GOLUB CAPITAL BDC, Inc. Q1 FY2025 earnings call

• Credit performance was solid with some realized losses on non-accrual investments offset by gains elsewhere.
• Earnings supported by high base rates, attractive spreads, but saw reduction in yields from SOFR decrease and spread compression.
• Realized reduction in borrowing costs from base rate decline and funding structure initiatives.
• Earnings benefited from lower expenses due to fee structure.
• Negatively impacted by $0.01 per share non-cash interest expense from interest rate swaps.
• Gross originations $1.2 billion, net funds increased $450 million, net portfolio growth ~5.5%.
• Non-accrual investments decreased to 0.5%, lowest since 2019. Ratings category 3 investments declined to 8.8%, categories 1 and 2 very low at 1.3%.
• Declared regular quarterly distribution of $0.39 per share. NAV per share decreased due to distributions exceeding earnings.
• Executed debt funding transactions to drive down weighted average cost of debt, including $2.2 billion term debt securitization. Upgraded by Moody's to Baa2 stable outlook.

GBDC had a strong quarter. Adjusted NII per share was $0.39, corresponding to an adjusted NII return on equity of 10.1%. Excluding non-cash interest expense from interest rate swaps, adjusted NII per share was $0.40. Adjusted net income per share was $0.42, with $0.03 from adjusted net realized and unrealized gains. Gross originations were $1.2 billion, net funds increased by $450 million sequentially, representing net portfolio growth of ~5.5% quarter-over-quarter. Non-accrual investments decreased to 0.5% of total investments at fair value, the lowest since September 2019. Total distributions paid were $0.48 per share. NAV per share decreased to $15.13. Net debt to equity increased to 1.19 turns, but average net leverage during the quarter was 1.14 turns.

• Expect to recognize full run rate profitability benefit of larger investment portfolio next quarter.
• Expect to maintain average net leverage near target of 1.15 turns.
• Full run rate profitability benefit from November 2024 debt funding transactions expected in March 31, 2025 quarter.
• Portfolio rotation through monetization of non-earning investments and redeployment into new core middle market originations could generate incremental NII.

• Elevated credit stress across market, with BSL market default rate ~4.7% for 12 months ended Dec 31, more than double 20-year average.
• Spread compression in credit markets impacting new deals and some existing deals.
• Potential tariff impacts on portfolio, though relatively insulated but second, third order impacts unknown.
• Increased dispersion in performance among BDC managers, testing underwriting and turnaround skills of players.

Q: How will the portfolio respond to dollar rally, regulations, and tariffs?

A: Relatively insulated from foreign exchange and tariffs as most portfolio is U.S. borrowers serving U.S. companies. Underweight in manufacturing and commodity exposure. Caution needed for second, third order impacts of trade war.

Q: Talk about loss environment in direct lending, competition, and expected loss rate.

A: Credit stress showing in BSL market with higher defaults. Liability management transactions in BSL not helpful for turnarounds. Private credit has tail of credit stress, core middle market has stronger documentation and early problem addressing. Testing underwriting and turnaround skills of players.

Q: How is Golub responding to competition, fundraising, and origination?

A: Not running faster due to competition. Focus on core middle market, which is a better business. Continue to beat own drum, focusing on competitive advantages in private credit and sponsor finance.

Q: Liability side cost savings and potential on JPMorgan facility?

A: Weighted average cost of debt was 6.2% in Dec quarter, current in-place cost around 5.5%. Room for improvement on JPMorgan facility with good bank relationships and track record.

Q: Asset side risk of portfolio churn and mix shift with market activity?

A: Portfolio turnover likely to increase with M&A activity, but manageable as new originations and repayments will both increase. Ability to move origination to attractive opportunities, with core middle market still being a strong area but able to adjust to other size ranges as needed.

Q: Impact of AI on software category?

A: Software has been favorable but distinguishing good from bad software companies will be more important and harder with AI. Firms need strong internal expertise to evaluate software companies in AI era.