Business Context and Reporting Period
Company: Goldman Sachs BDC, Inc. (GSBD)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2018
Business Overview: A closed-end management investment company regulated as a Business Development Company (BDC) and a Regulated Investment Company (RIC). The Company focuses on lending to U.S. middle-market companies through secured debt (first lien, unitranche, second lien) and select equity investments. It operates a joint venture, the Senior Credit Fund, LLC, with the Regents of the University of California.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total Investment Income | $35.54 million | $32.19 million |
| Net Investment Income (After Taxes) | $18.74 million | $17.95 million |
| Net Increase in Net Assets from Operations | $18.45 million | $14.56 million |
| Earnings Per Share (Basic & Diluted) | $0.46 | $0.40 |
| Net Asset Value (NAV) Per Share | $18.10 | $18.26 |
| Total Assets | $1,286.23 million | $1,298.59 million |
| Total Debt (Carrying Value) | $526.49 million | $542.53 million |
| Cash and Cash Equivalents | $6.93 million | $11.61 million |
| Asset Coverage Ratio | 237% | 233% |
| Portfolio Weighted Average Yield (Fair Value) | 11.7% | 11.3% |
Material Changes vs. Prior Period
- Revenue Growth: Total investment income increased by 10.4% year-over-year, driven primarily by higher LIBOR rates on variable-rate debt and an increase in the total investment portfolio size. Interest income rose from $27.51 million to $30.18 million.
- Expense Increases: Total expenses rose to $16.52 million from $13.87 million. This was due to higher interest and debt expenses ($5.72 million vs. $4.51 million) resulting from increased borrowing rates and average debt balances, and higher incentive fees ($4.68 million vs. $3.73 million) due to a decrease in net capital losses.
- Portfolio Activity: Gross originations were $67.23 million compared to $112.56 million in the prior year. Proceeds from sales and repayments were $78.71 million. The portfolio decreased slightly in fair value to $1,256.68 million.
- Realized Gains: The Company recorded a net realized gain of $1.67 million, compared to a net realized loss of $0.17 million in Q1 2017. A significant gain of $1.55 million was recognized from the exit of myON, LLC.
- Unrealized Depreciation: Net change in unrealized appreciation/depreciation was a loss of $1.51 million, an improvement from the $3.22 million loss in Q1 2017.
Guidance, Outlook, and Risks
- Dividend Policy: The Board declared a quarterly distribution of $0.45 per share on May 1, 2018, payable July 16, 2018. The Company intends to distribute substantially all taxable income to maintain RIC status.
- Leverage Proposal: The Board approved a proposal to submit to stockholders to reduce the required asset coverage ratio from 200% to 150% under the Small Business Credit Availability Act. If approved, this would allow increased leverage and a reduction in the Management Fee from 1.50% to 1.00% on gross assets.
- Market Risks: The Company is exposed to interest rate risk. Approximately 96.2% of performing debt bears floating rates. A 100 basis point increase in rates would increase net income by approximately $6.02 million annually, while a 100 basis point decrease would reduce it by $5.46 million.
- Portfolio Quality: As of March 31, 2018, 92.6% of the portfolio was graded as "Grade 2" (performing as expected), and 7.4% as "Grade 3" (increased risk). There were no "Grade 4" investments. One investment remained on non-accrual status (0.1% of portfolio).
- Regulatory Risks: Changes in laws regarding BDC operations, leverage limits, and tax regulations could impact the Company's ability to raise capital and maintain its tax status.
Investor Verification Checklist
- Stockholder Vote on Leverage: Verify the outcome of the June 15, 2018, annual meeting regarding the proposal to lower the asset coverage ratio to 150% and reduce the management fee.
- Debt Maturities: Review the maturity schedule of the Revolving Credit Facility (matures Feb 2023) and Convertible Notes (matures April 2022) to assess refinancing risks.
- Portfolio Concentration: Monitor the concentration of the portfolio in specific industries (Software 17.9%, Health Care 14.6%) and the performance of the Senior Credit Fund joint venture.
- Interest Rate Sensitivity: Assess the impact of potential Federal Reserve rate changes on the Company's net investment income, given the high percentage of floating-rate assets and liabilities.
- Non-Accrual Status: Track the status of the single investment on non-accrual to ensure it does not deteriorate or require a significant write-down.