Business context and reporting period
Goldman Sachs BDC, Inc. (NYSE: GSBD) filed this Form 10-K for the fiscal year ended December 31, 2023. GSBD is an externally managed business development company and regulated investment company focused primarily on lending to U.S. middle-market companies. It seeks current income mainly through secured debt, with smaller allocations to unsecured debt and equity. All dollar amounts below are U.S. dollars.
Key financial metrics
| Metric | FY 2023 / Dec. 31, 2023 | FY 2022 / Dec. 31, 2022 |
|---|---|---|
| Investment income | $454.9 million | $357.5 million |
| Net expenses, after fee waivers | $202.8 million | $124.4 million |
| Net investment income after tax | $247.2 million; $2.28 per share | $228.6 million; $2.24 per share |
| Net realized investment gain (loss) | $(71.8) million | $(19.0) million |
| Net change in unrealized investment appreciation (depreciation) | $25.4 million | $(155.5) million |
| Net increase in net assets from operations | $195.9 million; $1.81 per share | $55.0 million; $0.54 per share |
| Operating cash flow | $300.7 million | $27.4 million |
| Net assets / NAV per share | $1.602 billion / $14.62 | $1.502 billion / $14.61 |
| Investment portfolio, fair value | $3.414 billion | $3.506 billion |
| Debt, carrying value | $1.827 billion | $2.013 billion |
| Cash / undrawn revolving facility capacity | $52.4 million / $724.1 million | $39.6 million / $548.7 million |
| Asset coverage ratio | 187% | 174% |
Portfolio yields at amortized cost and fair value were 11.8% and 13.2%, respectively, versus 11.0% and 12.1% a year earlier. Nearly all performing debt was floating-rate (99.9%). Portfolio-company weighted average net debt/EBITDA was 6.1x and interest coverage was 1.5x. GSBD declared distributions of $1.80 per share for 2023, or $0.45 each quarter.
Material changes versus the prior comparable period
- Investment income rose 27%, chiefly as higher base rates lifted interest income on floating-rate loans; PIK income also increased, from $21.2 million to $33.9 million.
- Net expenses rose 63%. Interest and other debt expenses increased to $111.3 million from $79.5 million, and incentive fees increased to $49.4 million from $12.0 million. The average borrowing rate rose to 5.31% from 3.55%.
- Operating results improved from 2022, when substantial unrealized depreciation weighed on results. In 2023, unrealized appreciation was $25.4 million, but realized investment losses widened to $71.8 million, including losses on National Spine and Pain Centers and Bolttech Mannings.
- Credit indicators weakened: non-accrual investments increased to 3.8% of portfolio cost from 2.1%; investments rated Grade 3 or 4 increased to 10.4% of fair value from 2.9%. Management attributed downgrades primarily to financial underperformance.
- New investment commitments declined to $423.1 million from $752.2 million, while repayments and sale proceeds were $519.2 million. The portfolio’s fair value declined despite growth in the number of portfolio companies, from 134 to 144.
- Reported NAV per share was nearly unchanged. Total return based on NAV was 13.35% in 2023 versus 2.80% in 2022; market-value total return was 20.95% versus (20.09)%.
Outlook, commentary, risks and unusual items
- The filing gives no specific earnings, yield, investment, or distribution guidance. Management said future distributions are subject to Board discretion and available funds. After year-end, the Board declared a $0.45-per-share distribution payable April 26, 2024.
- Management cited elevated rates and inflation, recession risk, borrower credit deterioration, market volatility, and financing access as relevant risks. Higher rates supported income in 2023 but also raised borrowing costs and borrower debt-service burdens. A 100-basis-point rate increase was estimated to raise annual net income by $17.8 million, assuming the investment and borrowing structure stayed unchanged; a 100-basis-point decrease was estimated to reduce it by the same amount.
- PIK income rose to $33.9 million. PIK and original issue discount can be recognized as income before cash is received, creating collection, distribution, and RIC-tax qualification risks.
- Valuations merit attention: $3.344 billion of investments were Level 3 at year-end, and the auditor identified valuation of certain Level 3 debt investments as a critical audit matter. The auditor nevertheless issued an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective.
- Other material risks include leverage, illiquid investments, covenant-lite lending, concentrated sector exposure (software was 17.4% of portfolio fair value), and potential conflicts from the adviser’s management of other Goldman Sachs accounts and co-investment allocations. The 2025 Notes have $360 million principal due February 2025; the 2026 Notes have $500 million due January 2026.
- The filing’s cover page marks that the financial statements reflect a correction of an error; the mark for a restatement requiring an executive-compensation recovery analysis is not checked. The supplied filing text does not explain the correction, so its nature and effect should be verified in the full filing and related disclosures.
Most important facts for investors to verify
- Review the schedule and subsequent performance of Grade 3/4 and non-accrual investments, including the credit quality and recovery assumptions behind the reported fair values.
- Check the nature and financial-statement impact of the indicated error correction, and confirm whether any related prior-period disclosures were revised.
- Assess liquidity and refinancing plans for the 2025 Notes and 2026 Notes, including revolving-facility borrowing-base conditions, covenants, and available capacity.
- Compare cash earnings with reported net investment income, particularly the increased PIK component, and evaluate distribution coverage and RIC distribution requirements.
- Examine the Level 3 valuation assumptions, portfolio-company leverage and interest coverage, and industry concentrations; portfolio-company statistics are based on latest available, potentially adjusted figures and were not independently verified by GSBD.
- Review the effect of rising financing costs and incentive fees, and the potential for adviser conflicts or allocation differences among GSBD and affiliated accounts.