Business Context and Reporting Period
Company: Goldman Sachs BDC, Inc. (GSBD)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended December 31, 2018
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 through direct originations of secured debt (first lien, unitranche, second lien), unsecured debt, and select equity investments. It is advised by Goldman Sachs Asset Management, L.P. (GSAM).
Key Financial Metrics
| Metric | 2018 | 2017 |
|---|---|---|
| Total Investment Income | $146.73 million | $136.78 million |
| Net Investment Income (after tax) | $82.84 million | $79.99 million |
| Net Realized Gain (Loss) | $1.73 million | ($66.31 million) |
| Net Unrealized Appreciation (Depreciation) | ($30.76 million) | $35.87 million |
| Net Increase in Net Assets from Operations | $53.68 million | $49.55 million |
| Total Assets | $1,396.98 million | $1,298.59 million |
| Total Investments (Fair Value) | $1,375.44 million | $1,258.31 million |
| Total Debt (Net) | $659.10 million | $542.53 million |
| Net Assets | $709.89 million | $725.83 million |
| Net Asset Value (NAV) per Share | $17.65 | $18.09 |
| Weighted Average Portfolio Yield (Fair Value) | 10.1% | 11.3% |
| Asset Coverage Ratio | 206% | 233% |
Material Changes vs. Prior Period
- Portfolio Composition Shift: First Lien/Senior Secured Debt increased significantly to 53.0% of the portfolio (from 32.4% in 2017), while First Lien/Last-Out Unitranche decreased to 7.8% (from 21.8%). This shift contributed to a decline in the weighted average portfolio yield.
- Non-Accrual Status: Investments on non-accrual status rose to 8.3% of the portfolio at amortized cost ($119.01 million) from 0.1% in 2017. This was driven by investments totaling $88.63 million being placed on non-accrual, resulting in a net unrealized depreciation of $30.76 million for the year.
- Expense Fluctuations: Total net expenses increased to $62.31 million from $55.24 million. Interest and debt expenses rose to $26.23 million due to higher borrowing rates and increased average daily borrowings. Management fees decreased to $15.97 million following a rate reduction from 1.50% to 1.00% effective June 15, 2018.
- Realized Gains/Losses: The Company recorded a net realized gain of $1.73 million in 2018, a significant improvement from the $66.31 million net realized loss in 2017, which was driven by large write-downs on specific portfolio companies (Bolttech Mannings, Iracore, Washington Inventory Service).
Guidance, Outlook, and Risks
- Management Commentary: Management noted that the decrease in portfolio yield was primarily driven by changes in portfolio composition and the placement of certain investments on non-accrual. The Company continues to focus on generating current income through direct lending.
- Recent Developments (Post-Period):
- On February 20, 2019, the Board declared a quarterly distribution of $0.45 per share.
- A new stock repurchase plan was approved in February 2019, authorizing up to $25.00 million in repurchases.
- The Senior Credit Fund (a joint venture with Cal Regents) was authorized for liquidation and dissolution in February 2019.
- The Revolving Credit Facility was expanded to $795.00 million via a joinder agreement with MUFG Union Bank.
- Key Risks:
- Interest Rate Risk: Approximately 96.6% of performing debt bears floating rates. Rising rates increase borrowing costs but also investment income; however, floors on some loans may limit income growth relative to expense growth.
- Credit Risk: Investments in middle-market companies carry higher default risks. The increase in non-accrual assets highlights exposure to portfolio company underperformance.
- Liquidity and Leverage: The Company relies on debt financing (Revolving Credit Facility and Convertible Notes). Asset coverage ratios must be maintained at 150% or higher.
- Conflicts of Interest: Potential conflicts exist regarding the allocation of investment opportunities between the Company and other funds managed by GSAM.
Investor Verification Checklist
- Non-Accrual Trends: Verify the specific portfolio companies placed on non-accrual status and the likelihood of recovery or further write-downs.
- Yield Compression: Assess the sustainability of the 10.1% portfolio yield given the shift toward lower-yielding first lien debt and the impact of rising interest rates on net investment income.
- Debt Covenants: Confirm continued compliance with the 150% asset coverage ratio and other covenants under the Revolving Credit Facility and Convertible Notes.
- Senior Credit Fund Liquidation: Monitor the progress of the Senior Credit Fund liquidation and the impact of asset transfers on the Company's balance sheet and asset coverage.
- Convertible Notes: Review the terms of the $155 million Convertible Notes (maturing 2022) and the potential for dilution upon conversion.