GBDC

Golub Capital BDC, Inc. (GBDC) - 10-Q Summary

Business Context and Reporting Period

This filing covers the quarterly period ended March 31, 2012. Golub Capital BDC, Inc. is an externally managed, closed-end, non-diversified business development company (BDC) regulated under the Investment Company Act of 1940. The Company invests primarily in senior secured, one-stop, mezzanine, second lien loans, and equity securities of middle-market companies, often sponsored by private equity firms. As of March 31, 2012, the Company had 25,639,371 shares of common stock outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total investment income increased by $5.24 million (57%) for the three months ended March 31, 2012, compared to the same period in 2011. This was driven by a significant increase in the weighted average investment balance of earning assets (from $373.1 million to $553.5 million) and a higher weighted average annualized interest income yield (from 8.3% to 9.6%).
• Expense Increases: Total expenses rose by $3.36 million (85%) for the three-month period. Interest and debt financing expenses increased by $1.11 million due to higher average debt outstanding ($301.1 million vs. $194.0 million). The incentive fee increased by $1.21 million due to higher pre-incentive fee net investment income.
• Portfolio Expansion: The portfolio grew from $459.8 million at September 30, 2011, to $613.8 million at March 31, 2012. The asset mix shifted toward higher-yielding instruments; "One stop" loans increased from 38.7% to 40.9% of the portfolio, while senior secured loans decreased from 44.3% to 36.8%.
• Capital Raise: In February 2012, the Company closed a public offering of 3.5 million shares at $15.35 per share, raising approximately $53.7 million in gross proceeds. An additional 325,000 shares were sold in March pursuant to an over-allotment option.

Guidance, Outlook, and Management Commentary

• TRS Termination: On April 11, 2012 (subsequent to the period end), the Company terminated its Total Return Swap (TRS) with Citibank. This resulted in a realized gain of $2.26 million and the return of $19.9 million in cash collateral. Proceeds are intended to fund new middle-market debt and equity investments.
• Outlook: Management anticipates slower originations and net funds growth in the quarter ended June 30, 2012, following strong growth in the prior two quarters.
• Distributions: On May 1, 2012, the Board declared a quarterly distribution of $0.32 per share, payable June 29, 2012. The Company maintains a dividend reinvestment plan (DRIP).
• Liquidity: The Company believes existing cash and available borrowings are sufficient to fund requirements through at least March 31, 2013. Asset coverage for borrowed amounts was 235.3% as of March 31, 2012.
• Risks: The Company faces risks related to leverage, interest rate fluctuations, and the credit quality of portfolio companies. Approximately 0.5% of the portfolio was rated as "1" (substantially below expectations) on the internal performance rating scale.

Investor Verification Checklist

• Debt Maturity Profile: Verify the maturity schedule of the $331.7 million in debt, noting that $34.2 million is due within one year (Credit Facility) while the majority ($297.5 million) is due after five years (Debt Securitization and SBA debentures).
• Non-Accrual Loans: Review the $2.8 million in non-accrual loans (0.5% of portfolio) and the specific portfolio companies involved to assess credit risk concentration.
• Incentive Fee Waiver: Confirm the impact of the $0.65 million incentive fee waiver by the Investment Adviser for the period ended December 31, 2011, related to the TRS accounting methodology change.
• Unfunded Commitments: Assess the $57.1 million in outstanding commitments to fund investments and the Company's ability to deploy this capital given current market conditions.
• Derivative Exposure: Review the details of the terminated TRS and the remaining U.S. Treasury futures contracts used to hedge SBA debenture interest rate risk.