Goldman Sachs BDC, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Goldman Sachs BDC is a business development company focused on lending to U.S. middle-market companies, primarily through secured debt, with select equity investments. Unless stated otherwise, dollar amounts below are in millions.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Investment income | $112.1 | $77.5 | $219.5 | $155.8 |
| Net investment income after taxes | $64.5 | $49.6 | $112.5 | $99.8 |
| Net increase in net assets from operations | $65.7 | $18.7 | $93.7 | $58.8 |
| Earnings per share | $0.60 | $0.18 | $0.88 | $0.58 |
- Q2 investment income rose about 45% year over year, primarily due to higher base rates on floating-rate investments; payment-in-kind (PIK) income also increased. Q2 net investment income rose about 30%.
- Higher funding costs and incentive fees weighed on results: Q2 interest and other debt expenses were $27.8 versus $16.2 a year earlier; incentive fees were $7.8 versus $3.8. No Q2 fee waiver was recorded, compared with $4.2 of waivers in Q2 2022.
- Q2 realized and unrealized gains totaled $1.3, versus losses of $31.0 in Q2 2022. For the first half, those gains and losses were a net loss of $18.2, including a $39.2 realized investment loss, primarily from exiting National Spine and Pain Centers.
- Cash from operating activities was $58.2 for the first half, compared with cash used of $55.5 in the prior-year period. Cash was $42.4 at June 30. Investment purchases were $107.4 and sales and principal repayments provided $77.0.
- At June 30, investments had fair value of $3,550, compared with $3,506 at December 31, 2022. Total assets were $3,637; net assets were $1,597. NAV was $14.59 per share, down from $14.61 at year-end 2022 and $15.53 at June 30, 2022.
- Debt carrying value was $1,955, down from $2,013 at year-end. The company reported $594.8 of available capacity under its $1,695 revolving facility and an asset coverage ratio of 181% (174% at year-end). The six-month weighted average borrowing rate was 5.20%, versus 3.55% for 2022.
- The portfolio comprised 135 companies; 100% of performing debt was floating-rate. Portfolio-company weighted-average net debt/EBITDA was 5.9x and interest coverage was 1.6x. First-half distributions were $0.90 per share; the board subsequently declared another $0.45 quarterly distribution.
Material changes and notable items
- Portfolio weighted-average yield increased from 11.0% to 11.9% at amortized cost and from 12.1% to 13.4% at fair value, driven mainly by higher rates and market volatility. Q2 new investment commitments were $86.3, all floating-rate debt, versus $366.4 in Q2 2022.
- Non-accrual investments involved 10 portfolio companies at June 30, versus eight at year-end; they were 1.8% of investments at amortized cost and 0.8% at fair value. Portfolio investments rated Grade 3 or 4 rose to 8.5% of fair value from 2.9% at year-end, primarily due to financial underperformance.
- Unfunded investment commitments totaled $366.1, modestly below $371.0 at year-end. Management stated it believed available financial resources were adequate to meet them.
- The March 2023 follow-on offering issued 6.5 million shares at $15.09 per share and generated net proceeds of $97.6. The company terminated both ATM equity distribution agreements effective August 1, 2023; its ATM program is no longer in effect. The share repurchase plan remained suspended as of August 3 and was scheduled to expire August 17, 2023.
- Most investment assets are Level 3 fair-value measurements based on significant unobservable inputs, making valuations subject to management judgment and estimation uncertainty.
Outlook, risks and contingencies
- The filing provides no specific earnings or portfolio guidance. Management describes investment activity as dependent on economic conditions, available capital, market competition and the company’s funding capacity. It cautions that interim results are not necessarily indicative of full-year results.
- Management identifies interest rates, inflation, recession risk, capital-market disruption and portfolio-company performance as significant uncertainties. A modeled 100-basis-point rate increase would raise annual interest income by $28.3 and expense by $10.2, increasing annual net income by an estimated $18.2; a 100-basis-point decrease would have the opposite modeled effect, assuming no changes in the balance sheet structure.
- The company reported that most LIBOR-linked investments and its revolving facility had transitioned to SOFR or alternative reference rates by June 30; remaining USD LIBOR investments were expected to transition or use fallback provisions.
- The filing added risk disclosure that stress in the banking system could adversely affect the company and its portfolio companies, which depend on bank relationships. No material legal proceedings were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether rising interest expense, incentive fees and any changes in fee waivers continue to offset higher portfolio income.
- Developments in the non-accrual portfolio and Grade 3/4 investments, including recoveries or further impairments after the National Spine and Pain Centers exit.
- Portfolio-company cash generation and payment capacity, particularly given increased PIK income and portfolio-company leverage and interest-coverage metrics.
- Liquidity after considering $366.1 of unfunded commitments, distributions, available revolving capacity, asset-coverage requirements and debt maturities.
- Valuation assumptions for Level 3 investments and any subsequent changes in portfolio fair values or NAV.
- The amount and tax characterization of future distributions; the filing notes distributions depend on available funds and may include return of capital.