GOLUB CAPITAL BDC, Inc. Q3 FY2024 earnings call

• Closed second win-win-win affiliate merger in early June, accretive to NAV and permanent reduction in incentive fee to 15%.
• Origination volume picked up with new investment commitments of $435 million, up from prior year, concentrated in areas of competitive advantage.
• Most borrowers performed well with median revenue and EBITDA up, but had two negative credit surprises (Imperial Optical and Pluralsight).
• Portfolio activity: Net funds increased by $2.5 billion post-merger, portfolio at fair value $7.9 billion, credit ratings improved, non-accruals at 1% but below sector average.
• Distributions: Board approved $0.44 per share, including regular and supplemental, with additional special distributions planned.

GBDC's quarter ended June 30 had adjusted NII per share of $0.48. NAV per share was $15.32, up 1.3% from March 31. Originations for the quarter totaled $435 million, up $111 million from the prior year. Credit performance was generally strong with internal ratings improving, non-accruals at 1% (below sector average), and weighted average loan-to-value at 45%. However, there were negative surprises with two credits leading to net realized and unrealized losses of $0.17 per share.

• Origination activity likely to stay modulated in second half with sellers holding off on sales due to interest rates and uncertainty, expecting volumes to return to normal in 2025.
• Spreads saw compression, with market volatility potentially enabling stabilization, but outlook unchanged on headwinds for origination, spreads, and credit.
• Plan to re-leverage balance sheet to target 1.15x debt-to-equity, but will be picky on quality to ensure attractive loan opportunities.

• Market volatility could impact spreads, with uncertainty on how long volatility needs to continue for spreads to widen again.
• Credit stress visible in certain sectors and managers, with dispersion in results expected to continue.
• Loan structures in some large market loans allow for certain borrowings, but private credit insulated by incentives and norms among lenders and sponsors.

Q: Robert Dodd from Raymond James asked about market volatility and when spreads might widen again.

A: David Golub said market conditions are hard to generalize, but market volatility reflects economic data weakness and emotional valuation concerns, with no clear timeline on when spreads would widen.

Q: Finian O'Shea from Wells Fargo inquired about sponsor support and leverage.

A: David Golub said sponsor support needed is uncommon, most portfolio companies are cash flow positive; leverage target is ~1.15x debt-to-equity, but will be picky on quality when re-leveraging.

Q: Paul Johnson of KBW asked about fee waivers.

A: David Golub said the fee waiver was a voluntary action due to onetime noise in the quarter, consistent with Golub Capital's tradition of waiving fees periodically