Welcome to GBDC's December 31, 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. .

Thank you. Hello, everybody, and thanks for joining us today. I'm joined by Ross Teune, our Chief Financial Officer; Gregory Robbins, Senior Managing Director; and Jon Simmons, Managing Director at Golub Capital. We and the rest of the Golub Capital team hope that your 2021 is off to a good start. .

Yesterday, we issued our earnings press release for the quarter ended December 31, and we posted an earnings presentation on our website. We'll be referring to this presentation throughout the call today. .

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. .

Let me start by giving the headline for the quarter ended December 31, and that headline is that GBDC's results were strong, and they were in line with the preliminary estimates that we filed on January 20. GBDC's performance for the quarter exhibited solid net investment income and continued strong credit performance.

We'll discuss both these topics in more detail as we go through today's presentation. Gregory is going to start by providing a brief overview of GBDC's performance for the 12/31 quarter, and then he's going to hand it off to Jon and Ross for a more detailed review of the results.

I'll then provide some closing commentary reviewing our post-COVID performance, and then we'll open the line for questions. .

With that, let's take a closer look at GBDC's results for the quarter and the key drivers of those results.

Gregory?.

Improved internal performance ratings; declining nonaccruals; low net realized losses; and continued solid net unrealized gains. .

Let's take a closer look at each of these trends, starting first with our internal performance ratings. Slide 7 summarizes the positive trends in the internal performance ratings of GBDC's portfolio during the COVID period.

Specifically, since March 31, we've seen a steady increase in categories 4 and 5, those are loans performing at or better than our expectations at underwriting; and a decrease in Category 3, loans that are performing or expected to perform below expectations.

The percentage of the portfolio performing materially below expectations in categories 1 and 2 also has decreased steadily. .

In the quarter ended December 31, categories 4 and 5 increased from 78.9% of the portfolio as of 9/30 to 81% of the portfolio as of 12/31. Category 3 decreased from 19.7% to 17.9% over the same period. Categories 1 and 2 also declined quarter-over-quarter from 1.4% to 1.1%.

The very small and declining proportion of the portfolio rated in categories 1 and 2 is important because it indicates that significant credit impairment remains rare and idiosyncratic. The proportion of the portfolio rated 3 is still higher than what we typically saw pre-COVID, but meaningfully improved from 3/31. .

A second key indicator of the continued credit improvement is the fact that nonaccruals also declined quarter-over-quarter from 1.7% to 1.2% as a percentage of investments at fair value at 12/31. We'll come back to this point in our usual discussion of GBDC's financial results. .

Low net realized losses and solid net unrealized gains. This slide provides a bridge from GBDC's $14.33 NAV per share as of 9/30 to its increased $14.60 NAV per share as of 12/31. Let's walk through the bridge. .

How did GBDC fair in navigating the challenges of COVID? That question will be the subject of David's closing remarks today. .

Let's now take a closer look at our results for the quarter ended December 31. For that, let me hand the call over to Jon Simmons to walk you through the results in more detail.

Jon?.

Thanks, Gregory. First, as a reminder, please note that in addition to the GAAP financial measures in the investor presentation, we've also provided certain non-GAAP measures. These non-GAAP or adjusted measures, as we refer to them, seek to strip out the impact of the GCIC merger purchase premium write-off and amortization.

These adjusted measures are further described in the appendix of our earnings presentation, and we'll refer to them throughout today's call. .

With that context, let's turn to Slide 10 to look at GBDC's results for the quarter in more detail. Adjusted net investment income per share or, as we call it, income before credit losses for the quarter ended December 31 was $0.29. This is up from the $0.28 of adjusted NII per share we earned in each of the last 2 quarters.

Adjusted net realized and unrealized gain per share was $0.27. This compares to adjusted net realized and unrealized gain per share of $0.29 for the September quarter. The adjusted net realized and unrealized gain this quarter was primarily driven by the continued reversal of unrealized losses recorded in the March 2020 quarter.

Adjusted earnings per share for the December quarter was $0.56. This compares to adjusted earnings per share for the prior quarter of $0.57. .

Our net asset value per share at December 31, 2020 increased to $14.60 from $14.33 as of September 30. Finally, on February 5, 2021, our Board declared a quarterly distribution of $0.29 per share, payable on March 30, 2021 to stockholders of record as of March 5, 2021.

This distribution is consistent with our goal of having quarterly cash distributions approximate 8% of net asset value on an annualized basis. .

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 11.

New investment commitments were a record for the quarter ended December 31, totaling $526.8 million, after factoring in total exits and sales of investments of $278.7 million as well as unrealized depreciation and other portfolio activity, total investments at fair value increased by 6.3% or $269 million during the quarter ended December 31.

As of December 31, we had $43.5 million of undrawn revolver commitments and $126.2 million of undrawn commitments on delayed draw term loans. These unfunded commitments are relatively small in the context of our balance sheet and liquidity position. .

I show on the bottom of the table the weighted average rate of 7.1% on new investments and the weighted average spread over LIBOR on new floating rate investments of 6.1%, both decreased from the prior quarter as market conditions continued to rebound since the onset of COVID.

Just 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 12 shows that our 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 81%. .

Turning to Slide 13. 97% of our investment portfolio remained in first lien, senior secured floating rate loans and defensively positioned in what we believe to be resilient industries that are insulated from COVID-19. .

Turning to Slide 14. 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 investment, including interest and fee income, excluding the amortization of upfront origination fees and purchase price premium.

The income yield remained stable at 7.4% for the quarter ended December 31. The investment income yield are the dark blue line, which includes the amortization of fees and discounts, increased by 10 basis points, 7.9% during the quarter due to increased fee amortization caused by portfolio repayments.

Primarily due to the impact of the $400 million unsecured fixed rate bond offering that closed early in the quarter, our weighted average cost of debt, the aqua blue line, increased slightly by 20 basis points to 2.9%.

Our net investment spread or the green line, which is the difference between the investment income yield and the weighted average cost of debt, decreased by 10 basis points to 5%, but remains close to its highest level in the last 2 years despite the significant drop in LIBOR. .

Flipping to the next 2 slides, nonaccrual investments as a percentage of total debt investments at cost and fair value remained low and decreased to 1.6% and 1.2%, respectively, as of December 31.

During the quarter, the number of nonaccrual investments decreased to 7 portfolio company investments from 9 portfolio company investments as 2 portfolio company investments returned to accrual status. .

As Gregory discussed in his opening commentary, as a result of stronger portfolio company performance, the percentage of investments rated 3 on our internal performance rating scale decreased to 17.9% of the portfolio at fair value as of December 31. As a reminder, independent valuation firms value at least 25% of our investments each quarter. .

Slides 17 and 18 provide further details on our balance sheet and income statement as of and for the 3 months ended December 31. .

Turning to Slide 19. The graph at the top summarizes our quarterly returns on equity over the past 5 years, and the graph on the bottom summarizes our regular quarterly distributions as well as our special distributions over the same time frame. .

Turning to Slide 20. This graph illustrates our long history of strong shareholder returns since our IPO. .

Slide 21 summarizes our liquidity and investment capacity as of December 31 and highlights our recent debt financing amendments. On December 21, we amended the GCIC 2018 debt securitization, which included, among other things, a reduction in the interest rate on the 38.5 million of Class A-2 notes from 4.665% to 2.498%.

After the end of the quarter, we also amended our revolving credit facility with Morgan Stanley on January 29 that included, among other things, an extension of the reinvestment period through April 30, 2021, and a decrease in the maximum borrowing capacity from $325 million to $250 million. .

Slide 22 summarizes the terms of our debt capital as of December 31, which reflects our continued focus on optimizing the right-hand side of the balance sheet. .

Lastly, Slide 23 summarizes our recent distributions to stockholders. Most recently, our Board declared a distribution of $0.29 per share payable on March 30 to stockholders of record as of March 5. .

With that, I'll turn it back to David for some closing remarks.

David?.

Thanks, Ross. So to sum up, GBDC had a strong quarter. Adjusted net investment income rose to match our dividend, realized credit losses were very low and unrealized gains were substantial, continuing the reversal of unrealized losses that we incurred in the March quarter.

I want to end our prepared remarks with a bit of what I'm going to call post-COVID hindsight. I think now is a good time to start to reflect on COVID and what we've learned from COVID. But I recognize it's still early as probably it's not over yet.

Having said this, I think enough has happened for us to look back at the post-COVID period and begin to assess how we performed. .

On Slide 24, we outlined 3 key goals that we established back in March 2020 for navigating COVID. First, proactive management of GBDC's investment portfolio; second, optimization of GBDC's balance sheet; and third, when market conditions improve, capitalizing on attractive new investment opportunities.

We now have 9 months of data on how we performed against these 3 key goals. Let's take a closer look. .

Our first key goal, as I mentioned, was to proactively manage GBDC's highly diversified first lien senior secured investment portfolio. In calendar Q1 of 2020, we had, in fact, our whole industry had, significant unrealized losses from marking our portfolio to fair value as a consequence of the market dislocation bred of COVID.

We've said consistently since then that we'd be laser-focused on preventing those unrealized losses from becoming permanent or realized credit losses. And we said consistently that we expect to see a lot of those unrealized losses reverse over time if we succeeded.

So how are we doing?.

Too early to give a definitive answer, but the data so far is quite encouraging. Let's look back at our 4 key credit metrics, but with a longer-term horizon. First, internal performance ratings. These ratings have improved, as Gregory discussed in his remarks, because GBDC's portfolio companies have generally continued to perform well.

Since March 31, we've seen a meaningful upward migration in risk ratings 2 rating categories 4 and 5, Those are the rating categories corresponding to loans performing at or better than expectations at origination, and they've migrated there from Category 3. Category 3 loans are loans performing or expected to perform a bit below expectations.

Category 3 loans have declined from 26.5% of the portfolio as of 3/31 to 17.9% of the portfolio as of 12/31. So that 17.9% is still a bit elevated relative to pre-COVID levels, but it's much closer to our long-term trend of around 10%. .

Importantly, throughout this COVID-impacted period, the proportion of portfolio rated 1 and 2, those are loans that are at material risk of impairment, stayed very low. They stayed about 1% to 2%. And in fact, they've declined in overall number. This means we've had relatively few really problematic borrowers. .

Second, nonaccruals are back to our low pre-COVID levels, about 1.2% of the portfolio at fair value as of 12/31. Third, and this is not unrelated to #2, realized losses have remained low.

In total, GBDC has had realized losses of about 50 basis points on its investments at cost since COVID began, with the bulk of those losses being attributable to companies that were underperforming before COVID began. .

And fourth and finally, unrealized losses have reversed significantly. In fact, we've recovered about 75% of the fair value markdowns from the March 2020 quarter as a consequence of very solid portfolio company performance.

These 4 key metrics suggest that our underwriting was strong and that our proactive portfolio management strategy has been working. .

Let's move to the second key goal for navigating COVID, optimizing the balance sheet. How are we doing on that one? I'd make 3 key points. First, in the period since March 31, GBDC has received investment-grade ratings. It's issued attractively priced and flexible unsecured debt capital.

It's issued a new low-cost CLO, and it's reduced use of its secured bank facilities. Second, GAAP leverage is right within our target leverage range at slightly less than 1:1 debt-to-equity. And finally, third, liquidity is abundant with over $350 million of cash and borrowing capacity. .

To position GBDC to capitalize on what we anticipated would be a period of unusually attractive new investment opportunities. How did we do there? I think our record setting over $525 million of new originations in the 12/31 quarter speaks for itself. .

So to sum up our post-COVID hindsight, we think we set out the right goals and that we've made good progress against those goals. It's too early to be definitive, particularly on credit, and we haven't been perfect. Our work's never over, but the signs so far are encouraging. Let me talk about what comes next. .

Focus on these same 3 key goals, stick to our proven strategy of backing resilient companies in resilient industries sponsored by relationship-oriented private equity firms and lean on our competitive advantages. .

Thank you.

Operator, could you please open the line for questions?.

[Operator Instructions] And your first question comes from the line of Robert Dodd from Raymond James. .

First, on to your point, David, kind of a post-COVID hindsight, the market certainly seems to have moved on from the COVID point. Can you give us any color on -- I mean spreads like -- now you held -- and your new deployment spreads were wider than they were a year ago.

So there still seems to be some widening at least in the fourth calendar quarter on spreads versus pre-COVID. I mean is that still true as we go into January? And can you give us any color on -- I mean the market spread seemed to have compressed. Are terms holding up? And any color you can give us on that front would be appreciated. .

Sure. Hello, Robert. Good to hear your voice. So let me put it in context. Calendar Q4 was a record quarter for Golub Capital, unusual quarter in the sense that there was a surge in M&A activity market-wide. So it wasn't just a good origination quarter for Golub Capital.

It was a strong origination quarter for most of the large private debt managers who are open for business. .

I would say if you looked at calendar Q4, quite as you said, Robert, spreads were a bit better than pre-COVID. Documentation terms were a bit better. Leverage was a bit better. And importantly, we were able to focus on companies that had proven post-COVID performance.

The bulk of the activity that we saw in calendar Q4 was with sponsors we've worked with multiple times. Over 90% of our Q4 originations were with repeat sponsors. I believe over 40% of our originations in calendar Q4 were actually add-ons. So we were able to focus on credits that we know very well with sponsors that we know very well.

I think that makes for attractive investment opportunities because we're able to make decisions with lots of information. .

As we crossed 12/31, moved into calendar 2021, first quarters tend to be slower in general than Q4 quarters. There's a bit of seasonality that's typical in the sponsor-financed business. And I think that's -- we're seeing that in the first quarter this year. .

We're also seeing that there's a burst of competitiveness and spread compression in the broadly syndicated market. And I think you were alluding to that, Robert. We've seen that in the form of a lot of flexes, a lot of spread tightening on loans that are being syndicated during the syndication process.

So my expectation is that the middle market is impacted by what happens in the high-yield market and in the broadly syndicated market. Usually, there's a lag. And it's not a one-for-one relationship.

But my expectation is that we're going to see pressure on spreads in the private markets over the course of the coming months, unless there's a change in dynamics and what's happening in the broadly syndicated market. .

For now, it continues to be attractive. We're -- I would characterize Q1 as a good solid quarter right now from an origination pipeline standpoint. But I think it's reasonable to anticipate that we're going to see the same kinds of patterns in the private market that we're seeing right now in the broadly syndicated market. .

I appreciate that. If I can next question, not related to market. Well, I mean the -- the overall credit quality book looks to be improving. I mean, it looks pretty good. The only thing that kind of sticks out to me is this PIK income. Obviously, I mean, it's triple where it was a year ago. You generally run very low PIK income.

So you're still below the industry average even there. The only thing that stands out a little bit is up fairly meaningfully from the last -- from the third calendar quarter to the fourth calendar quarter. Nothing leaps out in the portfolio that I've seen. I mean there's no single big PIK asset or anything like that.

But was there a trend in amendments or something else that grew that PIK a little bit in the fourth quarter. Again, it's not a horribly high number. It's not overly concerning, but it did tick up a bit. .

I think you're right. To put it in context, PIK income is relatively small at Golub capital by industry standards. It has increased some. And I think the 2 areas that we've seen where it's grown, one relates to our activities in late-stage lending.

So this is with companies that are in the Software-as-a-Service business, where they, in some cases, prefer to have PIK as a portion of the way in which they compensate us. And our portfolio of LSL loans has grown over the last number of years. .

The second is a point that you alluded to, which is in negotiations on amendments to existing credit facilities through COVID, we have, in some circumstances, used incremental interest in the form of PIK as part of the mix of different components of amendments. And so there is some increase in PIK income associated with that. .

I don't think this is going to be a continuing trend. I think you're going to see PIK income stabilize and perhaps even go down in coming quarters. And I don't think that you're going to see what I suspect you're afraid of, which is a repetition of a pattern that we've seen with other BDCs where PIK income has never been received.

That's -- I'm not terribly concerned about credit risk associated with our PIK accruals at this point. .

Yes, I'm pretty transparent about what I was really asking about, but I appreciate the answer and congrats on the quarter. .

And your next question comes from the line of Finian O'Shea from Wells Fargo Securities. .

David, first question, appreciating the commentary at the end on the underperforming or COVID-impacted names.

Can you provide any additional color on how well the EBITDA or profitability levels of this category are improving as the economy generally, although slowly, perhaps recovers and opens up and so forth?.

So we've been very candid over the course of the last several quarters about how pleased we've been with the performance of companies in the industry categories that we mentioned in the week of the March 31 quarter as being the industry categories we're most concerned about.

So if you recall, going back to the April time frame, we talked about dental care, restaurants, retail, eye care and fitness franchises. And while we don't disclose EBITDA performance, a proxy for EBITDA performance is fair value marks.

And if you look at the fair value marks in those industry sectors, I mean, a typical one of those industry sectors has gone from fair value marks averaging in the high 80s to fair value marks averaging in the now high 90s. .

The one sector that I would say we continue to monitor really carefully that I continue to have some concerns about is fitness franchises, the risk of stating the obvious. With the way in which the COVID vaccination campaign has been going slowly, I think there's a general view that the recovery in fitness franchises is going to be also slow.

Good news for us here is it's a small portion of the portfolio. It's diversified amongst a half dozen different companies. We're focused on the low-cost, high-value segment, which I think will recover well and recover fast when people feel comfortable going back into gyms. So I'm -- I don't mean to sound alarmist.

I'm cautiously optimistic about our fitness franchise exposure. But of those COVID industries -- COVID-impacted industries that we identified early, the others have really recovered quite well. .

That's helpful. And then just a follow on, on origination style. Obviously, for at least a long time, been focused mainly on unitranche, and there's some activity in first lien this quarter, for example. But with the shift on the right side of the balance sheet, we now have unsecured. And it sounds like that number will grow.

Do you anticipate any style drift into any element of added risk, whether it be second lien, other financials and so forth?.

Short answer, no. We're not anticipating any meaningful change in strategy. Our focus is to continue to achieve our mission, which is be best in sponsor finance with a strong focus on enabling sponsors to finance their businesses a number of different ways, depending on what's right for the deal.

And I anticipate that the mix within GBDC is unlikely to shift much. If you go back and look at the charts that we present every quarter about the proportion of the portfolio that's in one-stops currently about 81%, it really hasn't moved much in many, many quarters.

And if you look at the statistics about degree of diversification and granularity in the portfolio, again, it really hasn't moved in many, many quarters. So those core elements of our strategy are, I'd say, unlikely to change. .

Your next question comes from the line of Ryan Lynch from KBW. .

David, you provided some commentary around your reflections on kind of how your portfolio has performed during this COVID period as you kind of reflect back. One of the questions I had was a broader question. It feels like term structures and yields are quickly returning, if not already returned to kind of pre-COVID levels.

But my question is a little bit larger than that.

Do you see any lasting changes or lasting effects on the direct lending industry post-COVID, whether it's players, whether it's how players are funding themselves or where companies -- or where direct lenders invest? Just I'd love to hear your commentary on any potential lasting changes you think could come out of the direct lending industry kind of post-COVID.

.

I think it's a great question, Ryan, and one I've been thinking about a lot recently. We'll see if I'm right, but one of my hypotheses right now is that coming out of COVID, we're going to see a continuation of a trend that we saw during COVID, which is the big got bigger. And we saw that trend, to be honest, before COVID began.

The largest of the private debt players have been growing at a pace faster than the industry has been growing. .

So why do I think COVID may have contributed to this trend may crystallize an acceleration of this trend? It goes back to some comments that I made last quarter.

If you think about the challenges of establishing new relationships over Zoom, the challenges of managing multiple relationships without in-person meetings, it stands to reason that leading private equity firms are going to be inclined to reduce the number of relationships that they have and to focus more on strategically important credit partners. .

What I think we will see further exacerbate that trend is that we're seeing a degree of the same phenomenon in the private equity industry. The larger private equity complexes are growing more quickly than private equity is growing. And they're developing multiple product lines, multiple industries, multiple sized companies that they're working on. .

So if you think about the future direction of the private equity industry, where you're going to have a smaller number of larger companies comprising the biggest customer pool, they're going to want to work with a smaller number of large-scale private debt managers who, in turn, can offer a variety of different solutions. .

So I think that's where we're headed. I think that's good for Golub Capital. I think it's probably also good for the industry because it will lead to a more stable, smarter industry with fewer outlier players who are in and out and, to your point earlier, messing up terms or offering solutions that don't make any sense. .

Got you. Yes, that makes sense. And certainly, if those trends would persist, that it certainly would be a big beneficiary to Golub and your broader platform given your scale and reach on relationships. .

This might be an easy one. But if I look at the liquidity on your balance sheet today, right now, you guys have about $27 million of unrestricted cash, $45 million in Morgan Stanley facility, but that's just been downsized by $75 million, so nothing really available on that.

And then $25 million on your Wells facility, but that reinvestment period ends in March. And so as I look at your liability structure and your available capacity as well as the cash on the balance sheet, I wanted to get your thoughts on, you guys had $270 million of growth this quarter.

Where would the next $270 million of growth be funded?.

Sure. So 2 -- good question. Two comments on this. First, if you look at year-end, the picture is somewhat distorted because we have a very large amount of restricted cash in the CLOs as a consequence of year-end or almost year-end payoffs.

So imagine in the period post year-end, a significant number of assets were moved from bank facilities into securitizations using up that restricted cash and creating more availability in the bank lines. So we have very ample liquidity right now. .

Having said that, you make -- your question is an important one, which is where do we want to go with the balance sheet from here? And our intention is to do 2 things going forward. The first is we plan to pursue a corporate revolver.

And one of the things that we're trying to manage in dealing with the bilateral bank facilities is to have the right mix between a new corporate revolver and existing bank facilities. So I expect we'll have more information to share with you in the coming period as those discussions continue. .

The second piece is we do want to grow the unsecured component of the balance sheet. When we did our first unsecured issuance, we were very clear in saying we anticipate being a serial issuer. We don't anticipate this being our last issuance by any stretch.

And I can't remember, Ryan, whether it was you or -- but I think it was you who asked what's the ideal percentage of unsecured as a mix within our liability structure. And my answer at the time was something north of 35%. Again, we're not in a rush to do that.

We want to make sure that we are accessing that market at a time that is opportune from an execution standpoint. But I anticipate that we're going to want to add to the unsecured component of our liability structure over the course of this year. .

Okay. That's helpful. And then you gave some really good commentary on how your portfolio has really performed through COVID, and it's performed really well. But one of the statistics that you mentioned was 75% of your unrealized losses from the March 2020 quarter have reversed. So that means 25% have not reversed are still out there.

So I think there's a couple of different ways to think about that, but how would you encourage investors to think about that remaining 25% of unrealized losses that have not reversed from that March 2020 quarter?.

Well, I think it's opportunity, right? We've seen a significant increase in net income over the course of calendar Q2, Q3 and Q4 of 2020 in connection with reversals of unrealized losses. If you'd ask me after the March quarter, over how many quarters will we see reversals, I would have probably told you to expect it to accrue over 2 years.

In fact, 75% of it accrued in 3 quarters. So it's been faster than I would have anticipated. .

I don't think one should have anticipated that all of it would -- all of that which is going to reverse, would it reverse by 12/31. It's reasonable to assume that we've got some loans that are marked at a discount to NAV, not necessarily a big -- I'm sorry, discount to par, not necessarily a big discount to par that will pay off.

And when those loans pay off, we will see a reversal -- we may see a reversal sooner than that if our fair value marks go up back to par. So I don't think there's a negative conclusion to draw from the fact that we've got 25% that has not yet reversed.

I think the fact that we've only got a very small proportion of the portfolio in Performance Ratings 1 and 2 is a good indicator that we don't have a lot in the portfolio that's really seriously impaired right now. .

Look, things can change. We can get surprised. We were surprised last March by COVID. I certainly wasn't expecting a global pandemic. So I'm not arguing there isn't risk here. We're in a business of managing risk. But I feel pretty good about where the portfolio is right now. .

And your next question comes from the line of David Miyazaki from Confluence Investment. .

Just a little bit of -- and you have to forgive me for not knowing this or not remembering this properly, but a question regarding the amortization of GCIC.

Is that premium allocated specifically to individual credits, and that's the principal driver of the recognition? Or is part of it straight lined in some manner? Or just kind of trying to get my arms around how quickly this dissipates over time. .

So it is attached to specific credits and so it will dissipate as the credits that GBDC acquired from GCIC as those credits are repaid. And I would strongly encourage you to speak to our resident experts, Jon Simmons and Ross Teune, about this because it gets complicated in a hurry. .

Okay. Okay. I will take you up on that.

The -- in kind of a distantly related manner, can you talk a little bit about other GCIC-like concepts that might be happening at the external manager? What are some of the activities that are taking place? Are you raising other funds? Is there other longer-term strategic plans for more GCIC-like combination?.

So publicly available information on this, we have a private BDC that's very creatively called Golub Capital BDC 3, which we are in the process of ramping up. And when it is ramped, we will look at a variety of different options for GBDC 3, as we did for GCIC.

One of those options will be a potential merger with GBDC if we can figure out a way that's good for everybody to affect that and all of the respective Boards and appropriate shareholder votes go the right way. That might be one of the paths that we look at.

But no decision has been made at this point, David, that, that's the path that we're going to go down. .

As you know, we also, at Golub Capital, have a large family of private funds, very creatively called the Golub Capital Partners Funds, and we are in the process of fundraising for Golub Capital Partners 14 at the moment. .

Okay. Is there -- have you disclosed the size of what Golub Capital BDC 3 is? Or what your targeted fundraising size is? Just the... .

It's a public file. It's a public file. You can see both the size of its fair value of assets and its commitments in the SEC filings. .

Okay. Okay. And then just to shift gears a little bit.

One of the things that we've heard from a lot of the successful BDCs in the industry was a credit focus prior to COVID on companies that were acyclical or had a measure of recession resistance because of their size or their margin protections, or there's -- just where they're situated in specific industries.

And what I'm beginning to hear is that origination is now focused on COVID-resistant industries and companies. And it seems to me that there's probably a pretty sizable overlap between the 2.

I mean given how -- while your portfolio has managed through the pandemic and against the backup of the ones that have had problems, when you said you thought it would be a couple of years before you had this much recovery in unrealized losses.

What is sort of the difference between COVID-resistant and recession-resistant? And I don't think COVID is going to go away anytime soon, but as we look forward, is COVID-resistant underwriting the best way to go?.

Well, I think there are 2 time frames here. In the near term, because of the degree of uncertainty about how long vaccination process is going to take, whether we're going to get a mutant strain that's resisting to vaccines, I think it's prudent as a lender to be focused on COVID-resistant companies, COVID-resistant borrowers right now.

There are some hedge fund players in distressed debt who disagree with me and are loading up on movie theaters and amusement parks and cruise ships and a whole variety of similar credits, but that's not what we're doing. .

In the longer term, assuming that the vaccines are effective and we get back to something that we can call normal, I think there's an element of underwriting that's going to be forever changed. I don't think I'm ever going to forget what this global pandemic has looked like.

And the idea of people congregating in close proximity being a risk factor that we need to think about in an underwriting context, I think that's going to be around for a long time. .

Does that mean that all such companies are going to be ruled out? Probably not. But does it mean that we're going to need to factor in potential new pandemics as a downside case? I think that would be prudent. So it's going to be interesting to see how that dynamic plays out, David.

I think we're likely to see different players approach your question in different ways. .

Well, thanks, everyone, for joining us today. As always, if you have any further questions, please feel free to reach out to a member of the Golub Capital team. And I look forward to having the opportunity to talk again next quarter. .

This concludes today's conference call. You may now disconnect..