Welcome to GBDC's September 30th, 2020 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 those in the forward-looking statements as a result of a number of factors, including those described from time to time in GBDC's filings with the SEC.

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

low net realized losses and solid net unrealized gains. So, this slide shows a bridge from GBDC's $14.05 NAV per share as of 6/30 to the $14.33 NAV per share as of 9/30. Let's just quickly walk through the bridge. Adjusted NII per share of $0.28 was in line with our dividend of $0.29 cents and consistent with the prior quarter.

Net realized losses were very low at $0.02 per share and net unrealized gains were $0.36 per share. These unrealized gains reflect the reversal of another portion of the unrealized losses that were incurred in the March quarter.

You've heard me say before that our top priority since COVID has been and continues to be to minimize GBDC's permanent, or realized, credit losses. In the long run, unrealized gains and losses wash out; all that matters for lenders like us, who tend to hold their loans to maturity, is whether or not those loans get repaid.

So, we're pleased to report that in fiscal Q4 GBDC kept realized credit losses low and enjoyed another meaningful reversal of unrealized losses. With that, let me hand the call over to Greg Robbins, he's going to offer an update on our strategic response to COVID-19..

Thank you, David. Starting on slide 10, you can see that GBDC continues to execute on its three key goals for navigating the COVID-19 crisis. First, proactive management of our highly diversified first lien senior secured investment portfolio.

Second, continued optimization of our balance sheet; and third, capitalizing on attractive new investment opportunities. Turning to slide 11, you'll recall that we described a three phase strategy for proactively managing our portfolio during COVID-19.

That entailed gathering information, developing strategic plans, and executing those strategic plans. We're now in phase three of our strategy and we have been implementing game plans for each affected borrower, working collaboratively with sponsors, management teams and junior capital lenders. This strategy has produced meaningful results.

Our team has executed more than 90 credit enhancing amendments. We define a credit enhancing amendment as one involving a spread increase, improved documentation terms, or an incremental equity infusion. We have talked at length about the strong sponsor support for our portfolio companies. Let me describe one flavor of this.

Since COVID began, sponsors have put in over $700 million of new equity into GBDC portfolio companies. Slide 12 shows how GBDC has fortified its balance sheet at September 30th. GAAP leverage was 0.85 times, which is at the low end of our target range. Regulatory leverage was 0.76 times.

GBDC had nearly $500 million of liquidity in the form of cash and borrowing capacity at quarter end. We've also continued to take steps to optimize GBDC's debt capital structure. During the quarter, GBDC completed its fourth flexible, low cost CLO.

We remain one of a handful of BDCs with consistent access to this funding market on attractive terms, even during COVID. And on September 30th, GBDC received investment-grade ratings from S&P and Fitch, and priced its debut issuance of $400 million in unsecured bonds.

The bonds have an interest rate of 3.375%, one of the lowest cost debut unsecured bond issuances in the BDC space. GBDC used the proceeds primarily to pay down secured debt under revolving credit facilities, which has significantly expanded GBDC's unencumbered asset base without materially changing GBDC's overall leverage.

As a result of these initiatives, GBDC has more flexibility and firepower. That flexibility and firepower put GBDC in a great position to capitalize on attractive opportunities.

And as we've discussed in prior quarters and illustrate on slide 13, we believe GBDC has powerful competitive advantages which will help us deliver premium shareholder returns going forward. With that, let me hand it over to Jon Simmons to go through our financial results for the quarter ended September 30 in more detail.

Jon?.

Thanks Gregory. So, just as a reminder, please note that in addition to the GAAP financial measures in the investor presentation, we're also providing certain non-GAAP measures. We refer to those non-GAAP measures as adjusted measures, and they seek to strip out the impact of the GCIC merger-related purchase premium write-off and amortization.

We describe those adjusted measures further in the appendix of the earnings presentation. And we'll refer to them where appropriate as we think they're better indicators of our performance and are consistent with how we evaluate our own results.

So, with that context, let's turn to slide 15 and I'm going to talk through the column on the right hand page -- the right hand side of the page to discuss the quarter in more detail. Adjusted net investment income per share, or as we call it, income before credit losses, for the September 30th quarter was $0.28.

Adjusted net realized and unrealized gain per share was $0.29. This compares to adjusted net realized and unrealized gain per share of $0.66 for the June 30th quarter. The adjusted net realized and unrealized gain this quarter was primarily driven by the continued reversal of unrealized losses from the March quarter.

Adjusted earnings per share for the quarter ended September 30th was $0.57. This compares to an adjusted earnings per share for the June 30th quarter of $0.94. Our net asset value per share at September 30th, 2020 increased to $14.33, up from $14.05 as of June 30th. On September 29th, we paid a quarterly distribution of $0.29 a share.

And finally, on November 20th, 2020, our Board declared a quarterly distribution of $0.29 a share payable on December 30th, 2020 to shareholders of record as of December 11 2020. The distribution is consistent with our historical cash distributions, which approximate 8% of NAV annually.

With that, I'll hand the call over to Ross to go through the quarterly results in more detail.

Ross?.

Great thanks, Jon. Turning to slide 16, this slide highlights our total originations of $141.2 million and total exits and sales of investments of $172.4 million for the quarter ended June 30th -- I'm sorry, September 30th.

As we noted on last quarter’s earnings call, we started to see a pickup in deal activity and that trend has continued into the current quarter. Factoring in unrealized appreciation and other portfolio activity, total investments at fair value decreased slightly by 0.3% or 12.2 million.

As of September 30th, we have $41.6 million of undrawn revolver commitments and $100.2 million of undrawn commitments on delayed draw term loans. These unfunded commitments are relatively small in the context of GBDC's balance sheet and liquidity position.

As shown in the table on the bottom, the weighted average rate of 7.6% on new investments and the weighted average spread over LIBOR on new floating rate investments of 6.5% both increased from the prior 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 would be calculated using current LIBOR, the spread over LIBOR, and the impact of any LIBOR floor. The top of slide 17 shows that GBDC’s portfolio remained highly diversified by obligor, with an average investment size of less than 40 basis points.

The bottom of the slide shows that our overall portfolio mix by investment type has remained consistent quarter over quarter, with one stop loans continuing to represent our largest investment category at 82% of the portfolio.

Turn to slide 18, 97% of our investment portfolio remained in first lien secured floating rate loans and defensively positioned in what we believe to be resilient industries. It is worth noting that we updated our industry classification this quarter using the S&P 2018 industry codes.

We think this change provides investors with more detail and transparency about the industry exposure of our underlying portfolio relative to industry classifications that we were using previously. Turn to slide 19, this graph summarizes portfolio yields and net investment spreads for the quarter.

Focusing first on the light blue line, this line represents the income yield, or the actual amount earned on the investments, including interest and fee income, but excluding the amortization of upfront origination fees and purchase price premium.

The income yield decreased by 30 basis points to 7.4% for the quarter, primarily due to the continued decline in LIBOR. The investment income yield, or the dark blue line, which includes the amortization of fees and discounts, also decreased by 30 basis points to 7.8% during the quarter, primarily due to the decline in LIBOR.

Since our variable rate debt facilities are not subject to a LIBOR floor, our weighted average cost of debt, or the aqua blue line, decreased by 50 basis points to 2.7%.

As a result, our net investment spread, or the green line, which is the difference between the investment income yield and the weighted average cost of debt, increased by 20 basis points to 5.1%.

Flipping to the next two slides, non-accrual investments as a percentage of total debt investments at cost and fair value remain low and decreased to 2.4% and 1.7%, respectively, as of September 30th.

During the quarter, the number of non-accrual investments decreased to nine investments, as one portfolio company investment was restructured and returned to accrual status.

As David discussed in his opening commentary, as a result of stronger portfolio company performance, the percentage of investments rated three on our internal performance rating scale decreased to 19.7% of the portfolio at fair value as of September 30th. As a reminder, independent valuation firms value at least 25% of our investments each quarter.

Slides 22 and 23 provide further details on our balance sheet and income statement as of and for the three months ended September 30.

Slide 24, the graph on the top summarizes our quarterly returns on equity over the past five years and the graph on the bottom summarizes our regular quarterly distributions, as well as our special distributions over the same timeframe. Turning to slide 25, this graph illustrates our long history of strong shareholder returns since our IPO.

Slide 26 summarizes our liquidity and investment capacity as of September 30th, and highlights the recent initiatives to further enhance the right side of our balance sheet. As Gregory mentioned, during the quarter we issued $189 million in notes through a term debt securitization on August 26.

Proceeds were used to redeem all outstanding notes issued in the 2014 debt securitization and outstanding debentures issued by one of our SBIC subsidiaries, GC SBIC IV.

We also issued $400 million in unsecured notes on October 2nd, the proceeds of which were used to pay down existing debt, including a full repayment of the revolving credit facility with Deutsche Bank. Slide 27 summarizes the terms of our debt facilities as of September 30th, prior to the closing of the bond deal on October 2.

And lastly, slide 28 summarizes our long history of consistent distributions. Most recently, our Board declared a distribution of $0.29 per share payable on December 30th to stockholders of record as of December 11th. With that, I'll turn it over -- turn it back to David for some closing remarks..

large or small, traditional senior or one stops, buy and hold or syndicated. That's why our game plan for fiscal 2021 is going to sound very familiar. It's stay humble and cautious and lean on these competitive advantages that have served us well. Thank you. Operator, please open the line for questions..

Thank you. [Operator Instructions] Our first question is coming from the line of Robert Dodd with Raymond James. Please go ahead..

with the termination of the Deutsche Bank facility after you did the unsecured notes, will there be any acceleration or accelerated expenses tied to that in the next quarter?.

Ross, I'm going to let you handle that..

Yeah, no, nothing material, Robert..

Okay, got it. Thank you.

Then just one of your comments at the end there, David, that you think you're poised to see additional unrealized appreciation in the portfolio? I mean, if I looked at it you've still got, round numbers, $1 per share of depreciation in there, given the fair value of the portfolio versus cost right now, what gives you the confidence that you're going to get back more? Is that -- that you've recovered some so far, is that directly tied to the 700 -- sponsor $700 million additional equity that sponsors have put in? Is the appreciation -- expected future appreciation kind of contingent on private equity being willing to put in more money or what drives the confidence that you're going to get more of that back?.

Sure. So, let's go back and let's put it in context. So, at 3/31, we had write-downs that were the result of multiple factors. One was a degree of spread widening, market-wide spread widening that resulted from COVID-related uncertainty.

And the second was an expectation that lockdowns and COVID impacts were going to negatively affect credit, quite apart from spreads. So, we think about these -- it's hard to disentangle the two of them one from the other. But there were two key elements to it. One was spread-related and one was credit-related.

And here we sit, and it's what, nine months later and we've got a lot more information than the market had at that time about what the impact of COVID is going to be and how companies were going to perform. And two things have happened. One is that spreads have narrowed as the markets generally have recovered significantly from the March timeframe.

And the second is that, in specific respect of our portfolio, we've seen better than expected performance. And we talked about how we saw meaningfully better than expected performance when we were talking about the June 30th quarter. And you've heard me again talk about it in the September 30th quarter.

Why have we seen that better than expected performance? Well, there are a variety of reasons. One element is good underwriting. A second element is management teams have been very adept at pivoting, cutting costs, finding new revenue sources, managing their companies to be meaningfully profitable and cash generative, despite challenges.

A third element, and you alluded to this, is that sponsors have stepped up and we've seen very significant support from sponsors, sometimes in the form of advice and counsel, sometimes in the form of operating executives who've been parachuted in, and sometimes in the form of equity infusions.

I think it's challenging to try to dissect which degree of improvement in valuations and unrealized gains stems from which of these different threads that I just described. The good news, Robert, is that all of them are continuing with significant momentum.

What do I mean by that? Well, we're continuing to see the economy perform better than I expected; we're continuing to see management teams deliver in a way that's better than expected. We're continuing to see sponsors be very supportive. So, it's not one factor that gives me optimism. It's a variety of factors.

Now, I don't want to make it sound like it's a guarantee. It's not a guarantee. There are many sources of uncertainty that we're all, as investors and as people, dealing with today. COVID's not cured. We don't have a vaccine that's been widely administered. We've got a variety of different potential sources of risk.

But as we sit here today, in November, I would -- actually December 1, excuse me, I would tell you that I am cautiously optimistic about our ability to continue to manage the portfolio to keep realized losses low and to sustain some continuing unrealized gains..

I appreciate that. Thank you. And if I can, one more quick question, when -- your comments -- you sounded like you're a lot more optimistic about 2021 than you are -- we are now in December, there's one month of the year left to go. I mean, what's the activity level, clearly, I think started to ramp up into this fourth calendar quarter.

I mean, what are you just seeing in terms of activity or is -- when you talk about the M&A market being muted in terms of -- is that closings? Is that activity? Are people just not in a hurry now and less worried about taxes changing next year or things like that.

I mean is there anything going on this year versus things just spilling over to next year?.

So, again, just putting in context. So, in calendar Q2, very low activity, everybody was responding to the surprise of COVID. And there was very little new deal activity anywhere, even in sectors that were less COVID impacted.

In calendar Q3, we started to see some comeback particularly in less COVID impacted sectors, including software, including some elements of healthcare. And you can see in the reported results that we discussed today, a meaningfully higher level of new originations in the quarter ended September 30th than the quarter ended June 30th.

I anticipate that that the quarter ended December 31st will continue that trend. We'll see more improvement; we'll see a higher level of originations in calendar Q4 than we saw in calendar Q3. And we're seeing that more broadly. In other words, it's not just software and a few niches within healthcare, it's broader than that.

But if you compared activity in calendar Q4 2020 and calendar Q4 2019, calendar Q4 2020 is muted relative to calendar Q4 2019. And I think it's going to be into 2021 until we start seeing year-over-year increases in M&A activity and new origination activity. The key factor is going to be very simple.

It's going to be reduced uncertainty related to COVID..

Understood. Thank you..

Our next question is coming from the line of Ryan Lynch with KBW. Please go ahead..

Hey, good morning. Thanks for taking my questions.

First one that I just wanted to touch on, you mentioned you had one default in the quarter and restructuring, was that Rubio Restaurants or what portfolio company was that related to?.

Rubio's is a default -- it is currently in bankruptcy, we are working with the company and the sponsor on a restructuring of the company, so that it can emerge from bankruptcy and do well again. And I think it's -- as a company in good shape to be able to do that.

The other company that I think you're alluding to, which is a calendar Q3 event, is a dental practice company called Elite Dental, where we also did a consensual restructuring, as part of which we reduced the amount of debt on the company, and we took an equity stake..

Okay, perfect. And then you kind of touched on this earlier and you mentioned in your presentation, but you executed 90 plus credit enhancing amendments since COVID with a focus on some of these most -- impacted COVID-19 impacted sub sectors.

Just from a higher level, when you are looking to make a credit amendment to a company, and I know every situation is general, but maybe could you just walk through kind of the priorities that you look at? Are you guys looking to get higher spreads, more fees, tighter guardrails around your covenants, and what are you most wanting in return from the private equity sponsors in support of those amendments?.

It is hard to generalize, I think your introduction, your question is right. It's hard to give you a single answer to that question. Our key priority, and I think I've been very clear about this, our key priority is to minimize realized credit losses.

So, if you were to rank order the things that are important to us, the first and most important of all things to us is help us avoid losing money.

Beyond that, it's very much situation-specific and we look at all the facts and circumstances in a particular borrower and assess what's most important to us and what's most important to the sponsor and the company, and seek to create a win-win solution..

Sure. Okay. And I just had one last one regarding the unsecured notes issuance. First off, congratulations on the investment-grade rating and that note issuance, that was a very attractive rate. Just as you sit here today, your balance sheet looks to be in very good shape, very low leverage.

Some pretty good diversity, at this point, but just looking forward looks like you have about 20% of your liability structure in unsecured notes today.

Is that kind of a level that you guys want to run going forward? Or would you guys like to increase that? Or is it more -- just going to be kind of an opportunistic approach to when new -- when a market opens up and has very attractive rates, you guys will look to tap the unsecured market for more?.

I'd say somewhere between two and three.

So, yes, we would like over time to have a higher proportion of our debt in the form of unsecured notes and yes, we're going to be opportunistic and thoughtful about when we go to market because we think that our liabilities are a critical competitive advantage, we think it's one of the most important things we can manage..

Okay, that's all for me. I appreciate the time today..

Our next question is from the line of John Kemmerer with Zeke Capital. Please go ahead..

Yeah. Hi, this is John. My question is in response to the Fed talking about the LIBOR phase-out yesterday.

Just curious when we might see your first loan with a non-LIBOR benchmark? And then sort of related question, maybe you could just summarize for me the overall impact on your operations of this change?.

Sure. So, as I think everybody on this call probably knows, there's an industry-wide effort underway to shift from LIBOR to a new standard for floating rate loans known as SOFR.

We serve on the LSTA, that's the industry trade association for the Loan Syndication Trading Association, the LSTA's special committee on LIBOR transition, and our expectation is that the LIBOR transition to SOFR is not going to be particularly eventful.

Internally, we have a number of working groups making sure that we have the appropriate systems and operational procedures to make the transition. I think that's well in hand.

So, I think this is a bit like Y2K, it requires a lot of work in preparation and then when it happens, it's -- there's -- you almost forget such a deal, because all of the preparation and work and anticipation of it made it not a big deal. So, that's -- we're in the work in preparation phase right now..

Got it.

So, is there a timeline when you might originate the first loan with the new benchmark?.

Well, I think the loans are going to have a LIBOR language with what's called fallback language, which means a specified language that shows what happens when LIBOR is removed. And we're starting to see that -- all that within credit agreements now..

Okay. Thank you..

There are no further questions at this time..

Great. Well, I want to thank everyone once again for tuning in for this quarter's call. Look forward to speaking to you all next quarter. And as always, if you have any questions before then please feel free to talk to any of us..

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