Goldman Sachs BDC, Inc.
Q4 2020 Earnings Call Transcript

Published: 26 Feb 2021

[Operator:]

Good morning. This is Erica, and I will be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs BDC, Inc. Fourth Quarter and Year End 2020 Earnings Conference Call. Please note that all participants will be in listen-only mode until the end of the call when we will open up the line for questions. Before we begin today's call, I would like to remind our listeners that today's remarks may include forward-looking statements. These statements represent the Company's belief regarding future events that by their nature are uncertain and outside of the Company's control. The Company's actual results and financial condition may differ, possibly materially, from what is indicated in those forward-looking statements as a result of a number of factors, including those described from time-to-time in the Company's SEC filings.

[Brendan McGovern:]

Thank you, Erica. Good morning, everyone, and thank you for joining us for our fourth quarter and year end 2020 earnings conference call. I am joined on the call today by Jon Yoder, our Chief Operating Officer and Jonathan Lamm, our Chief Financial Officer. I'll begin the call by providing an overview of our fourth quarter results, including commentary on the performance of our portfolio following the completion of the company's merger with Goldman Sachs Middle Market Lending Corp or MMLC, which was completed on October 12, 2020. In addition, I'll offer some perspectives on the current state of the lending environment and the opportunity set we see before us today. Jon Yoder will then discuss our portfolio activity in more detail before turning over to Jonathan Lamm to walk through our financial results. Finally, I'll conclude with some closing remarks before we open the line for Q&A. So with that, let's get to our fourth quarter results. Our Q4 net investment income per share was $0.59 on after-tax net investment income of $55.3 million. Excluding the impact of asset acquisition accounting in connection with the merger with MMLC, adjusted net investment income per share was $0.48, reflecting solid income performance to support the company's dividend. Net asset value per share increased to $15.91 per share as of December 31, an improvement of 2.7% from the end of the third quarter. The increase reflected continued improvement in the underlying portfolio company performance, coupled with ongoing market spread tightening. On October 12, we closed our merger with MMLC, which resulted in a number of benefits to GSBD, which we have discussed at length in prior conference calls, including, first a reduction of our net debt to equity ratio from 1.29 times to one time at year end.

[Jon Yoder:]

Great, thanks, Brendan. As Brendan mentioned, the very strong deal volumes during the quarter led to a record amount of new originations. All of our new investment commitments were in senior secured loans as we continue to maintain our focus on lending to sectors that exhibit strong growth despite the macroeconomic headwinds that are being caused by the pandemic. During the quarter, and excluding the names that we inherited as part of the MMLC merger, we made 22 new investment commitments, 13 of which were two new portfolio companies and nine to existing portfolio companies. This totaled $423 million. Meanwhile, net fundings of previously unfunded commitments were 9.1 million during the quarter. Sales and repayment activity totaled 252.7 million driven by the full repayment of investments in six portfolio companies. We continue to expect strong deal activity going forward, though perhaps not quite at the same pace as what we saw in the fourth quarter. Regarding portfolio composition, as of December 31, total investments in our portfolio were 3.243 billion at fair value, comprised of 96.5% in senior secured loans, including 78% in first lien, 4.4% in first lien last Last-Out Unitranche, 14.1% in second lien debt, as well as a negligible amount in unsecured debt, and 3.5% in preferred common stock and warrants. We also had 242.9 million of unfunded commitments as of December 31, bringing total investments and commitments to 3.486 billion. As of quarter end, the company had 123 portfolio companies operating across 39 different industries. The weighted average yield of our investment portfolio at cost at the end of the fourth quarter was 8.4%, as compared to 7.7% at the end of the third quarter. This increase as Brendan mentioned was largely driven by the higher yields on the assets that we obtained as part of the merger with MMLC. The weighted average yield on our total debt and income producing investments at cost also increased to 8.7% at the end of the fourth quarter from 8.3% at the end of the third quarter. So turning to credit quality, the underlying performance of our portfolio companies overall were stable quarter-over-quarter. The weighted average net debt to EBITDA of the companies in our investment portfolio was six times at quarter end versus 5.7 times at the end of the third quarter. The weighted average interest coverage of the companies in the portfolio at quarter end was 2.6 times which was flat from the prior quarter. As of December 31, investments on nonaccrual status were just 0.3% and 0.7% of the total investment portfolio at fair value and amortized cost respectively.

[Jonathan Lamm:]

Thanks Jon. We ended 2020 with total portfolio investments at fair value of 3.24 billion, outstanding debt of 1.63 billion and net assets of 1.62 billion. We ended the fourth quarter and the year with a net debt to equity ratio of one times compared to 1.29 times at the end of the third quarter and 0.93 times following the close of the merger with MMLC. As Brendan mentioned earlier $500 million in unsecured notes, with maturity in January of 2026 were issued during the quarter. The notes priced at a fixed rate of 2.875%. Additionally, pursuant to the closing of the merger with MMLC GSBDS revolving credit facility was upsized to a total capacity of 1.695 billion. At quarter end 62% of the company's outstanding borrowings were unsecured. And we feel we have ample capacity to pursue new investment opportunities, while being mindful of an appropriate mix of secured and unsecured borrowings. Before continuing to the discussion of the income statement, and expansion on the quarter-over-quarter change in net assets, it's important that we discuss the merger accounting to provide some context. Under GAAP the merger was accounted for under the asset acquisition framework, whereby fair value of the consideration paid by GSBD for MMLC was determined to be the GSBD the share price at the closing date of the transaction, less than adjustment to account for the illiquidity of the shares given the lockup imposed on MMLC shareholders at close, multiplied by the shares issued pursuant to the exchange ratio. The final consideration yielded a purchase discount for the assets of MMLC, relative to their fair value at the closing of the merger of $84 million. This purchase discount was allocated pro rata based on fair market value to the former fully funded MMLC assets. As a result, GSBDs initial cost basis for the assets equal their fair value at the time of the acquisition less the purchase discount. Immediately upon the close of the merger, GSBD recognized a onetime unrealized gain equal to the total purchase discount of $84 million as GSBD remarked the assets back up to fair value. This onetime gain is a non-cash event.

[Brendan McGovern:]

Thank you very much, Jonathan. As most investors who have followed us for a long time know, I typically like to end each conference call by thanking you for the privilege of managing your capital. Today I'd like to switch things up a little bit to acknowledge the pending departure of Jonathan Lamm who was been our CFO since our inception back in 2012. As a founding member of the GSBD team, Jonathan has left an indelible mark on our company, and has made significant contributions as a steward of your capital. So on behalf of Goldman Sachs, our Board of Directors, and especially the entire GSBD team, I'd like to thank Jonathan for his distinguished service and wish him well in his new endeavor. Joe Dimaria, a longstanding Managing Director at Goldman will assume the role as interim CFO, and will continue to manage a team of top-notch professionals in the GSBD finance function while we identify a long-term replacement for Jonathan. With that Erica, let's open the line for questions.

[Operator:]

Your first question is from Finian O'Shea with Wells Fargo Securities.

[Finian O'Shea:]

Hi, everyone. Good morning. I guess first I echo Brendan's comments and congrats, Mr. Lamb on your notable tenure at Goldman's BDC. I'll start with you here. So appreciate I the -

[Jonathan Lamm:]

Thank you.

[Finian O'Shea:]

Appreciating the waiver outline you gave. And it looks like a part of this waiver was to shore up the - or stem the - would be capital gains from GAAP accounting, et cetera. You could word all this better than I could. But the question is, now that this is a pretty complicated line item in the model, roughly where do you stand on your normalized incentive fee? Or like are you caught up in terms of your hurdle rate going forward, should we think about that?

[Jonathan Lamm:]

Is your question Fin on the capital gains side or on the - like the -

[Finian O'Shea:]

Both.

[Jonathan Lamm:]

On the capital gains type we're not we're not fully caught up. That's an annual vesting, but I wouldn't expect that to have any near-term impacts. With respect to the net investment income incentive fee, what this waiver does - and just to make sure that you're got it right. The capital gain or the unrealized gain that was a result of this merger accounting effectively accelerated or caught up previous losses, which caused us on the net investment income side to be able to fast incentive fees that previously GSAM had waived or temporarily waived. But because there is this 12-quarter lookback, this write-up would have caused GSAM to take a significant amount of those previously passed on incentive fees. The waiver though effectively comes in and permanently waives GSAM's ability to ever catch up or take any of that net investment income incentive fee. So hopefully that resolves it, but it's the gain caused in NII incentive fee that GSAM is waving.

[Finian O'Shea:]

In the NII fee had started, to pierce back to the cap last quarter modestly. And then just so I was assuming it would be somewhere in between given the credit performance, but it sounds like a pretty normalized income incentive fee accrual to resume obviously before the waivers and such next quarter.

[Jonathan Lamm:]

That's correct. Though, for the remainder of the year through the end of '21, the waiver will stay in place to waive any incentive fees in order to cause GSBD to earn adjusted net investment income of $0.48. So if GSBDs incentive - if GSBDs net investment income on an adjusted basis is above $0.48, then GSAM will take an incentive fee, but if it's below then they will effectively waive any of that normalized incentive fee that you're talking about in order to get to that $0.48 of adjusted NII.

[Finian O'Shea:]

Okay. Well, you're as sharp as you were on your first day. Congrats again Jonathan. I'll switch to one to Brendan or Mr. Yoder on the portfolio. I noticed that the leverage went from 5.7 to 6. Was this more - or was this like a result of refreshing the portfolio? There was a lot of activity this quarter. Or is this perhaps some COVID related EBITDA declined maybe div recaps just any color on there for mostly firstly in portfolio, it's pretty high leverage, right?

[Brendan McGovern:]

Yeah. No, your first comment is - and I think it is correct as we went through it in a lot of detail, a lot of portfolio activity this quarter, both in terms of repayment activity. And when you think about the nature of those more seasoned loans, the trajectory tends to be loans that decrease from a leverage perspective over their life as they grow. And so the recycling of those repayments into a higher number of new issues at higher first allocation cash in point is causing them crazy. Underlying performance of the portfolio companies on a broad basis continues to be strong, as was reflected broadly in marks within the portfolio and company as well.

[Jon Yoder:]

Yeah, and I mean, the only thing that I would add in, for you noted this Fin, but the weighted average interest coverage didn't change. So it's not an excessive - another good indicator that it's not performance related, it's just really mix shift between newer loans, where when you start as Brendan said, they are generally higher leverage, but then the companies if you've done your underwriting properly, they grow over time their EBITDA and that brings down the debt to EBITDA ratios.

[Finian O'Shea:]

Okay. That's helpful. That's all for me. I'll jump back in. Thank you.

[Brendan McGovern:]

Thanks Fin.

[Operator:]

Your next question is from Robert Dodd with Raymond James.

[Robert Dodd:]

Hi, guys, and same. It will be a sad day to see you go Jonathan, but I wish you luck in your - whatever it is you're heading off to do. So thanks for that.

[Jonathan Lamm:]

Thanks Robert.

[Robert Dodd:]

On kind of more concisely, I think - I appreciate all the disclosure about the waiver as well, et cetera. But if we look beyond '21, right in perpetuity, the discount accretion is not just going to quit unless the whole portfolio turns over this year, it's not going to be just a one-year event. Will the discount accretion, which is obviously non-cash accounting treatment, will that be excluded from the calculation of pre-investment - pre-incentives NII beyond '21? Or will you be taking an income incentive fee on that accounting gain beyond '21?

[Jonathan Lamm:]

It's a great question. And the answer is that the way that the investment management agreement works is that you can't exclude it because it is part of income. That being said, I would not expect for it to have any impact given the way that we have the limiter set up. So for every dollar of income accretion, that's going to come in related to this discount, there's also going to be a corresponding unrealized loss, which would effectively limit the incentive fee anyways, Robert. So it'll be in there, but effectively, all of the impacts are really taken this quarter because of that corresponding up down that you see in the way that our incentive fee is calculated.

[Robert Dodd:]

Understood and about the impact on the unrealized. My only point being, of course that it can't be excluded unless the management fee agreement is amended or a permanent waiver is put in place to accelerate to adjust.

[Jonathan Lamm:]

That's right. Yeah, you're hitting on exactly the issue. So in order to change your investment management agreement, you got to go out to shareholders get a vote and all of that. So the calculation will effectively work in such a way that there won't need to be a waiver, but should there have ever been a situation GSAM would have basically - would stand in and obviously wave in that situation post '21, but it won't have an impact, Robert.

[Robert Dodd:]

Got it, appreciate that. Moving on to the portfolio, I mean, the originations in the quarter were obviously very strong. I mean, obviously, it's a bigger business now, as a platform, so the previous ones, it should be bigger. But even with that in mind, they're very big. The one thing that did kind of leap out to me is the funded versus unfunded. This time funded three quarters of the new commitments, which seems relatively low compared to historic patterns. Is that a lot of undrawn revolvers, acquisition lines, can you give us any color on what that unfunded is and why it was relatively high as a proportion of new commitments this quarter?

[Brendan McGovern:]

Yeah. So we could sort of go back and take a closer look and give you much more detail about that breakout. But about unfunded portion based on those new commitments. And so just looking at the nature of the commitments and deals that we did there during this quarter a number of platform acquisitions where M&A is an expected outcome within the sponsors plan and so providing a delayed draw term loan to enable the sponsor or subject to certain conditions, to use that capital to pursue those transactions. So not a bigger increase in revolvers, as a general tool in the toolkit, but more around DDTLs and now say, moreover, when we look at just the total unfunded exposure here, I think it's in the $250 million range on a $3.3 million - $2.3 billion portfolio. Yeah, I think that's probably pretty consistent with where we've been, historically overall. So certainly recognized in this particular quarter, just looking at the originations, it might be a bit skewed, but overall, yeah, I think we're in a pretty similar spots where we would be prospectively and I'd point out as you're looking at that amount of capital, and we've talked about this a bunch, Robert we certainly within our own risk parameters, view that money as committed, but it is a source of capital that's being used in effect by the company that's not being used to generate income. And so the future findings of that are potential future increases in the run rate income portion of the company as well.

[Jon Yoder:]

One thing that I would add Robert, is if we take a longer-term historical view of unfunded commitments, I would say that relative to maybe five or eight years ago, a lot of the unfunded commitments that you were asked to make were in the form of revolving commitments that were kind of rainy day type of funds, they never really expected to get drawn on. I think as we've - as the sponsor community has kind of developed into a wider use of strategies where, as Brendan mentioned, they're investing in platforms that they then expect to do a lot of follow on or sort of tuck in acquisitions for them. It means that a lot of the unfunded today is really more specifically for those acquisitions, for those sort of delayed draw to make acquisitions. And so the impact to us is that we now expect that most of our unfunded - or many, probably the majority of our unfunded commitments will actually be funded and generally speaking, what we're seeing is that they get funded relatively quickly. It's not the kind of thing where that sits out there for three, four or five years and never gets drawn. But again, because of the strategy, the sponsors to make tuck in acquisitions for their companies. It tends to get drawn reasonably quickly. So it's becoming - as Brendan said, it's not the most efficient use of our balance sheet to make those commitments. But the trends are positive in that we don't stay unfunded for terribly long.

[Robert Dodd:]

Understood, that kind of ties into to a follow up, I had to one of your comments where you said you expected strong field activity, but not at Q4 levels. I mean, Q4 is obviously very, very strong. So from that - presumptively that means you expect commitments and new commitments to be continued to be strong through 2021, which is certainly consistent with what we're hearing. I mean, and then on top of that you expect the unfunded commitments you have to be drawn as well. So I certainly don't think you have a leverage problem, obviously, you do leverage with MMLC, et cetera. But where's your comfort level in this environment for leverage, obviously, you've got a target range, but kind of where's the comfort level given if those unfunded sat out there a little bit, but you expect them to be drawn? Where's the comfort level in the Intermediate Period?

[Brendan McGovern:]

Yeah, there's a lot embedded in that, in that question and I'll hit on the specificity and maybe a little bit of a backward looking. We look at having gone through the COVID crisis, as we always do from a risk management lens. As we've talked about, we feel really, really confident in the risk management approach with a lot of oversight and decades of experience here in the firm. I think our models and our approach proved to have worked looking back. We went through a severe crisis, the balance sheet certainly took a hit, we've marked down the assets significantly, and we're never really close to being in violation of any of our covenants or any of the regulatory issues that we had. We're obviously, quite pleased that our assets have performed. And so I think through that lens investors should take comfort, even though we went into the crisis at a higher historical leverage. I think things turned out quite well. Certainly, the merger of MMLC was a further deleveraging event. All that being said, obviously, in the context of that crisis, in the context of the industry moving to two to one, a lot of discussions with fixed income investors, a lot of discussions with rating agencies. And I would say you're looking at that through the lens of our risk management models as well, 1.25, 1.3 times debt to equity is where I think we end up. There's a more nuanced discussion, as you know, based on loss given default, and asset quality, and lien type, et cetera. But I think in the interest of just sort of giving a number that you can orient to that's what I described to you. And I will tell you that also when we're factoring that in, we're including those unfunded. And so we're not excluding - we certainly have seen those are obligations, we've always viewed those as obligations that can get called at any given point in time. So that's something to be aware of, as well in thinking that - then that point through.

[Jon Yoder:]

And Robert, the only thing I would add to that is just specifically on the comments that I made about we're seeing and continue to expect fairly robust deal activity in this year. Remember that we also - when we see periods of elevated deal activity of new originations, it tends to be highly correlated with high levels of repayment activity, just like we saw in the fourth quarter. So that's the other side of the coin here is that that kind of tamps down on overall portfolio growth.

[Robert Dodd:]

Got it. Thank you, that's it for my questions. I appreciate it and Congrats.

[Brendan McGovern:]

Thanks Robert.

[Operator:]

At this time, there are no further questions. Please continue with any closing remarks.

[Brendan McGovern:]

Great, thank you Erica and thank you all for your time today. It's been obviously pretty brutal winter here in the northeast, but we're finally looking like we're getting a break in the weather here. So you might say February came in like a lion was going out like a lamb. So thanks everyone.