Business Context and Reporting Period
Company: Goldman Sachs BDC, Inc. (GSBD)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and nine months ended September 30, 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.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2017 |
|---|---|---|---|
| Total Investment Income | $37.98 million | $110.76 million | $102.62 million |
| Net Investment Income (After Tax) | $21.57 million | $60.46 million | $60.99 million |
| Net Increase in Net Assets from Operations | $19.02 million | $54.94 million | $37.26 million |
| Earnings Per Share (Basic & Diluted) | $0.47 | $1.37 | $0.98 |
| Net Asset Value (NAV) Per Share | $18.13 (End of Period) | $18.13 (End of Period) | $18.23 (End of Period) |
| Total Debt Outstanding | $578.94 million | $578.94 million | $546.25 million |
| Asset Coverage Ratio | 225% | 225% | 233% |
| Cash and Cash Equivalents | $4.65 million | $4.65 million | $11.97 million |
Material Changes vs. Prior Period
- Investment Income Growth: Total investment income increased 10.4% for the nine months ended September 30, 2018, compared to the prior year period. This was primarily driven by an increase in LIBOR on variable-rate secured debt and a larger portfolio size.
- Expense Fluctuations:
- Management Fees: Decreased from $13.18 million (9M 2017) to $12.54 million (9M 2018) due to a reduction in the annual management fee rate from 1.50% to 1.00% effective June 15, 2018.
- Incentive Fees: Increased from $9.60 million (9M 2017) to $13.99 million (9M 2018) due to an increase in the Incentive Fee Cap, driven by a decrease in net capital losses.
- Debt Expenses: Increased from $14.24 million (9M 2017) to $18.33 million (9M 2018) due to higher interest rates on the Revolving Credit Facility and the issuance of additional Convertible Notes in July 2018.
- Realized Gains/Losses: The Company recorded a net realized gain of $1.78 million for the nine months ended September 30, 2018, compared to a net realized loss of $40.63 million in the prior year period. The prior year loss was significantly impacted by the exit of Washington Inventory Service and an exchange agreement with Iracore International Holdings, Inc.
- Unrealized Depreciation: Net change in unrealized appreciation/depreciation was a loss of $6.70 million for the nine months ended September 30, 2018, compared to a gain of $16.90 million in the prior year. The current period loss was primarily driven by unrealized depreciation in Conergy Asia Holdings, Ltd.
Guidance, Outlook, and Risks
- Capital Structure Changes: On June 15, 2018, stockholders approved the application of reduced asset coverage requirements (150% instead of 200%) under the Investment Company Act. Concurrently, the management fee was reduced to 1.00% annually.
- Debt Issuance: On July 2, 2018, the Company issued an additional $40 million of 4.50% Convertible Notes due 2022. Proceeds were used to pay down the Revolving Credit Facility.
- Portfolio Activity: The portfolio weighted average yield increased to 11.7% (at fair value) as of September 30, 2018, from 11.3% at year-end 2017. The Company had $72.79 million in unfunded commitments as of September 30, 2018.
- Non-Accrual Status: As of September 30, 2018, two investments were on non-accrual status, representing 0.6% of total investments at fair value. This is an increase from one investment (0.0% of fair value) at December 31, 2017.
- Risk Factors:
- Leverage Risk: Increased leverage capacity (up to 150% asset coverage) may magnify gains and losses and increase debt service costs.
- Interest Rate Risk: Approximately 96.4% of performing debt bears floating interest rates. A 100 basis point increase in rates would increase net income by approximately $6.06 million annually, while a 100 basis point decrease would reduce it by the same amount.
- Valuation Risk: The majority of investments are Level 3 assets, requiring significant management judgment and unobservable inputs for fair value determination.
Key Facts for Investor Verification
- Fee Reduction Impact: Verify the long-term impact of the management fee reduction (1.50% to 1.00%) on the Company's expense ratio and net investment income sustainability.
- Convertible Note Conversion: Monitor the trading price of GSBD common stock relative to the conversion price of approximately $24.49 per share to assess potential dilution from the $155 million Convertible Notes outstanding.
- Non-Accrual Trends: Track the performance of the two investments currently on non-accrual status (including Kawa Solar Holdings Limited) to assess potential credit losses.
- Leverage Utilization: Observe if the Company utilizes the newly approved 150% asset coverage ratio to increase leverage, which could impact volatility in NAV.
- Senior Credit Fund Performance: Review the performance of the Senior Credit Fund (a joint venture with Cal Regents), which represents a significant portion of the portfolio (approx. 7.0% of total portfolio at fair value).