Business Context and Reporting Period
Company: Goldman Sachs BDC, Inc. (GSBD)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2015
Business Overview: A specialty finance 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 also co-invests in the Senior Credit Fund, LLC.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2015 | Nine Months Ended Sep 30, 2015 | Net Assets (Sep 30, 2015) |
|---|---|---|---|
| Total Investment Income | $32.90 million | $86.58 million | $703.54 million |
| Net Investment Income (After Tax) | $20.60 million | $52.16 million | |
| Net Increase in Net Assets from Operations | $13.48 million | $45.44 million | |
| Earnings Per Share (Basic & Diluted) | $0.37 | $1.33 | |
| Net Asset Value (NAV) Per Share | $19.38 | ||
| Total Debt Outstanding | $447.00 million | ||
| Asset Coverage Ratio | 2.57 to 1 | ||
| Cash and Cash Equivalents | $11.72 million |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments at fair value increased to $1.15 billion (Sep 30, 2015) from $943.5 million (Dec 31, 2014). The portfolio now consists of 40 portfolio companies, up from 34.
- Revenue Increase: Net investment income for the nine months ended Sep 30, 2015, rose to $52.16 million from $35.34 million in the prior year period, driven by a larger portfolio size and distributions from the Senior Credit Fund.
- Expense Increase: Total expenses increased to $34.16 million (nine months 2015) from $13.58 million (nine months 2014). This was primarily due to higher interest and credit facility expenses ($7.66 million vs. $2.56 million) and incentive fees ($11.43 million vs. $1.50 million) resulting from increased assets and borrowings.
- Unrealized Losses: The company recorded a net change in unrealized depreciation of $6.62 million for the nine months ended Sep 30, 2015, compared to $0.74 million in the prior year period.
- Capital Raise: The company completed its IPO in March 2015, issuing 6.9 million shares and raising approximately $131.8 million in net proceeds.
Guidance, Outlook, and Risks
- Outlook: Management expects to continue generating current income and capital appreciation through direct originations. The company maintains a dividend reinvestment plan and intends to distribute substantially all annual taxable income.
- Recent Developments: In November 2015, the company amended its Revolving Credit Facility to increase capacity to $570 million (with potential to reach $1 billion), reduce interest rates, and extend the maturity to November 2020. A quarterly distribution of $0.45 per share was declared for payment in January 2016.
- Risks:
- Interest Rate Risk: Approximately 87.6% of debt investments bear floating rates. A 100 basis point increase in rates would increase net income by $2.22 million annually, while a decrease would reduce it by $2.22 million (due to interest rate floors on assets vs. liabilities).
- Valuation Risk: The majority of investments are Level 3 assets, requiring significant management judgment and independent valuation.
- Leverage: The company uses leverage to enhance returns, subject to Investment Company Act asset coverage requirements (minimum 2:1).
Investor Verification Checklist
- Debt Covenants: Verify continued compliance with the Revolving Credit Facility covenants, specifically the asset coverage ratio (currently 2.57:1) and minimum liquidity tests.
- Portfolio Quality: Review the credit grading of the portfolio; 90.2% is graded "2" (performing as expected), while 7.8% is graded "3" (increased risk). No assets are currently on non-accrual status.
- Unrealized Depreciation: Investigate the drivers of the $6.62 million unrealized depreciation, specifically noting declines in specific portfolio companies such as Reddy Ice Corporation and Securus Technologies Holdings.
- Senior Credit Fund: Assess the performance and leverage of the unconsolidated Senior Credit Fund, which holds $258.5 million in debt investments and $173.0 million in debt.
- Dividend Sustainability: Confirm that net investment income ($52.16 million for nine months) continues to cover declared distributions ($48.58 million for nine months).