Goldman Sachs BDC, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Goldman Sachs BDC is a business development company focused on lending to middle-market companies and is externally managed by Goldman Sachs Asset Management. Amounts below are in millions except per-share data.
Financial and portfolio highlights
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Investment income | $120.1 | $95.2 | $339.5 | $251.0 |
| Net expenses, after fee waivers | $45.6 | $33.2 | $151.0 | $87.5 |
| Net investment income after taxes | $72.9 | $61.2 | $185.4 | $161.0 |
| Realized and unrealized gains (losses) | $(21.3) | $(68.8) | $(39.5) | $(109.6) |
| Increase in net assets from operations | $51.6 | $(7.5) | $145.3 | $51.3 |
| Net investment income per share | $0.67 | $0.60 | $1.72 | $1.58 |
| Earnings (loss) per share | $0.47 | $(0.07) | $1.35 | $0.50 |
- Balance sheet and NAV: Total investments at fair value were $3,438.7, versus $3,506.2 at December 31, 2022. Net assets were $1,600.6, up from $1,502.4; NAV was unchanged at $14.61 per share. Cash was $76.6, versus $39.6.
- Debt and liquidity: Debt carrying value was $1,878.2, down from $2,012.7. The revolving facility had $670.9 of availability against $1,695.0 in committed capacity. Asset coverage was 185%, compared with 174% at year-end 2022; the company reported compliance with facility covenants.
- Cash flow, nine months: Operating activities provided $217.9, compared with $109.7 used in the prior-year period. Financing activities used $180.8; debt borrowings were $279.1 and repayments $416.0. Cash increased by $37.1 to $76.6.
- Distributions and equity: The company declared $0.45 per share each quarter, or $1.35 for the first nine months. A March follow-on offering generated $97.6 net proceeds; the ATM program ended August 1, 2023. No shares were repurchased during the period.
- Portfolio: Investments covered 137 portfolio companies, with 99.9% of performing debt at floating rates. Weighted-average portfolio yield was 11.6% at amortized cost and 12.7% at fair value, up from 11.0% and 12.1% at year-end. Portfolio-company weighted-average net debt/EBITDA was 5.9x and interest coverage was 1.5x.
Material changes versus comparable periods
- Q3 investment income rose 26% year over year, principally because higher base rates increased income on floating-rate loans. Payment-in-kind income also increased, from $5.3 to $9.3 in Q3, as more investments earned PIK.
- Higher funding costs partly offset income growth: Q3 interest and other debt expenses increased to $28.2 from $22.0, primarily due to rising rates on the revolving facility. Incentive fees were $6.2 for Q3, versus none in Q3 2022; nine-month incentive fees rose to $36.4 from $12.0 before waivers.
- Q3 realized and unrealized investment losses were $21.3, narrower than the $68.8 loss in Q3 2022. Nine-month realized losses were $44.4, mainly reflecting a $36.3 loss on the exit of National Spine and Pain Centers. Nine-month unrealized investment appreciation was $4.7, compared with $110.4 depreciation in 2022; the filing attributes improvement chiefly to reversals related to National Spine and Zep, partly offset by weakness in other holdings.
- Credit indicators weakened: non-accrual investments increased to 11 portfolio companies from eight at year-end 2022, representing 4.2% of investments at amortized cost and 2.3% at fair value, versus 2.1% and 0.3%. Grade 3 and 4 investments together rose to 9.0% of fair value from 2.9%, primarily due to borrower underperformance.
Outlook, risks, and unusual items
- The filing provides no earnings or investment guidance. Management notes that results depend on economic and market conditions, investment activity, portfolio-company performance, and financing costs; reported interim results are not necessarily indicative of full-year results.
- Almost all performing debt investments are floating rate, while revolving borrowings also bear floating rates. The company estimates a 100-basis-point rate increase would raise annual net income by $17.7, while a 100-basis-point decrease would lower it by $17.7, assuming no structural changes. Management also flags persistent inflation and potential pressure on portfolio-company margins.
- Portfolio credit risks include increased non-accruals, borrower financial underperformance, covenant-lite lending, and exposure to PIK income, which is accrued rather than received in cash. Fair value estimates involve significant judgment: $3,332.8 of investments were classified as Level 3 at quarter-end.
- Unfunded investment commitments totaled $364.5. Management stated it believed available financial resources were adequate to meet them. The filing reports no material current or threatened legal proceedings.
- After quarter-end, an October 18 amendment increased the revolving facility’s uncommitted accordion capacity from $2,250.0 to $2,542.5 and extended maturity to October 18, 2028 for lenders representing about 87% of commitments. The board declared another $0.45-per-share distribution for payment January 26, 2024. One additional portfolio company was placed on non-accrual after quarter-end; management said this did not meaningfully change the reported non-accrual percentages.
- The CFO’s planned departure and successors’ appointments take effect November 10, 2023; the filing says the resignation was not due to disagreement. Disclosure controls were judged effective as of September 30, 2023.
Important facts for investors to verify
- Review which borrowers drove the increase in non-accruals and Grade 3/4 exposures, including subsequent developments at portfolio companies.
- Assess how much investment income is PIK or otherwise non-cash, and compare income generation with distributions and cash available for commitments.
- Check the timing and terms for refinancing the $360.0 of 2025 Notes and the revolving facility, including the effect of floating borrowing costs and facility availability.
- Examine the valuation assumptions and sensitivity of the predominantly Level 3 portfolio, particularly positions with significant markdowns or non-accrual status.
- Confirm the ongoing sustainability and tax character of the $0.45 quarterly distribution, given RIC distribution requirements, excise taxes, and the possibility of return of capital.