Business Context and Reporting Period
Company: Goldman Sachs BDC, Inc. (GSBD)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2016
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, primarily 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 | Three Months Ended Sep 30, 2016 | Nine Months Ended Sep 30, 2016 | Net Assets (Sep 30, 2016) |
|---|---|---|---|
| Total Investment Income | $33.95 million | $94.62 million | $674.97 million |
| Net Investment Income (After Tax) | $18.68 million | $58.09 million | |
| Net Increase in Net Assets from Operations | $22.66 million | $35.06 million | |
| Earnings Per Share (Basic & Diluted) | $0.62 | $0.97 | |
| Net Asset Value (NAV) Per Share | $18.58 | ||
| Total Debt Outstanding | $471.25 million | ||
| Asset Coverage Ratio | 2.43 to 1 | ||
| Cash and Cash Equivalents | $14.67 million | ||
| Portfolio Yield (Weighted Avg, Fair Value) | 11.8% |
Material Changes vs. Prior Comparable Period
- Investment Income: Total investment income increased to $94.62 million for the nine months ended September 30, 2016, compared to $86.58 million in the prior year period. This was driven by an increase in the average portfolio size and higher dividend income from the Senior Credit Fund.
- Realized Losses: The Company recorded a significant net realized loss of $21.99 million for the three and nine months ended September 30, 2016. This was primarily due to a restructuring of Hunter Defense Technologies, Inc., where second lien debt was converted into non-interest bearing equity, resulting in a realized loss of $22.12 million.
- Unrealized Gains: Net change in unrealized appreciation was positive $25.98 million for the quarter, offsetting the realized loss. This included a reversal of previously recognized depreciation on Hunter Defense Technologies upon restructuring.
- Expenses: Total expenses increased to $35.80 million for the nine-month period (vs. $34.16 million in 2015). Interest and credit facility expenses rose due to higher average borrowings ($460.47 million vs. $331.61 million). Incentive fees decreased year-over-year for the nine-month period ($8.95 million vs. $11.43 million) due to unrealized depreciation impacting the fee cap.
- Portfolio Composition: The portfolio grew to $1.14 billion at fair value. The weighted average leverage of portfolio companies increased to 4.6x (from 4.3x), and the weighted average interest coverage decreased to 2.9x (from 3.1x).
Guidance, Outlook, Risks, and Unusual Items
- Subsequent Financing: On October 3, 2016, the Company closed an offering of $115 million in unsecured convertible notes (4.50% interest, maturing April 2022). Net proceeds of approximately $110.9 million were used to pay down debt under the Revolving Credit Facility.
- Distributions: The Board declared a quarterly distribution of $0.45 per share on November 1, 2016, payable January 17, 2017. The Company maintains a dividend reinvestment plan.
- Repurchase Plan: The Company has an authorized repurchase plan of up to $25 million if the stock trades below NAV, effective through March 18, 2017. No repurchases were made in the quarter.
- Risks:
- Interest Rate Risk: Approximately 89.6% of performing debt bears floating rates. A 100 basis point increase in rates would increase net income by approximately $1.35 million annually.
- Conflicts of Interest: The Investment Adviser manages other funds with similar mandates, creating potential conflicts in allocating investment opportunities.
- Portfolio Credit Quality: One investment (NTS Communications, Inc.) was on non-accrual status as of September 30, 2016, representing 3.7% of total investments at fair value.
- Regulatory: Potential SEC rule changes regarding derivatives and financial commitment transactions could limit hedging capabilities.
Investor Verification Checklist
- Realized Loss Impact: Verify the long-term implications of the $22.12 million realized loss on Hunter Defense Technologies and the quality of the resulting equity position.
- Debt Utilization: Confirm the impact of the new $115 million convertible note issuance on the Company's leverage ratios and interest expense profile.
- Non-Accrual Status: Monitor the status of NTS Communications, Inc. (3.7% of portfolio) and any potential further credit deterioration.
- Incentive Fee Structure: Review how unrealized depreciation continues to impact the incentive fee cap and overall expense ratios.
- Portfolio Yield Sustainability: Assess the sustainability of the 11.8% portfolio yield given the mix of floating-rate assets and potential refinancing needs.