Good day and thank you for standing by. Welcome to the Golub Capital BDC Earnings Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] With that, we'll begin the call..

Good afternoon and welcome to GBDC's December 31, 2021 quarterly earnings conference call. Before we begin, I'd 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 we intend to refer to on today's earnings call, please visit the Investor Resources tab on the homepage of our website, www.golubcapitalbdc.com and click on the Events/Presentations link. Our earnings release is also available on our website in the Investor Resources section.

As a reminder, this call is being recorded for replay purposes. With that, I'll turn the call over to David Golub, CEO of GBDC. David, take it away..

Thank you, Jon. Hello, everybody, and thanks for joining us today. I'm joined here by Chris Ericson, our Chief Financial Officer; Gregory Robbins, Senior Managing Director; and Jon Simmons, Managing Director at Golub Capital. On behalf of our whole team, we hope the New Year is off to a great start for you.

Yesterday afternoon we issued our earnings press release for the quarter ended December 31 and we posted an earnings presentation on the website. We're going to 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 it 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. The headline for today is that GBDC had another strong consistent quarter.

For the quarter ended December 31, adjusted NII per share was $0.31, adjusted EPS was $0.37 and ending NAV rose to $15.26 per share. During the quarter, GBDC made a quarterly distribution of $0.30 per share. And you'll recall that the Board decided in November 2021 to raise GBDC's dividend in light of the company's sustained strong performance.

Now I'll hand the floor to Gregory, Jon and Chris to elaborate on GBDC's performance for the quarter. And following that, I'll provide some closing commentary and then open the line for questions. Gregory, over to you..

Thank you, David. Slide 6 describes two key themes that contributed to GBDC's success in the quarter ended December 31. We've discussed these themes on our last several earnings calls and we've said that we expected them to continue. In our view more of the same is a good thing. The first theme is strong portfolio performance.

I'd call your attention to the Golub Capital Middle Market Report, or GCMMR for December 31, which we published several weeks ago. The median revenue and EBITDA growth rates in October and November from the pre-COVID period in 2019 to the same period in 2021 exceeded 20% for the third consecutive quarter.

Strong earnings growth across GBDC's portfolio was reflected in the continued improvement of key credit metrics. The second theme is robust origination. The Golub Capital platform had its best year ever from an origination perspective in calendar 2021 and calendar Q4 was particularly strong. This led to the very strong portfolio growth at GBDC.

Importantly, we believe that portfolio growth came in the form of very attractive new investments. We'll take a closer look at the data on credit metrics and portfolio growth later in the presentation. Turning to slide seven. Let's walk through how our two key themes contributed to growth in NAV per share relative to the quarter ended September 30th.

As you can see, GBDC out-earned its now higher quarterly dividend with $0.31 of adjusted NII per share. In addition, adjusted net realized and unrealized gains totaled $0.06 per share, reflecting the excellent credit quality of GBDC's portfolio. Let's now take a closer look at our results for the quarter.

With that let me hand the call over to Jon Simmons to walk you through the results in more detail.

Jon?.

Thank you, Gregory. Slide 9 summarizes our results for the last several quarters, during which GBDC achieved consistent and expanding adjusted NII, as well as strong adjusted net realized and unrealized gains, EPS and distributions.

Turning to slide 10, this was another strong quarter for originations at GBDC, with new investment commitments totaling $867.7 million.

After factoring in total exits and sales of investments of $661.8 million as well as unrealized appreciation and other portfolio activity, total investments at fair value increased by 5.1% or $251.9 million, during the quarter.

As of December 31, 2021, GBDC had $41 million of undrawn revolver commitments and $267.2 million of undrawn commitments on delayed draw term loans. These are both relatively small commitments in the context of GBDC's balance sheet and liquidity position.

As shown in the bottom of the table, both the weighted average rate and spread over LIBOR on new investments increased a bit quarter-over-quarter. Slide 11 shows that GBDC's portfolio mix by investment type remained consistent with one-stop loans continuing to represent approximately 80% of the portfolio at fair value.

Flipping to slide 12, this slide shows that our portfolio remained highly diversified by obligor with an average investment size of less than 30 basis points. As of December 31st, 94% of our portfolio was comprised of first lien senior secured floating rate loans and defensively positioned in what we believe to be resilient industries.

Turning to slide 13. This graph summarizes portfolio yields and net investment spreads for the quarter and over the past several quarters.

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 10 basis points to 7.1% for the quarter ended 12/31.

The investment income yield or the dark blue line which includes the amortization of fees and discounts remained flat at 7.7% for the quarter. Our weighted average cost of debt or the aqua blue line decreased by 10 basis points to 2.7%.

And then finally, 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 10 basis points to 5%. With that I'll hand the call over to Chris to continue the discussion of our quarterly results.

Chris?.

Thanks, Jon. Flipping to the next two slides, non-accrual investments as a percentage of total debt investments at cost and fair value remained low at 1.2% and 0.9%, respectively, as of December 31st. During the quarter, the number of non-accrual investments declined from six to five due to the disposition of one portfolio company investment.

As Gregory discussed in his opening commentary, as a result of continued strong portfolio company performance, the percentage of investments rated 3, meaning companies performing or expected to perform below our expectations at underwriting on our internal performance rating scale, decreased to 6.6% of the portfolio at fair value as of December 31st.

As a reminder, independent valuation firms value at least 25% of our investments each quarter. Slides 16 and 17 provide further details on the balance sheet and income statement as of and for the three months ended December 31, 2021.

Turning to slide 18, 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 time frame.

Turning to slide 19, this graph illustrates our long history of strong shareholder returns since our IPO. As illustrated, investors in GBDC's 2010 IPO have achieved a 10% IRR on NAV since inception and a bit higher than that based on our current stock price.

Slide 20 summarizes our liquidity and investment capacity as of December 31st, which remains strong with over $1.2 billion of capital available through cash, restricted cash and availability in our various credit facilities. We also highlight our continued progress in optimizing the right-hand side of our balance sheet. Two key highlights.

First, on October 13th and 15th, respectively, we issued an additional $200 million of 2026 unsecured notes at a price resulting in a yield to maturity of 2.667% and an additional $100 million of 2024 unsecured notes at a price resulting in a yield to maturity of 1.809%.

Second, on November 19th, we amended our revolving credit facility with JPMorgan, primarily to increase the accordion feature, which now allows us to increase the facility up to $1.5 billion from $712.5 million.

In addition, we entered into a series of agreements, most recently on December 17th, to increase the aggregate commitments outstanding under the JPMorgan facility to $1.1875 billion from $475 million as of September 30, 2021. Slide 21 summarizes the terms of our debt facilities as of December 31, 2021.

Slide 22 summarizes our recent distribution to stockholders. Most recently our Board declared a quarterly distribution of $0.30 per share payable on March 29, 2022 to stockholders of record as of March 4, 2022. With that, I will turn it over to David for some closing remarks..

Thanks Chris. So to sum-up, GBDC had a strong quarter for the period ended December 31st. Adjusted net investment income exceeded our recently increased dividend. Realized and unrealized gains were solid. We added additional low-cost and highly flexible unsecured borrowings and we had robust new originations that enabled the portfolio to grow nicely.

Let's talk briefly about our outlook before I open the line for questions. We remain optimistic about the prospects for Golub Capital and GBDC in the coming period. To borrow a phrase Gregory used earlier, our overall outlook is, we expect more of the same. We pointed in recent quarters to one tailwind, which is the strength of GBDC's portfolio.

Our internal performance ratings are in line with pre-COVID levels, non-accruals are low and we're seeing net realized and unrealized gains rather than losses. All that means we won't be distracted by needing to play defense on a troubled portfolio. A second tailwind is the strength and flexibility of GBDC's balance sheet.

Chris alluded to this in his comments; low-cost highly flexible and fixed rate unsecured debt now constitutes more than half of GBDC's debt funding. A third tailwind is the continued growth of the private equity ecosystem.

Based on growth in private equity fundraising and the current level of private equity dry powder, we think the private equity ecosystem is on a flight path to double in size over the next three to five years. And that means the sponsor finance business will be in a position to grow along with it.

In other words, we think Golub Capital is a leader in an attractive growing market. Finally, we believe the changes in the private equity ecosystem play to our competitive advantages.

The biggest and strongest players in our market are getting bigger and stronger as leading private equity firms consolidate their relationships among a select few lenders. What do those lenders have in common? They have the scale, capabilities, the expertise and the long-term track record to be strategic partners on a wide range of transactions.

We expect these four tailwinds are going to continue for the foreseeable future. As always, our optimism is tempered by caution. We worry about Russian adventurism, about the potential for the Fed to raise rates too fast, about inflation and about supply chain issues.

But we're optimistic based on the strength of the Golub Capital platform and the proven resilience of GBDC's portfolio that we're going to be able to continue to serve shareholders well over the course of the coming period. With that, operator, please open the line for questions..

[Operator Instructions] Your first question comes from the line of Finian O'Shea with Wells Fargo Securities..

Good afternoon. This is Jordan Wathen on the line for Fin today. I want to ask about your late-stage lending book. It looks like it grew pretty solidly in the fourth quarter even though there is a little bit of volatility in public software and SaaS names.

I'm curious how you kind of describe the demand for this capital when public markets take a breather and maybe whether or not you've seen a change in demand for these loans maybe say like November to January?.

Sure.

So to give context for those who are on the phone who may not be as familiar as Jordan is, when we talk about our late-stage lending or growth lending business, we're talking about loans to software companies that are in a rapid growth mode and have made the decision to invest heavily in selling and marketing expenses at the expense of profitability during a period of rapid growth.

We look at these companies using a different set of credit metrics because of the stage of development that they're at and because of this affirmative decision by the management teams and owners of these companies to focus on growth at the expense of profitability. It's been a long-standing strategy of Golub Capital.

We've been doing this for more than eight years. It's been a very successful strategy. Our credit losses in our late-stage lending business have been very, very low.

When the venture market and the IPO market are particularly strong, it puts a damper on our late-stage lending business because the companies that we're lending to have choices and among the choices they have are issuance of equity as an alternative to issuance of debt.

So during periods in which valuations are really high and venture firms are eager to deploy capital, it's harder to find attractive late-stage lending opportunities. So the fourth quarter was one of those periods. It was a period of relatively high stock prices, relatively robust, venture fundraising and venture deployment.

So I'd describe it as a relatively unfavorable period for our late-stage lending business in terms of new lending activity. We have as you point out seen a drop in stock market prices in the tech sector. And in January that drop was particularly significant for young tech companies.

So I'm cautiously optimistic that we're going to see a pickup in our late-stage lending business in calendar 2022. First quarter always tends to be a bit seasonally slow, but it looks like we're headed into a period that's more favorable for this piece of our business.

Does that answer your question, Jordan?.

Yes, it does. That's helpful and good to know. So just to move on to another topic. You guys easily have probably one of the best fee structures in the industry with your total return hurdle. We can think of a lot of BDCs that would have done better for shareholders if they had it and not many that would have been worse with it.

So given where the BDC trades now, do you think the market is really giving you credit for the fee, or have you thought about maybe reorienting it in a way that -- to really make the value of that structure show through?.

It's a good question. I think maybe one we need to give some more thought to. I would tell you that in my mind a key part of our fee structure is that, we think is really important in addition to the features you mentioned is the hurdle rate. We have an 8% hurdle rate before the manager begins to receive net investment income incentive fee.

And I think that's a really important part of the structure as well. I do think it's a very favorable overall structure from a shareholder perspective. And I think it has -- over the course of the almost 12 years we've been public I think it's done a nice job of aligning incentives between manager and shareholders..

Thanks so much..

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

Good afternoon and thanks for taking my questions. First one, there's been a lot of investor interest recently on the impact of rising rates on BDC's operating earnings. But I wanted to kind of flip to the other side of that and talk about the portfolio of companies or borrowers.

Right now today they're facing, this is from a high-level standpoint obviously, but facing higher labor costs, facing higher raw material, input costs. And so to the extent that the Fed -- and James Bullard, the Fed President came out today and said they want to get rates above 1% by July.

To the extent that rates increase quick enough to get above the floor -- interest rate floors that most loans have today, how do you think credit quality is going to be able to hold up in your portfolio? And can your borrowers support paying higher interest rates in addition to managing these other costs that are there flowing through their business?.

Thanks for your question Ryan. So, if we look at the world from the perspective of our borrowers right now, there are tailwinds and headwinds that they're facing. And I think it's -- worth talking about both and putting this all in context. On the tailwind side, the economy continues to grow nicely.

And if you look at the Golub Capital Middle Market Index results from the most recent quarter, you'll note that median company revenue and EBITDA for the first two months of the fourth quarter were well up year-over-year and over 2019 over the pre-COVID impact period.

So, one of the important components of the situation that management teams are facing right now is one that includes growth and robust consumer spending. On the headwind side, they're facing rising costs. Inflation is in particular hitting wages in many markets and across many different industries.

In some sectors, we're also seeing other input costs go up significantly. I think right now those inflationary increases in costs are a much more significant headwind than rising interest rates. You're right Ryan that the Fed's recent announcements would indicate a reasonably high likelihood that we're going to see LIBOR rise above floor levels.

But the overall levels that we're talking about -- the overall quantum of increased interest expense that we're talking about -- is still relatively small. So, I don't think we're going to see an environment in which rising rates in and of themselves have a meaningful impact on credit performance.

I think there are two principal risks to credit performance in the coming period. The first is companies that don't have pricing power, and one of the things we underwrite for is companies with pricing power. So, I don't think this is going to be a big factor for our portfolio, but I think it's going to be a big factor for the economy generally.

Companies that don't have pricing power are going to see shrinking credit -- shrinking margins. They're not going to be able to raise prices as quickly as their costs are going up. I think that's going to be a significant factor across the economy. The second risk is that the Fed moves too quickly.

In retrospect, I think most people would agree that the Fed to-date has moved too slowly, right? I mean we're actually still seeing the Fed implementing a quantitative easing program purchasing securities in February and I think it's supposed to end now in March.

But it's kind of hard to believe -- scratch your head and believe -- it's the right thing to be doing for the Fed to still be expanding its balance sheet in February of 2022. But that's what it's doing.

So, having gone through a period where it moved too slowly, the second risk is it may move too quickly and it may reverse the recent growth in the size of its balance sheet. It may raise rates too fast and overshoot the effort to lower inflationary pressures in the economy to the point where we see a significant weakening of the economy.

Those are the two keys we're thinking about right now and watching very carefully. I'm much more concerned about those two than I am about increased interest expense in the P&Ls of our borrowers..

Understood. That's really good insight. I appreciate the very wholesome conversation about all the puts and takes that are going on right now in our standard position, what we think. Kind of another higher-level question on just kind of market activity.

In your prepared remarks and -- which I would agree with, you talk about kind of the private equity ecosystem potentially doubling over the next three to five years and what that could mean for private credit and direct lenders and in particular those lenders who have large-scale platforms like yourselves.

I'm just curious, though, in the near term, kind of, revisiting back to the comments on rising rates, we've already seen rising rates push down multiples in the public markets. I would assume that that has or is about to trickle down into private market valuations.

And I would think, sponsors who have transacted over the last several years at certain multiples, depending on where those multiples go, if they come down meaningfully, they may want to transact much less frequent or hold those positions longer until multiples potentially resume.

So can you kind of pair your comments with overall expanding total addressable market, with a secular tailwind for that with the potential, I would say, maybe for some headwinds on multiples and sponsors willing to transact?.

a plus because, it might drive a need for liquidity; a minus because, families might see that they'd be better off waiting and selling in a better environment. And I kind of see the same dynamic happening in the private equity ecosystem, where it's both a plus and a minus.

You're right that it might lead some private equity firms to want to hold some portfolio companies longer to grow and to, in essence, generate a better dollar return on their investment by just taking longer. On the other hand, the pressure on sponsors to show good rates of return is a mitigant to this longer holding period pattern.

Longer holding periods make it harder to achieve the rates of return that private equity firms seek. So I think it's complicated. I'm not sure how I see this all netting out. I come back to the main point, which is, you've got existing unused capital that the private equity firms have in their coffers and need to spend within a defined time period.

There's enormous fundraising that's been going on for the last several quarters, record after record being broken. So I think, both of those argue for robust new private equity spending. So I think on balance, I still think even if we see an equity market decline, you're likely on balance still to see a robust private equity-backed M&A environment..

That's helpful. And David, I'll give you a pass on not being able to see the future with complete clarity. That’s all right. One last one, if I can. And this is just kind of a small minor one on GBDC. But if I look at your guys' equity portfolio, it's still very, very small relative to the overall size of your portfolio.

But it has been growing over the last several quarters. And if we look at the commitments, again, still a very small portion of your portfolio but commitment size on a quarterly basis as a percentage of investments in a quarter has increased pretty materially 5% two quarters ago, 3% a quarter ago and 8% on new commitments.

So any insights you could provide into that? I know it's still really small and it's not a huge change, but that was something that stood out a little to me..

Yeah. I think it's a good point. It is still small. We plan for it to continue to be small, but we have seen some what we think are very attractive opportunities in some what we call yield-oriented preferreds. These are preferreds in mostly software companies that nest themselves between the debt and the equity.

They're relatively low attachment point on a loan-to-value basis and in companies that we know well and have a lot of conviction in. So we have done more of those in the last several quarters than we've done historically and we see it as an attractive new part of the portfolio..

Okay, understood. Appreciate the comment..

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

Hi guys, and congrats on the quarter. And almost a follow-up but from a different direction to Ryan's question. On the PE ecosystem, I mean we have seen a lot of growth. We continue to see growth.

But a relatively large element of that is, of course, bigger funds or bigger platforms doing larger and larger funds, which kind of necessitates larger and larger deals for them. So do you think there's -- I mean, obviously, the private credit market is growing, gaining share, doing more.

We talked about this last quarter, the larger unitranche deals and those are still expected to grow.

But do you think that growth in the PE ecosystem and your target of participating in that growth, is that going to require you to do a larger and larger share of the extremely large deals with -- that might be a $2 plus billion unitranches that may or may not be cov-lite et cetera? Is that segment of your book going to grow as a percentage of the mix?.

It's a great question and I don't know. We'll see. I think that element of the market is going to continue to grow and our participation in it is going to be a function of whether we think the opportunities are attractive. But I want to make a really important point, which sometimes isn't understood.

While Golub Capital is a market leader in these mega unitranches, I think in 2021, calendar 2021, we were lead or co-lead in roughly half of them. It's not most of what we do.

If you were to do a carving of the GBDC portfolio by level of EBITDA, the vast preponderance of the portfolio, in the neighborhood of 80%, is in the form of loans to companies with less than $75 million of EBITDA. So we're not committed to this large market strategy as the only source of deal flow for us or even the main source of deal flow for us.

It's a part of our business. When we see attractive opportunities in that area, we're going to take advantage of them. But if that market got overheated, if that market shrunk in size unexpectedly, it's really not a big problem..

Understood. Yes to be fair I mean I think you gave us last quarter it was 15% to 20% of your portfolio last quarter. The question's whether it's going to grow rather than how significant it is today, but I appreciate that color. One more if I can.

Kind of without asking necessarily about volume I mean as we get into 2022 and LIBOR phasing out how has that – less about the existing deals in the book and more potentially pipeline.

Is the transition to SOFR going – SOFR plus CSA going – as expected, or any stickiness to LIBOR still out there? There were still LIBOR deals being done in January from what I heard so I'm just curious..

My sense is that the transition market-wide is going very smoothly. I think an enormous amount of work was done by the industry to prepare for this. And – sure there will be some grindiness, given the scope and nature of the transition. There'll be some issues that arise. But from my vantage point to date it's going exceptionally smoothly..

Appreciate it. Thank you..

Your next question comes from the line of Ray Cheeseman of Anfield Capital..

Thank you for taking my question. You guys have built a very high-quality mousetrap, tremendous stable results over many cycles, high-quality credit portfolio. I'm wondering, you started by saying that the big guys are getting bigger and succeeding as the other side of the equation has been reducing the number of people they do business with.

And the question is kind of a corollary to Robert's before.

Do you think that your platform, at $5 billion or a little bit better, and the growth path you're currently on is optimal, or should you be bigger or the risk is if you're bigger, does that kind of force you to do deals you might not want to do?.

So what's the right size for Golub Capital? It's a really interesting question one that we wrestle with regularly. Again, let me put them in context. GBDC is one of the vehicles that we manage at Golub Capital. We also manage a series of private funds and several private BDCs. Overall, the – across the platform we manage about $45 billion.

So we are one of the largest of the players in this sponsor finance marketplace. I think being one of the largest players creates a lot of important advantages. We have a broad product suite. We can help private equity firms with both small companies and large company financings.

We have one of the largest, if not the largest investment team over 160 people that enables us to have really deep domain expertise in a wide variety of different industries. That makes it easier from a private equity firm standpoint for us to get up to speed and add value through a diligence process or after diligence in an ownership process.

We have market leadership in this one-stop or unitranche product, where we were a pioneer and we've proven time and again that it's a really effective way for sponsors who want to do buy-and-builds to scale up their right-hand side of the balance sheet through a series of transactions as they're growing.

So, there's a whole series of things that we can do that in many ways are a result of or are enabled by our scale. When I made those comments earlier what I had in mind is that many of the most successful private equity firms who -- it's true. Robert Dodd is right that in some cases those firms are doing larger deals. They're also doing more deals.

They're larger firms and they just do more things in a given year. My point is that those really successful winning private equity firms have developed a pattern and the pattern is they have a capital markets group that develops a relationship with a small group of lenders that they go back to over and over again.

And so if you think about what's important to them, it's about partnership orientation, it's about reliability, it's about reputation, it's about track record, but it's also about capabilities. And those capabilities are much more robust if you're like Golub Capital a large-scale player with a broad product suite and a big underwriting team.

So, I think that trend is very likely going to continue going into the future. I think the private equity industry already has a cohort of winning firms that are gaining share and that are doing really well relative to the industry as a whole. I think that's going to continue.

And I think the private debt industry is also going to consolidate around a relatively small group of leading players that the leading private equity firms view as strategically important partners. So, what does that mean in terms of your question? What does that mean in terms of what is our optimal size? I think we have room to grow from here.

And part of that is based on a view that the private equity ecosystem is going to grow. And you heard me earlier, I think it's going to roughly double over the next three to five years. But I also think we have an opportunity to gain share. I think the industry is, as I mentioned, consolidating.

And that consolidation gives us an opportunity not just to grow with the industry, but also to grow a bit faster than the industry. Now, we're not going to do anything super-fast. We're big believers in methodical growth -- in planned, careful, disciplined, methodical growth.

And that's what we've done over the course of the period that GBDC has been public and that's going to be our game plan going forward..

Thank you for a very robust answer..

There are no further questions at this time. I would like to turn the call back over to the presenters..

Great. Thank you everyone for joining us today. Very much appreciate your time and attention. And as always if you have questions, feel free to reach out to us. Otherwise we look forward to talking again next quarter..

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