Goldman Sachs BDC, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Comparisons are to the corresponding 2021 periods; balance-sheet comparisons are to December 31, 2021. Amounts are in USD unless noted.
Business context
Goldman Sachs BDC is a business development company focused on lending to U.S. middle-market businesses, primarily through secured debt, with select equity investments. At quarter-end, the portfolio included 133 companies and investments with a fair value of $3.62 billion. Nearly all performing debt investments were floating-rate.
Financial performance and condition
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Investment income | $95.2m | $96.7m | $251.0m | $263.2m |
| Net investment income after tax | $61.2m | $64.3m | $161.0m | $180.1m |
| Net realized and unrealized gains (losses) | $(68.8)m | $(26.2)m | $(109.6)m | $(26.3)m |
| Net increase (decrease) in net assets from operations | $(7.5)m | $38.0m | $51.3m | $153.5m |
| NII per share | $0.60 | $0.63 | $1.58 | $1.77 |
| Earnings (loss) per share | $(0.07) | $0.37 | $0.50 | $1.51 |
- NAV and portfolio: Net assets were $1.544bn and NAV was $15.02 per share at September 30, down from $1.614bn and $15.86 at year-end 2021. Portfolio fair value was $3.618bn, versus $3.478bn at year-end; cost was $3.758bn, above fair value.
- Cash flow: For the first nine months, operating activities used $109.7m, compared with $297.2m provided in 2021. Financing activities provided $108.6m, including $232.6m net additional debt borrowings, and period-end cash was $32.7m.
- Debt and liquidity: Debt carrying value was $2.097bn, versus $1.861bn at year-end; the $155m convertible notes matured and were repaid in April using revolver proceeds. The revolving facility had $449.3m available under its $1.695bn committed capacity. Asset coverage was 173%, compared with 186% at year-end; the company reported compliance with facility covenants.
- Commitments and distributions: Unfunded investment commitments were $435.9m. The company reported adequate resources to meet them. Distributions were $0.45 per share each quarter, or $1.35 for the first nine months; a further $0.45 distribution was declared for payment in January 2023.
- Portfolio yields and credit: Total portfolio weighted-average yield was 9.9% at cost and 10.6% at fair value, up from 7.9% and 8.0% at year-end 2021. Weighted-average borrower net debt/EBITDA was 6.0x and interest coverage was 1.8x, compared with 6.4x and 2.5x. Seven portfolio companies were on non-accrual, versus four at year-end; non-accrual investments were 1.4% of portfolio cost and 0.4% of fair value.
Material changes and unusual items
- Q3 investment income declined modestly, while net investment income after tax fell to $61.2m from $64.3m. For the nine-month period, interest income declined, primarily because lower repayment activity reduced accelerated fee and discount accretion; higher floating base rates partially offset the decline.
- Interest and other debt expenses rose to $22.0m in Q3 and $53.8m for nine months, from $14.4m and $44.0m, primarily reflecting higher borrowings and rates. The facility’s reported average borrowing rate for the nine-month period was 3.08%, versus 2.01% in 2021.
- Investment valuation losses drove the quarterly operating loss. Q3 unrealized depreciation on investments was $72.3m; management cited market volatility, wider credit spreads, and underperformance at Bolttech Mannings, National Spine and Pain Centers, and Wine.com. Bolttech alone had $18.7m of Q3 unrealized depreciation; its controlled-affiliate fair value was zero at quarter-end.
- For the nine months, unrealized depreciation was $110.4m. Management identified market volatility and credit-spread widening, plus underperformance at Bolttech, National Spine and Pain Centers, Wine.com, Zep, and Diligent, partly offset by reversal of depreciation on exited Convene loans.
- The new equity distribution agreements permit up to $200m of stock sales; the company issued 741,107 shares for $12.4m net during the nine months. A $75m share repurchase plan became active in September, but no shares had been repurchased by quarter-end.
- Most investments are privately held and valued using significant unobservable inputs. Level 3 assets totaled $3.477bn. NAV and reported investment values are therefore subject to estimation uncertainty.
Outlook, risks, and contingencies
The filing provides no quantified earnings or portfolio guidance. Management notes that higher rates have raised yields on floating-rate assets, but also increased borrowing costs and may pressure portfolio borrowers’ ability to service debt. The company’s sensitivity analysis estimates that a 100-basis-point rate increase would raise annual net income by $17.9m, assuming no changes in portfolio or borrowing structure; a 100-basis-point decrease would reduce it by the same amount.
Management highlights risks from inflation, recession, supply-chain disruption, COVID-19, Russia’s invasion of Ukraine, market volatility, refinancing and capital-market access, borrower defaults, illiquid investments, and subjective valuations. The company also notes that covenant-lite lending can limit lender protections and that conflicts may arise in allocating co-investments among affiliated accounts. No material legal proceedings were reported, and no indemnification claims were accrued.
Important facts for investors to verify
- Whether valuation declines and identified borrower underperformance persist, and how non-accrual exposure changes.
- Liquidity after considering $32.7m cash, $449.3m revolver availability, and $435.9m of unfunded commitments.
- Effects of higher rates on both portfolio-company credit quality and the company’s net interest income and debt costs.
- Debt capacity and asset coverage relative to the 150% statutory threshold, including the effect of further borrowing or portfolio losses.
- Distribution coverage, given nine-month NII of $1.58 per share against distributions of $1.35, and the potential for future changes in taxable income or distributions.
- Terms and potential dilution from future ATM issuance or repurchases, and the sensitivity of NAV to Level 3 valuation assumptions.