Welcome to the Golub Capital BDC, Inc.’s December 31, 2018 Quarterly Earnings Conference Call. Before we begin, I would like to take a moment to remind our listeners that remarks made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results, and involve a number of risks and uncertainties.

Actual results may differ materially from these 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 in Securities and Exchange Commission.

For materials the company intends to refer to on today’s earnings conference call, please visit the Investor Resource tab on the homepage of the company’s website, www.golubcapitalbdc.com and click on the Events Presentations link. 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 will now turn the conference over to David Golub, Chief Executive Officer of Golub Capital. Please go ahead..

Thanks, Sarah. Hello, everyone, and thanks for joining us today. I am joined by Ross Teune, our Chief Financial Officer; Gregory Robbins, Managing Director; and Jon Simmons, Director here at Golub Capital. Yesterday, we issued our earnings press release for the quarter ended December 31, and we posted an earnings presentation on our website.

We are going to be referring to that presentation throughout the call today. Gregory Robbins is going to start with an overview of GBDC’s results for the first fiscal quarter of 2019. Ross will then take you through the results in more detail and I am going to come back at the end for some closing remarks on three topics.

First, I am going to talk about our perspective on the fourth quarter market downdraft -- fourth quarter 2018 market downdraft. Second, I am going to give you a status update on the proposed merger with Golub Capital Investment Corporation or what we call GCIC.

And third, I am going to update you on our debt capital structure and our leverage strategy. The quarter ended December 31 was another solid one for GBDC and that’s despite the worst downdraft in liquid credit markets that we have seen since the financial crisis.

For those of you who are new to GBDC, our investment strategy is, and since inception has been, to focus on providing first lien senior secured loans to healthy, resilient middle market companies that are backed by strong partnership-oriented private equity sponsors. With that, I will turn the call over to Gregory..

Thank you, David. Let’s look at the details for the quarter. Net increase and net assets resulting from operations or net income for the quarter ended December 31, 2018, was $18.4 million or $0.31 per share, as compared to $15.9 million or $0.26 per share for the quarter ended September 30, 2018.

Net investment income or as we call it income before credit losses was $19.8 million for the quarter ended December 31st or $0.33 per share, as compared to $20.3 million or $0.34 per share for the quarter ended September 30th.

Excluding $0.5 million reversal in the accrual for the capital gains incentive fee, net investment income was $19.3 million or $0.32 per share, as compared to $19.5 million or $0.32 per share for the quarter ended September 30th.

Consistent with previous quarters, we have provided net investment income per share excluding the capital gains incentive fee accrual, as we think this adjusted NII is a more meaningful measure.

Net realized and unrealized loss on investments in foreign currency of $1.4 million or $0.02 per share for the quarter ended December 30th -- December 31st was the result of $2 million of net realized losses and $600,000 of net unrealized appreciation.

This compares to a net realized and unrealized loss on investments in foreign currency of $4.4 million or $0.08 per share for the prior quarter. Despite the slight net realized and unrealized loss on investments this quarter, we continue to see solid investment income and credit quality from the portfolios, as Ross will discuss further in a bit.

New middle market investment commitments totaled $203.1 million for the quarter ended December 31st, approximately 20% of the new investment commitments were senior secured loans, 77% were one stop loans and 3% were investments in equity securities.

Overall, total investments in the portfolio of companies at fair value increased by approximately 7.6% or $135.6 million during the quarter ended December 31st.

On December 28th, we paid a quarterly distribution of $0.32 per share and a special distribution of $0.12 per share, the third consecutive calendar year in which we have paid a special distribution.

Primarily as a result of this special distribution, our net asset value per share declined to $15.97 as of December 31st from $16.10 as of the prior quarter.

Turning to slide four, you can see in the table the $0.31 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 the capital gains incentive fee and our net asset value per share of $15.97 at December 31st.

As shown on the bottom of the slide, the portfolio remains well-diversified with investments in 212 different portfolio companies and an average size of $8.7 million per investment. With that, I will now turn over to Ross who will provide some additional portfolio highlights and discuss the financial results in more detail..

Thanks, Gregory. Turning to slide five, this slide highlights our total originations of $203.1 million, and total exits and sales of investments of $63.6 million. You will recall that payoffs were a big offset to strong originations for most of calendar 2018.

We expected the payoffs to normalize in the December 31st quarter and we were right, leading to strong growth in total investments at fair value of 7.6% or $135.6 million with total investments just over $1.9 billion.

Turning to slide six, this slide shows that the overall portfolio mix by investment type has remained consistent quarter-over-quarter and one stop loans continue to represent our largest investment category at 80%.

Turning to slide seven, this slide illustrates that the portfolio remains well-diversified with an average investment size of $8.7 million. Our debt investment portfolio remains predominantly invested in floating rate loans and there have been no significant changes in the industry classification percentages over the past year.

Turning to slide eight, the weighted average rate of 7.7% on new investments this quarter was down from 8.2% in the previous quarter. As we noted on the call last quarter, the increase in the weighted average rate on new investments last quarter was largely the result of a few larger deals originated with high relative spreads.

It was not a general market move as the market remains very borrower friendly. The weighted average rate of investments that paid off this quarter decreased to 8.5% as the prior quarter included a few larger payoffs on existing loans with high relative rates.

Continued downward pressure on spreads contributed to a decline in the weighted average spread over LIBOR on new investment to 5.3% from 5.9% in the previous quarter. As a reminder, the weighted average interest rate on new investments is based on the contractual interest rate at the time of funding.

For variable rate loans, the contractual rate will be calculated using 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 yields and spreads for the quarter.

Focusing first on the light blue line, this line represents the income yield or the actual amount earned on investments, including interest and fee income, but excluding the amortization of discounts and upfront origination fees. The income yield decreased by 20 basis points to 8.6% for the quarter ended December 31.

This is primarily as a result of a decline in prepayment fee income and payoffs of loans with high relative rates over the past few quarters. These same variables are also the primary cause for the decrease in the investment income yield or the dark blue line, which includes amortization of fees and discounts.

The weighted average cost of debt or aqua blue line, remain unchanged at 4.3%, as the lower spreads over LIBOR on our new debt securitization was partially offset by an increase in LIBOR rates as the LIBOR contract rates reset. Flipping to the next two slides, the number of non-accrual investments remained flat at three investments.

As of December 31, non-accrual investments as a percentage of total investments at cost and fair value were 0.7% and 0.3%, respectively. These were unchanged from the prior quarter.

Fundamental credit quality as of December 31 remains strong with nearly 90% of the investments in our portfolio have an internal performance rating of 4 or higher as of December 31 as shown on slide 10. And as a reminder, independent valuation firms value approximately 25% of our investments each quarter.

Reviewing the balance sheet and income statement on slides 11 and 12, we ended the quarter with total investments at fair value of $1.9 billion, total cash and restricted cash of $53.7 million and total assets of $1.98 billion. Our total debt was $971.8 million.

This includes $597.1 million in floating rate debt issued through our securitization vehicles, $277.5 million of fixed rate debentures and $97.2 million of debt outstanding in our revolving credit facility. Our total net asset value per share was $15.97.

Our regulatory debt-to-equity ratio was 0.75 times, while our GAAP debt-to-equity ratio was 1.04 times, which is consistent with our target of about 1 times GAAP leverage. Moving to the statement of operations, total investment income for the quarter ended December 31 was $39.4 million.

This was a decrease of $1 million from the prior quarter, primarily due to a decline in dividend income from SLF, which was partially offset by higher interest income from a growing portfolio. On the expense side, total expenses were $19.6 million, a decrease of $0.6 million, which was primarily attributable to lower incentive fee expense.

Turning to the following slide, the tables on the top provide a summary of our quarterly distributions and return on average equity over the past five quarters.

Our regular quarterly distributions have remained stable at $0.32 per share, which is consistent with our net investment income per share when excluding the GAAP accrual for the capital gain incentive fee.

As mentioned earlier, we paid special distribution of $0.12 per share during the quarter ended December 31, as our GAAP and taxable income exceeded our net investment income for the calendar year. The bottom of the page illustrates our long history of consistently increasing NAV per share over time.

For historical comparison purposes, we presented NAV per share both including and excluding special distributions.

Turning to slide 14, this slide provides some financial highlights for investment in Senior Loan Fund, which had a weak quarter as a result of unrealized losses, below target leverage and a shortage of attractive new investment opportunities appropriate for this fund. SLF investments at fair value at December 31 declined by 2.6% to $174.4 million.

The next slide summarizes our liquidity and investment capacity as of December 31 in the form of restricted and unrestricted cash availability, and our revolving credit facilities and debentures available through our SBIC subsidiaries. On February 1, 2019, we closed on a new $200 million revolving credit facility with Morgan Stanley.

The credit facility bears an interest rate equal to one month LIBOR plus 2.05% during the revolving period. In connection with the new credit facility, we repaid all advances outstanding on the revolving credit facility with Wells Fargo in full, and following such repayment the agreements governing the credit facility with Wells were terminated.

And now I will turn the call back to David, who will provide some closing remarks..

Thanks, Ross. So to sum up, GBDC’s first fiscal quarter of 2019 was solid, especially when you view it in the context of what happened in the market during the same period.

In calendar Q4, the broadly syndicated loan or BSL asset class experienced its worst quarter since the financial crisis, posting a total return of negative 3.5% as the average price of loans in the S&P/LSTA Leveraged Loan Index fell by about 5 points. High-yield bonds also traded down.

They fell on average by about 6 points and of course the S&P 500 was down by more than 13%. We haven’t seen this kind of sudden steep sell-off in liquid markets since 2008. Interestingly, since the turn of the year, we have seen a sharp rebound. So I want to first talk about what’s going on.

What does this mean? Was this volatility that we saw in calendar Q4 and into the early part of this year, was this another short-lived tantrum like what we saw in late June and early July of 2018, with a bigger intensity, or was this particular sudden event a warning that we are near the turning point in the credit cycle? We think there’s a stronger case for interpreting the recent volatility as another tantrum.

In broad strokes, here’s our take. We think the Fed has kept interest rates low for the last 10 years in a way that’s been designed to push investors away from cash and treasuries and toward riskier asset classes.

As a result, our sense is that many investors have more risk exposure than they would really like to have and they are very concerned about getting out of those risk assets before the cycle turns. Essentially, a way to think about it is that the Fed has created a class of investors who are twitchy about changes in monetary policy and the economy.

At the same time, we think changes in market structure have made twitchy behaviors more likely to cascade. In particular, we focus on the growth of passive investment strategies that today aggregate trillions of dollars of capital, and by their very nature, they buy and sell indiscriminately in response to daily funds flows.

Similarly, momentum strategies now feature prominently in many actively managed funds and these strategies tend to involve to a significant degree buying what’s going up and selling what’s going down.

So when you combine twitchy investors who make a sudden move, index funds and momentum traders tend to amplify that move and we think that’s what happened in calendar Q4. Part of the reason we reached this conclusion is because it’s difficult to attribute the market swoon to economic fundamentals. We saw that U.S.

middle market companies that we are lending to continue to post strong operating results through calendar Q4. In fact, on January 11, 2019, we published the Golub Capital Middle Market Report and we reported double-digit year-over-year revenue and EBITDA growth in the median company in our portfolio.

That’s the fifth consecutive quarter of very strong growth and that growth suggests strongly that U.S. businesses that sell to other U.S. businesses continue to have a lot of momentum making an imminent recession seem quite unlikely. Now, we may be right. We may be wrong. The truth is that we are not particularly great at predicting recessions.

The good news is that the recent market volatility, whether it was a tantrum or a signal of returning to the credit cycle, either way we think GBDC is well-positioned. Our late cycle investing strategy is a simple one.

You have heard me talk about it before and we have stuck with it, staying at the top of the capital structure, partnering with strong sponsors and resilient companies, remaining highly selective on underwriting, leaning in on our competitive advantages, and when necessary, giving up some yield for higher credit quality and portfolio stability.

We expect this strategy will continue to deliver solid performance if market conditions are benign and we think it will set us up to be able to play offense if and when the credit cycle turns. In the meantime, we think we are likely to see more tantrums like the fourth quarter of 2018 before there is a decisive downturn.

We have now seen two just in the last nine months. In our experience, this is likely to be a good thing for Golub Capital and GBDC. Periods of volatility tend to lead sponsors to particularly value our large scale buy-and-hold capability, and we think that that pattern is likely to recur.

Now, we shift focus to the second topic I mentioned earlier, the proposed merger with GCIC. We remain very excited about the pending merger. To refresh your recollection, we discussed on our fiscal fourth quarter 2018 earnings call seven reasons we believe the merger with GCIC is compelling for GBDC.

First, the transaction will be immediately accretive to GBDC’s NAV, and I mean, NAV per share. Based on GBDC’s and GCIC’s NAV per share as of September 30, this accretion of GBDC’s NAV would be approximately 3.6%. We anticipate as GCIC continues to grow that this level of accretion is actually going to increase.

Second factor, because the transaction would be accretive to GBDC’s NAV per share, we think the transaction offers the potential for additional value creation assuming the GBDC continues to trade at the approximately 15% premium to NAV that GBDC has traded on average over the past three years.

Third factor, the combination of GBDC and GCIC would create the fourth largest externally managed publicly traded BDC by assets based on fair value of the holdings of each company as of 9/30. Fourth, the increased market cap of GBDC following the merger is anticipated to deliver improved trading liquidity and broader analyst coverage.

Fifth, we expect the portfolio of the combined company to look a lot like standalone GBDC, so no new risks there. Sixth, we expect the combined company to better access to the securitization market than either company on its own, giving the combined company greater opportunity to optimize the debt capital.

And finally, we expect some operational synergies from eliminating redundant expenses. In short, we believe that combined GBDC/GCIC maintains all the elements that have made GBDC successful and gives us a number of additional advantages.

We believe the increased scale of the combined company is expected to deliver tangible benefits, including incremental earnings power to support GBDC’s Board’s announced intention to increase GBDC’s quarterly dividend to $0.33 per share after the closing of the merger provided that the Board reserves the right to revisit this intention if market conditions or GBDC’s prospects meaningfully change.

Let me speak briefly to where the merger process stands. GBDC and GCIC filed their preliminary joint proxy statement with the SEC on December 21st immediately prior to the government shutdown.

Under normal circumstances, the SEC will conduct a full review of the proxy and provide initial comments about 40 days after the filing of the preliminary proxy. Unfortunately, the SEC’s formal review of the proxy was deferred until the government reopened on January 25th.

At this point, we can’t tell you exactly when we expect the proxy comments from the SEC to come back, and therefore, we can’t give you specific guidance about when we expect the transaction to close.

It will depend in part on how long it takes the SEC to clear its backlog, and whether there’s another government shutdown before we hear back from them, but our target remains to close the transaction during the first half of 2019. Finally, let me give you an update on our debt capital structure and leverage strategy.

We mentioned on last quarter’s call that we received a no-action letter from the SEC to create a path for us to use financing securitizations again. We anticipated that this would enable us to obtain lower cost, more flexible financing for certain investments previously held in bank facilities with Wells and with Morgan Stanley.

In November of last year, GBDC issued a new debt securitization with a weighted average spread over LIBOR of 1.64%. This is about 50 basis points lower than the current spread over LIBOR of the company’s bank facilities. So a very meaningful savings.

The SEC no-action letter and the anticipated benefit of improved access to the securitization market post-merger, informed our Board’s thinking about whether increasing our regulatory leverage limit would be good for shareholders. I mentioned last quarter the Board decided to put the matter up for shareholder vote.

At our 2019 Annual Meeting of Stockholders held earlier this week on February 5th, stockholders overwhelmingly approved the proposal to increase GBDC’s leverage limit under the 1940 Act by reducing its required asset coverage from 200% to 150%.

What does this mean for GBDC? In the near-term, it means primarily that we will have additional flexibility to manage capital and a bigger cushion to the regulatory leverage limit. It’s GBDC’s current intention to continue to target a GAAP debt-to-equity ratio of about 1 times.

You may recall that we talked in the past about three themes that guide our thinking about whether to use more leverage. One, the Hippocratic Oath, do no harm. We think we have got a pretty good model today. Two, the attractiveness of the investment opportunities that could be accessed with higher leverage.

And three, the costs and risks associated with incremental debt. Based on where things stand right now, we think GBDC’s current level of leverage is about right. But we believe it’s good for the company and good for shareholders to have flexibility to secure additional financing if conditions change and warrant it.

With that, let me thank you for your time today and for your partnership and I look forward to answering some questions. Operator, if you could please open line..

Thank you. [Operator Instructions] And our first question comes from the line of Christopher Testa with National Securities Corporation. Please proceed..

Hi. Good afternoon. Thank you for taking my questions today. Just going back to your commentary David on the investors getting spooked by the Fed.

Would you also entertain the notion that there’s been a tremendous amount of bashing of leverage loans and CLOs from both Powell and Warren and Yellen and The Times and The Journal and that led to this kind of massive outflow of $16 billion out of loan funds? Do you think that that might induce the tantrum more even more so than the Fed?.

Sure. I didn’t mean to imply that the Fed was to blame for the tantrum. I think the Fed laid out a foundation in its quantitative easing very low interest rate environment in which it’s easy for tantrums like this and for cascades like this to develop.

I think, Chris, you are right that there are a number of factors that you can identify that contributed to this tantrum.

I am sure that the comments that -- the commentary that you were referencing didn’t help, but we need to recognize that the decline in leverage loans happened contemporaneously with a larger decline in high yield and an even larger decline in equities..

Right..

So I don’t think it was just those comments. I think that we saw a general flight away from risk assets. And I think we are going to see a repeating pattern, and I think we saw it last July as well.

I think we are going to see a repeating pattern of episodic, unpredictable market tantrums where we see first a group of investors and then followed quickly by index funds and momentum traders causing volatility where there really is not a set of fundamental changes in market conditions..

Got it. Okay. Yeah. No. That make sense and that definitely clears that up. And just kind of sticking with that topic, David. The Fed seems kind of to be walking back some of the more hawkish language now. That would obviously imply that maybe there’s even a rate cut. Who knows how things go in the future.

Do you think investors in your opinion would actually flood back into risk-on mentality or actually panic because that could mean that the economy slowing materially?.

So, I am confused by some of the Fed’s recent pronouncements because they seem out of line with the numbers that we see coming out. So I mentioned earlier we released the Golub Capital Middle Market Index numbers in early January which indicated very strong revenue and EBITDA growth for our obligors.

That has been followed by a spate of surprises on the upside in earnings that have come out. It’s been followed by a very positive jobs report, a reasonably positive GDP report. So the idea that the economy is slowing down and therefore the Fed should be walking things back, I am not really sure I get it.

I think what may be happening is perhaps more political than based on macroeconomic factors. I think the Fed is trying to play nice with the White House. But fundamentally, I think, if we continue to see the kind of economic strength that we are seeing that we are likely to see more Fed increases in 2019..

Got it. Okay. That’s helpful. And given the volatility in the loan markets, your NAV especially backing out the special dividend was pretty much flat. So just wondering how you look at marks on the portfolio just relative to the leverage loan market. I know you mentioned that a lot of your book had obviously revenue and EBITDA growth.

So is that enough to offset any technical marks from the spreads widening?.

So we definitely had some spread widening in the middle market over the course of the fourth calendar quarter of 2018. But I’d highlight one other element to this picture that, perhaps, I should have mentioned earlier. A line I have often used is that the middle market is insulated from but not immune from trends in the broadly syndicated market.

It’s a valid observation with respect to calendar Q4 with an asterisk. And the asterisk is the degree of insulation of the middle market during this period is unusual. We have seen middle market pricing, turns, leverage move very little in response to a more significant move in the broadly syndicated market.

One can attribute that in part to the natural tendency of the middle market to lag. But I think one can also attribute that in part to the stage we are at in middle market lending right now.

By that, I mean, the amount of capital that’s been raised, the number of new players who come in, the amount of money that’s looking for a home in new middle market loan assets. So we are seeing less volatility in the middle market for better or for worse.

I must tell you in some ways I wish we were seeing more, because that would mean that conditions for new lending were more favorable than what we are seeing.

There is an area of opportunity though in this for us, which is we specialize in buy and hold solutions and the area where the volatility is most pronounced has been and remains most pronounced is in syndicated solutions.

So to the degree sponsors are looking at a choice between a financing that is buy and hold focused or syndicated in market conditions like we are seeing right now, they are going to be more inclined toward buy and hold solutions and that’s favorable for us..

Got it. Okay. That’s great detail. And just can you go over why dividend income was down at the SLF and also on that topic.

Given that this is a vehicle that hasn’t grown and now you are looking at reduced asset coverage and combining the GCIC when some time hopefully in the first half of calendar year, is this something that you are increasingly maybe considering just buying the loans out and bringing on balance sheet and getting rid of any frictional costs there?.

So let me -- a couple of questions embedded in your question. Let me parse it. So first what happened to dividend income? What’s happening in the Senior Loan Fund? Those two questions are related.

If you flip up page 14 of the earnings presentation, you will see that the analyzed quarterly return for senior loan fund this quarter was low, it was 0.6% and driving that relatively low quarterly return were a couple of markdowns, in particular, on loans in that portfolio that have been in workout for some time.

So we decided in the context of the mark-to-market adjustments in that portfolio, which we viewed not as market related, like some of the other Q4 changes, but more credit-related. We decided that it was appropriate to reduce the SLF dividend to GBDC during the quarter.

So if you look at our income statement under the dividend line, you will see that it’s meaningfully down. The predominant reason for that reduction is a reduced dividend from SLF. The impact of that reduction was to meaningfully reduce incentive fees paid by GBDC.

So this is another example, Chris, of something you have written about, which is the way in which GBDC’s fee structure is set up smartly for protecting investors. So, in essence, the manager bore the costs of these credit issues in SLF. Second part of your question was, what’s our -- are we ready yet to give you a new guidance on our view on SLF.

The answer is no. Guidance remains the same, as I have said in prior quarters, which is we are not actively looking to grow SLF right now, but we think it is a smart tool to keep in our arsenal if and when market conditions change and we find traditional middle market senior loans more attractive..

Okay. Great. That’s all for me and thank you for taking my questions today..

Thank you. And our next question comes from the line of Robert Dodd with Raymond James. Please proceed..

Hi, guys. Following up on, Chris’s, question on the SLF there. I mean, within that, there was a $1.3 million realized loss within the SLFs and a $900,000 unrealized markdown.

To clarify your comments David, is that to say that both the realized and the unrealized are related to company specific credit problems or was that just the realized and is the unrealized related to mark-to-market and maybe rebound next quarter..

I don’t have the data right in front of me on the breakout on the realized side. The two markdowns that I was alluding to were on the unrealized side..

Okay. Got it. Got it. And then just on GCIC and GBDC, I mean, obviously, it kind of ties into your initial comments about twitchiness of the markets. I mean, isn’t there an incentive for GCIC investors to avoid the twitchiness of the equity market. You are taking advantage of some movements that might occur in the middle market.

But one of the advantages of being in a non-traded vehicle is precisely avoidance of one of these extra layers of volatility that comes with being a publicly traded BDC versus a non-traded BDC.

So is there -- do you think that’s unlikely to have influence on, A, how they vote or, B, whether Golub has -- Golub the platform - has another vehicle available without the public equity BDC wrapper around it for them to move into and get access to the attractive risk return of the middle market private lending business without the twitchiness of the equity market that goes along with a publicly-traded BDC..

So, thanks for your questions. So let me address the first part of it first. So when we created GCIC, we created it by attracting investments from large institutional investors who wanted to -- who bought into exactly what we are doing, who bought into our business plan.

Our business plan was to ramp this up as a private entity and to look over time to either merge into GBDC or to take it public in some form to create a publicly traded platform.

So I am quite confident that that schema is what our investors want, because that’s what we told them we were going to do and they -- this is the strategy they were enthusiastic about participating in.

So from their perspective what the merger accomplishes is it takes them from having an illiquid investment in a private vehicle to having a more valuable investment in a liquid vehicle. I don’t know many investors who would pay a premium for illiquidity.

So here, our illiquid investors are getting the opportunity to get a premium and liquidity at the same time. So, my expectation is that GCIC investors will be very supportive of the merger based on discussions that we have had to-date. I see no data that support a different hypothesis.

Is there a market for a product for a BDC that’s permanently nonpublic for investors who are afraid of their own impulses if they have the opportunity to sell? I guess, maybe. I think that’s a little bit of a silly product, because you could replicate it as an investor by simply handcuffing yourself and saying you don’t have the opportunity to sell.

Why you need to restrict your ability to sell by investing in an illiquid vehicle, I guess, I am puzzled by that one..

Okay. Fair enough. Thank you..

Thank you. [Operator Instructions] Our next question comes from the line of Finn O’Shea with Wells Fargo Securities. Please proceed..

Hi. Thanks for taking my question. Just to go back to the market commentary a little bit and appreciate your thoughts there. But if you could maybe expand on sort of your views on how bad or volatile it has to get for the middle market to -- the private credit market to experience the better terms that most every other market saw.

On the core middle market it seems like the capital supply was vastly dwarfed what deal flow produced. So if you can kind of give maybe your view on how much longer that would have had to or just how that will eventually come about for one.

And then for two, you mentioned on the larger side that would maybe eventually link toward buy-and-hold if the episode wasn’t so acute. Were there -- to the extent those larger deals showed to folks like yourselves who can take on large deals.

Did they show better terms and if not, to what -- how close were they to offering you a real premium for your buy-and-hold capabilities? Apologies for the longwinded question..

No problem. I think I understand both pieces to it. So let me respond in inverse order. So, first, I think you are pointing out an important observation about calendar Q4.

In calendar Q4 in the middle market to the degree we saw spread widening, we saw meaningfully more spread widening in larger-sized transactions than we saw in smaller-sized transactions. In the larger-sized transactions, in many respects, our competition was the syndicated market and the syndicated market moved.

So that enabled buy-and-hold solution providers to move as well. The fundamental underlying problem in smaller middle market credits is there’s just too much money in the space and that is not going to get solved by a level of volatility. That’s going to get solved by capitalist evolution.

Capitalist evolution means that managers who are able to produce consistently good returns get continued access to capital and managers who are not able to produce consistently good returns don’t and sadly that process takes a while..

Understood. Thank you. And then to the extent you singled that the larger deals did push to buy-and-hold. Is that true for your origination this quarter given as seen on spread was a bit tighter. This does -- you also kind of -- well, I will ask that question as part one. And then, part two, your view is this pattern is likely to recur.

So why not get more aggressive at times like this to the extent you can?.

So we do get more aggressive in periods like this. We like to lean in on our competitive advantages. One of our competitive advantages is the capacity to get deals of a wide variety of different sizes done on a buy-and-hold basis with reliability and certainty. So I agree with your second question. It is an appropriate time for us to be aggressive.

On the first part of your question, can you repeat it for me please because I forgot answering the second part?.

It was related to -- you were outlining that the buy-and-hold became more compelling, and I think you said that there was more volume there. So does that describe….

A widening spread….

… why you had more spreads?.

Yeah. I don’t think that was the primary reason why we had a little bit of spread widening. I mean, Ross, talked about this some.

The fiscal Q3 quarter spread was a little bit artificially high, because of some high spread transactions that occurred during the quarter and this quarter arguably was a little artificially low, because we skewed a little more towards senior relative to one stops. So I wouldn’t read too much into those numbers..

Okay. And one more if I may. You put out the prospectus for the combination and there’s a delay there. One of your peers to the extent you are familiar is a little farther in the process and the SEC’s commentary or dialogue thus far is showing a pretty strict interpretation of merging these vehicles.

So do you have any -- to the extent you are familiar with those, do you have any concerns on structures in place in your situation that may invoke pushback?.

I am not sure I know this -- the details of the situation you are referencing. But the merger that we are endeavoring to do is a pretty straightforward merger between two externally managed BDCs. I don’t think we are plowing any new territory. So, no, I am not expecting any challenging regulatory issues..

Okay, David. Thank you so much..

Thank you. And gentlemen there are no further questions at this time..

Great. I want to just reiterate thank you all for listening. And should you have any questions that we didn’t get to today or that you come up with before we next get together, please feel free to reach out to Gregory, Jon, Ross or myself. Thank you..

Thank you. 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..