GOLUB CAPITAL BDC, Inc. Q4 FY2024 earnings call

• GBDC had a good fourth quarter and solid fiscal 2024, with key events like a permanent reduction in incentive fee rate, new supplemental variable distribution framework, and closing of GBDC 3 merger.
• Adjusted NII per share was $0.47, adjusted NII ROE 12.4%, adjusted earnings per share $0.36, adjusted net income ROE 9.4%.
• Borrower performance generally strong, but faced headwinds from underperforming borrowers, with realized losses and fair value markdowns.
• Gross originations nearly $1 billion, net funds increased $368 million, net portfolio growth ~5%.
• Credit performance solid, nonaccruals increased modestly to 1.2% of total debt investments at fair value.
• Distributions paid $0.49 per share, including base, variable supplemental, and special distributions.
• NAV per share decreased $0.13 sequentially, but up $0.17 from Sept 30, 2023.
• Debt to equity increased to 1.09 turns, average net leverage during quarter was 1.02 turns.
• Post-merger funding initiatives included pricing of new $2.2 billion term debt securitization, repay of legacy debt, and increase in credit facility size.

For the quarter ended September 30, 2024, adjusted NII per share was $0.47, corresponding to an adjusted NII return on equity of 12.4%. Adjusted net income per share was $0.36, with an adjusted return on equity of 9.4% for the quarter. Gross originations were nearly $1 billion, up from the previous quarter, and net funds increased by $368 million sequentially, representing a net portfolio growth of approximately 5%. The portfolio mix remained predominantly one-stop loans, with a weighted average rate on new investments decreasing modestly to 10.7%. Distributions paid in the quarter were $0.49 per share, including base, variable supplemental, and special distributions. NAV per share decreased by $0.13 sequentially to $15.19, but was $0.17 higher than at September 30, 2023. Debt to equity increased to 1.09 turns on a net of cash basis.

• Anticipate increased credit stress is a good thing, as Golub Capital has historically outperformed in challenging markets and expects market to shift to lender-friendly.
• Broadly syndicated loan and private credit markets saw spread compression, particularly in large market segment; GBDC focuses on core middle market with wider pricing, lower leverage, better documentation.
• Expect M&A activity to pick up in 2025 with tailwinds like lower rates, less political uncertainty, and pressure on PE sponsors to return money to LPs, though not predicting an M&A super cycle yet.
• GBDC well positioned to outperform due to strong relationships, investment process, and expertise in managing problem credits.

• Increased credit stress leading to more defaults and underperforming credits.
• Spread compression in broadly syndicated and private credit markets, particularly in large market segment.
• Borrower-friendly market conditions leading to weaker documentation terms in some segments.

Q: Robert Dodd asked about where we are in the cycle regarding documentation terms beyond spreads.

A: David Golub said documentation terms are borrower-friendly in large market, but core middle market has strong covenants and EBITDA definitions; GBDC focuses on core middle market.

Q: Robert Dodd asked about M&A outlook in 2025.

A: David Golub said 2025 M&A volumes uncertain, but has tailwinds like lower rates, less political uncertainty, but still uncertainty; not predicting M&A super cycle yet.

Q: Robert Dodd asked about balance sheet structure post quarter end.

A: David Golub said GBDC is always optimizing balance sheet, done a lot of work post-merger but will continue looking for opportunities.

Q: Paul Johnson asked about originations allocation across Golub platform and timing.

A: David Golub said originations deploy across Golub platform, GBDC was under target leverage post-merger, net funds growth $368 million normal, focused on repeat sponsors and borrowers.

Q: Paul Johnson asked about noncash interest expense related to swap.

A: Chris Ericson said it was about $0.02 per share.

Q: Raymond Cheesman asked about originations deployment timing.

A: David Golub said deployed across Golub platform, focused on competitive advantages with repeat sponsors.

Q: Raymond Cheesman asked about GBDC 4.

A: David Golub said GBDC 4 is a private BDC, possible merger with GBDC in future.

Q: Raymond Cheesman asked about optimal size.

A: David Golub said Golub Capital focuses on appropriate size for opportunities, not in raise and deploy model, considers dry powder level.