required to accrue the capital gain incentive fee as if unrealized capital appreciation will realize even though unrealized capital appreciation is not part of the calculation of the fee actually payable under the Investment Advisory Agreement.

For the quarter we had net realized and unrealized losses on investments of $2.7 million, or $0.05 per share for the quarter ended March 31. As I mentioned earlier this was roughly equal to the hit from Avatar.

For the quarter ended March 31, 2016 net asset value per share decreased slightly from $15.89 per share to $15.85 per share up 0.25% decline and this was largely the result of the unrealized loss I just mentioned. We are little sad to have broken our streak of consecutive quarterly increases in NAV per share.

But we are proud that GBDC achieved increases in NAV per share in 14 of the last 15 quarters. New middle market investment commitments for the quarter totaled $151 million. This included investments -- I am sorry including investments of $4.9 million for senior loan fund, total new investment commitments were $156 million.

Consistent with prior quarters, we continue to focus this last quarter on our one stop products, you will see in Ross' remarks that one stops represented a large proportion of our new originations.

And you'll also hear that the proportion of our new originations were in the form of repeat business meaning new loans to existing portfolio companies and to companies that are controlled by financial sponsors with whom we've done businesses before.

Our origination mix for the quarter to be specific was 72% one stops, 24% traditional senior, 3% in senior loan fund and 1% in equities. Overall, total investments in portfolio companies at fair value increased by 5.4% or $83.2 million during the quarter after pay offs and sales to SLF.

Total investments in portfolio companies at fair value held by SLF increased by about 2% or $6.4 million during the quarter. Turning to Slide 3.

You can see in the table that $0.28 per share we earned from our net income perspective and $0.32 per share we earned from a net investment income perspective before accrual for the capital gain incentive fee. And you can see our net asset value per share of $15.85. As shown on the bottom of the slide, the portfolio remains well diversified.

We've got investments today in 176 different portfolio companies and an average size per investment of $8.5 million. I'm going to now turn it over to Ross who's going to provide you with some additional information about the financial results and portfolio highlights.

And then I am going to come back with some closing remarks and we'll address questions. .

Thanks David. Turning to Slide 4, as David mentioned we had total originations of a $115.7 million and total exits and sales of investments of $76.5 million which contributed to the net funds growth of $83.2 million during the quarter.

Turning to Slide 5, these four charts provide a breakdown of the portfolio by investment types, industry size and fixed versus floating rate.

Looking first at the chart at the top left hand side, overall portfolio mixed by investment type remained very consistent quarter-over- quarter with one stop loans continuing to represent our largest category at 75%.

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

Looking at the chart on the right hand side, the investment portfolio remains diversified by investment size and our debt investment portfolio remains predominantly invested in floating rate loans.

Turning to Slide 6, the weighted average rate and new middle market investments was 7.2%, which was above the weighted average rate and investments originated last quarter of 6.7% and above the weighted average rate of investment that were sold or paid off during the quarter of 7%.

The increase in the weighted average rate and new investments is consistent with comments we made on our last quarterly call and we starting to see some spread widening in the middle market.

As a reminder, the weighted average interest rate on new investments is based on the contractual interest rates at the time of funding, for variable rate loans the contractual rate would be calculated using current LIBOR, 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, looking first at the gray line, this line represents the income yield or the amount earned on our investments including interest and fee income, but excludes the amortization of discounted and upfront origination fees.

This income yield remains steady at 7.6% for the quarter. The investment income yield or the dark blue line which includes amortization of discounts and fees decreased by approximately 20 basis points to 8% primarily due to lower OID amortization as a result of lower run offs. The weighted average cost of debt remains steady at 3.3% for the quarter.

ended December 31st as a result of an increase in the average LIBOR rate. Flipping to the next slide, overall credit quality continues to remain strong, nonaccrual investments as a percentage of total investments at amortized costs declined from 0.9% last quarter to 0.8% of the total portfolio at March 31.

Nonaccrual investment as a percentage of total investments at fair value also declined from 0.5% last quarter to 0.3% at March 31. There were no new nonaccrual investments added during the quarter and the overall percentage of nonaccrual investments both at cost and a fair value continues to remain very low.

Turning to Slide 8, the percentage of investments risk grade of 5 or 4, our two highest categories remain stable quarter-over-quarter and continues to represent over 90% of our portfolio.

The percentage of investments risk graded a 2 declined because an obligor was upgraded to a 3 as a result of restructuring and that contributed in part to an increase in the percentage of 3 risk graded assets. The percentage of investment risk graded a 2 also declined due to downgrade of Avatar to the one category.

As David mentioned this investment was sold subsequent to March 31 at a value slightly above its fair value as of March 31. As a reminder, independent valuation firm value approximately 25% of our investments each quarter. And reviewing the more detailed balance sheet and income statement on the following two slides.

We ended the quarter with total investment at fair value of $1.61 billion. Total cash and restricted cash of $42.2 million and total assets of $1.67 billion.

Total debt was $840.1 million which includes $461 million in floating rate debt issued through our securitization vehicles, $231.5 million of fixed rate debentures and $147.6 million of debt outstanding in our revolving credit facility. Total net asset value on per share basis was 15.85.

Our GAAP debt-to-equity ratio was 1.03x at March 31, while our regulatory debt-to-equity ratio was 0.75x times, both consistent with our targets. Flipping to the statement of operations, total investment income for the quarter ended March 31, was $30.8 million, up $0.3 million from the prior quarter.

On the expense side, total expense is up $13.9 million decreased by $1.3 million during the quarter primarily due to the change GAAP capital gain incentive fee expense.

For the quarter ended March 31, the GAAP capital gain incentive fee expense was a negative $0.5 million and this compares to a positive $1.4 million during the quarter ended December 31.

As David highlighted earlier, we had net realized and unrealized losses of investments of $2.7 million during the quarter and net income for the quarter totaled $14.2 million.

Turning to the following slide, the tables on the top provide a summary of our earning per share and return on equity, from both a net investment income and net income perspective for the past five quarters, excluding the GAAP accrual for the GAAP capital gains incentive fee, NII on a per share basis has remained stable at $0.31 or $0.32 per share for the past five quarters representing an annualized return of about 8%.

The annualized quarterly return based on net income was 7% this quarter but remains above 9% an average for the past five quarter due to strong equity gains and strong credit performance. The bottom of the page illustrates our long history of maintaining a stable and increasing net asset value over time.

Turning to Slide 12, this slide provides some financial highlights for our investment in Senior Loan Fund or SLF. Total investments at SLF at fair value as of March 31 were $360.9 million, up slightly from December 31.

The annualized total return for the quarter ended March 31 improved to 10.8% as the fund is operating in line with its targeted leverage and did not incur any significant net mark-to-market gains or losses during the quarter.

Turning to the next slide, as of March 31, we had approximately $$52 million of capital for new investments through restricted and unrestricted cash and availability on our revolving credit facility. In addition, we recently received SBA approval to issue another $75 million in debentures to one of our SBIC entities.

We did issue $6.5 million of new debentures during the quarter leaving $68.5 million of debenture commitments remaining subject to customary SBA regulatory requirements.

Slide 14 summarizes the terms of our debt facilities and lastly on Slide 15, our board declared a distribution of $0.32 a share payable on June 29 to shareholders of record as of June 6. I'll now turn it back to David who'll provide some closing remarks..

Thanks Ross. So despite a volatile calendar Q1 in liquid credit markets the first quarter of calendar 2016 was another steady one or GBDC. Looking forward, some commentators think we are going to see a return to the January, February volatility and others think that the March, April stability is here to stay. I am not sure.

But I think our capital is well positioned for either environment. Candidly and this shouldn't be a surprise to long time listeners on earnings calls, we've been nervous about credit markets for quite some time. We are seven years into this recovery from the great recession.

And to us since the fall of 2015 it feels more and more as though everyone's a genius part of the credit cycles over. So we think this is a time when it makes sense to continue to be very cautious about taking on too much credit risks and this is the overlay that we are using in our underwriting decisions today.

And this brings me to my last point about our positioning. As you heard on today's call that the credit quality of the underlying borrowers in GBDC's portfolio remain solid.

Years ago we decided to deemphasize or completely avoid riskier asset classes such as junior debt, CLO equity, industries with commodity sensitivity, industries known to be cyclical like autos and steel.

And we focused on firstly in senior secured loans to solid resilient companies that are backed by high quality partnership oriented private equity firms. Now we think this orientation, this positioning is one of the reasons that investors look at our strategy as an all weather strategy.

And what I mean by that is if we find ourselves in a position where economic growth accelerates we'll see more M&A and deal activity and that will bolster our investment choices. And if the economy falters and we think our portfolio construction puts us in a position where we are going to be able to play more offense and have to play less defense.

So that concludes our prepared remarks for today. As always we thank you for your time and your continued support. And with that operator if you can open the line for questions. .

[Operator Instructions] Our first question comes from the line of Joel Mazzoli of Wells Fargo. Please proceed with your question..

Good morning and I am filling in here Jon as he is at the hospital anticipating the arrival of his second child. So very exciting times. We see that Mills Fleet was a deal that backed KKR's $1.2 billion acquisition of the company. And given the size of the transaction we assume that it probably could have been underwritten and syndicated by banks.

So about $5 million was placed in Golub BDC but to gain perspective of the capability of the Golub Capital platform, how big was the total commitment across Golub Capital for this deal?.

So first off thanks Joe and our best wishes to Jon and his family. Let's go back a step. Sorry about Mills Fleet, so it's very interesting deal. Our first ever with KKR, the total transaction size as you indicated our piece over $200 million for the Golub Capital platform. Why were we in this deal? Couple of reasons.

One, we've now grown as a platform to a level where we can provide financing solutions even for large sponsors. So this deal is a small deal for KKR. But large deal for a middle market lending firm. And one that only among the largest middle market lending firms would be able to offer this kind of over $200 million buy and hold solution for.

Second reason that this transaction took place. It took place in the context of a choppy debt market. I mentioned that the first quarter was marked by a bit of rollercoaster ride in liquid credit markets.

I think it's fair to say that many sponsors during the first quarter were loath to bring their deal to the broadly syndicated or for upper middle market syndicated markets because of uncertainty about what that execution would look like.

And so when we were able to -- in this case offer KKR a solution with defined pricing, defined terms, to find owner of the -- the loans a long-term basis. It was viewed by the sponsor as a compelling solution. So when you look at this in the context and GBDC, this is I think an example of how the Golub Capital platform brings advantageous to GBDC.

GBDC a roughly a $1.5 billion in assets, could never provide a solution to KKR of this sort. Golub Capital as a platform does have the ability to do that and BDC has a capacity to take a piece of that loan very attractively priced, very attractive original issue discount to be able to add to its portfolio..

That totally makes sense. And thank you for that. And as a follow on to that the first question. As banks were likely hesitant to underwrite M&A financing amid market volatility as outline. We see that market technicals are improving post quarter end.

So do you think these types of opportunities are not going to be -- maybe I don't mean to say not going to be available but maybe banks would step into to take this type of financing in the current environment or are we still kind of in a risk off mode from a bank perspective?.

So the three factors that I think are relevant in thinking about your question. The first is a regulatory environment. So we continue to be in a regulatory environment in which banks are being pushed to do less in leverage lending. So first element to your question would banks want to be involved in a transaction like Mills Fleet or other of that ilk.

Sure they would like to but there is going to be continuing regulatory pressure on banks to do less leverage lending. And as a consequence of that I think they are going to do more of the leverage lending that they do, they are going to be more focused large sized transactions and less focused on the smaller size transactions we are focused.

Second element of the picture beyond the regulatory one is that there will be ups and downs to syndicated credit markets. When there is the kind of rollercoaster ride that we saw in Q1 and markets are dislocated or fragile then the certainty that we are able to offer in providing buy and hold facilities and scale become more compelling.

Not saying they aren't competitive and compelling during times when syndication markets are hot. But they are particularly compelling when syndications markets are cold. So I think the right way to look at this is first there is a regulatory overlay. Things including moving, market shares excluding moving away from banks.

The second is that there is going to be a particularly attractive market for Golub Capital during times when credit markets are choppy. And a third piece of this puzzle is about scale.

And the third what I mean by that is, is that we are now of a size where it's pretty easy for Golub Capital as a platform to be making commitments in the $200 million to $300 million size range. This was not true five years ago.

And our capacity because of our scale to be able to offer buy and hold solutions in this size range gives us some capabilities that in some respects are new to the market. And I think sponsors are becoming accustomed to this new capability.

They like the new capability and we are going to gain some share just because of the degree to which buy and hold solutions are often more attractive than syndicated solutions. .

Okay. Thank you for that. That makes sense. And my final question and congratulations on receiving the additional $75 million of SBA debentures.

And we know that Golub has had lot of success with this program historically and understanding that the Golub is cautious when considering economic leverage, we see that in the future the $75 million could be utilized with maybe growth in certain areas. But the Omnibus Bill increase the family of fund cap to $350 million.

So is there still a $50 million of available capacity or is that $50 million already used somewhere else within Golub Capital?.

So to remind everyone the issue Jose alluding to is that until late last year there used to be a cap on availability of debentures through the SBIC program of $225 million. And we had at GBDC at the time two SBIC subsidiaries, one of them with a $150 million of debenture and one of them with $75 million of debentures.

So we had fully utilized the $225 million of available debentures under the family cap. Late last year Congress passed and the President signed an Omnibus Law that included an increase in the family cap from $225 million to $350 million.

And under the revised cap, we were able to apply in our smaller SBIC for an expansion of our debentures so that we could fully utilize up to $300 million of debentures. So we were able to go from $225 million to $300 million. We were not able to go from $225 million to $350 million because there is another rule.

And the other rule is that the maximum size of any one SBIC is a $150 million in debentures. So with these $75 million incremental debentures that we received approval for in February, we are now at the cap for the two SBICs that we currently have subsidiaries of GBDC.

In order to get access to the incremental $50 million of debentures, we will have to form and gain approval for an additional SBIC subsidiary. We are in the process of applying.

And that process is a -- it's a process, it take some time and it's not assured, there are number of hurdles associated with gaining approval for a third SBIC and gaining approval for the debentures for that third SBIC..

Thank you. [Operator Instructions] Our next question comes from the line of Doug Mewhirter of SunTrust Robinson Humphrey. Please proceed with your question. .

Hi. Good morning. This is actually Michel Rosenberg on for Doug. Thank you for taking my question. So the SLF only grew little bit from the last quarter I think about 2%.

So first is that a reflection of the low deal flow in the market? And then second and the dividend income from the SLF did grow quite nicely I think from like $0.8 million last quarter to $1.8 million this quarter.

So could tell us a little bit more about the dynamic there?.

Sure. Quite as you say we grew assets in SLF. If you look at page 12 of the investor presentation from $354 million to $361 million during the quarter. We now view SLF as being at a scale size. So it is efficient in its capital structure. It is well diversified. We've achieved the first step of our goal in creating SLF which is to reach a scale size.

We continue to look to grow SLF modestly from here. But we do not expect to continue to grow SLF at the pace that we were growing it prior to this last quarter. We think there will be continuing opportunities to grow SLF. But our aspirations for growth here are modest relative to the growth that we had in SLF prior to the December 31 quarter.

In terms of earnings power from SLF, we think this last quarter is much more representative of the earnings power of SLF than the prior several quarters. And we are hopeful that we can actually increase the return on equity of SLF from the 10.8% annualized rate that we achieved in the March 31 quarter. We are hopeful we can increase that modestly.

But we are not aiming for the stars on this. We are aiming for a modest improvement on the 10.8%..

Okay. Thank you. And then my second question is in a little bit of different direction.

So since you increased your SBIC commitment, are you planning to go mostly through that facility or would you consider raising equity?.

Well, our view on raising equity has been really consistent over many years which is we think that in order for Golub Capital BDC to raise equity it's got to be good for shareholders, it's got to be good for new shareholders. And it's got to be good for the company.

And I talked before about how it can be challenging to have all three of that line up at the same time. So we look very carefully at whether we are trading at and what we view is an appropriate premium and what the pipeline of new investment opportunities looks like at that time.

And at what kind of incremental ROE would come with the equity raise that we are looking at. So we plan on continuing to look at equity raises through that lens. And we'll evaluate whether it make sense or doesn't make sense based on the characteristics of the market for new investments and the markets for our equity at that time.

In terms of growth from here, absent to new equity raise we are as Ross said very dialed right now in terms of our goals from a leverage standpoint. We are operating right around our goal of 1.0 debt to equity ratio for GAAP, 0.75% for regulatory leverage.

We have some incremental liquidity that we can use to grow investments as we outlined on this call. But we feel very good about how the balance sheet is tuned right now. .

Thank you. Our next question comes from the line of Leslie Vandegrift of Raymond James. Please proceed with your question.

Good morning. Just few quick follow up questions on -- you discussed at the beginning of call I believe you were talking about the repayment level this quarter. Obviously that led to little bit lower on OID acceleration et cetera. But was there market issues that led to low repayment this quarter versus first quarter last year.

Is that something specific for you guys?.

I think repayments across the market were lower in calendar Q1. I think this was a function of the topsy-turvy liquid credit markets. A portion of repayments in any period on the part of obligor is in a sense voluntary. They -- obligors will seek new financing when it make sense for them to seek new financing.

In a period when credit markets are little bit unstable and maybe credit spreads are widening that almost invariably leads to a temporary slowdown in repayment activity. Over time this tends to balance out. My expectations would be that we will see higher repayments later in calendar 2016. .

Now so more later in the year rather than packed in the second quarter as overflow. .

Well, any one quarter it's really hard to predict level of repayments because a lot of repayment activity is idiosyncratic. So I feel much more comfortable making the prediction that we are going to see higher repayments over the course of the rest of 2016 than being specific to calendar Q2. .

Okay. All right. And then on another topic. Last quarter we saw some higher one off deals on the one-stop or you have the higher leverage multiples come in.

Did you see any more of those this quarter? Did they trend down just kind I am trying to get some color around that?.

I think there was a trend in calendar Q1 towards some higher spreads. We talked about how that's reflected in our average spreads and investments made in calendar Q1. I don't think there was a lot of movements in calendar Q1 in terms of typical leverage levels for new investments.

So I think the data point you are identifying is probably more idiosyncratic than it is indicative of a trend. .

[Operator Instructions] At this present time we do not have any additional question. Please continue with your presentation or closing remarks. .

Thank you, operator. I just want to thank everybody again for participating in today's call. And for your continued support. As always if you have any questions that we didn't cover today, please feel free to reach out to Gregory, to Ross or to me. Look forward to talking to you next quarter. .

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