Business Context and Reporting Period
Company: Goldman Sachs BDC, Inc. (GSBD)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2017
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 secured debt (first lien, unitranche, second lien) and select equity investments. It operates a joint venture, the Senior Credit Fund, LLC, with the Regents of the University of California.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2017 | Nine Months Ended Sep 30, 2017 | As of Sep 30, 2017 |
|---|---|---|---|
| Total Investment Income | $34.41 million | $102.62 million | N/A |
| Net Investment Income (After Tax) | $18.95 million | $60.99 million | N/A |
| Net Increase in Net Assets from Operations | $18.11 million | $37.26 million | N/A |
| Net Realized Gain (Loss) | $(2.36) million | $(40.63) million | N/A |
| Net Unrealized Appreciation (Depreciation) | $1.52 million | $16.90 million | N/A |
| Total Assets | N/A | N/A | $1,207.69 million |
| Total Debt (Carrying Value) | N/A | N/A | $443.81 million |
| Net Assets | N/A | N/A | $731.16 million |
| Net Asset Value (NAV) per Share | N/A | N/A | $18.23 |
| Weighted Average Shares Outstanding | 40.11 million | 38.13 million | N/A |
| Distributions Declared per Share | $0.45 | $1.35 | N/A |
| Asset Coverage Ratio | N/A | N/A | 2.63 to 1 |
Material Changes vs. Prior Period
- Investment Income: Total investment income increased slightly for the three months ended September 30, 2017 ($34.41 million) compared to the same period in 2016 ($33.95 million), driven by a significant increase in Payment-in-Kind (PIK) income ($1.89 million vs. $0.05 million). For the nine-month period, income rose to $102.62 million from $94.61 million.
- Expenses: Total expenses increased to $15.08 million for the quarter (from $14.98 million) and $40.51 million for the nine months (from $35.80 million). The increase in debt expenses was primarily due to the issuance of $115 million in Convertible Notes in October 2016.
- Realized Losses: The Company reported a net realized loss of $40.63 million for the nine months ended September 30, 2017, compared to $21.99 million in the prior year. This was driven by a $14.40 million loss on an exchange of debt for equity in Iracore International Holdings, Inc., and a $23.71 million loss on the full exit of Washington Inventory Service.
- Portfolio Composition: The portfolio grew to 51 companies from 40 in the prior year. The weighted average yield on the portfolio decreased slightly to 11.1% (at fair value) from 11.8% at year-end 2016, largely due to placing a unitranche investment on non-accrual status.
- Capital Activity: In May 2017, the Company completed a follow-on offering, issuing 3.74 million shares and raising approximately $80.3 million in net proceeds.
Guidance, Outlook, and Risks
- Outlook: Management continues to focus on originating secured debt to middle-market companies. The Company maintains a quarterly distribution of $0.45 per share, with the next payment scheduled for January 16, 2018.
- Senior Credit Fund: The investment period for the Senior Credit Fund joint venture was extended from November 1, 2017, to January 2, 2018.
- Non-Accrual Status: As of September 30, 2017, two investments were on non-accrual status, representing 3.4% of total investments at amortized cost. This includes Bolttech Mannings, Inc., which was downgraded to Grade 4 due to declining financial performance.
- Key Risks:
- Interest Rate Risk: Approximately 96% of performing debt bears floating interest rates. A 100 basis point increase in rates would increase net income by approximately $6.00 million annually, while a decrease would reduce it by $1.26 million.
- Valuation Risk: The majority of investments are Level 3 assets, requiring significant management judgment and unobservable inputs for fair value determination.
- Liquidity: The Company relies on cash flows from operations, borrowings, and potential equity issuances to fund investments and distributions.
Investor Verification Checklist
- Realized Loss Drivers: Verify the specific terms and future outlook for the Iracore International Holdings, Inc. and Washington Inventory Service exits that drove the $40.63 million realized loss.
- Non-Accrual Exposure: Review the credit quality and recovery prospects of the two investments on non-accrual status (Bolttech Mannings, Inc. and Kawa Solar Holdings Limited).
- Debt Maturity Profile: Confirm the maturity dates of the Revolving Credit Facility (December 2021) and Convertible Notes (April 2022) and the Company's refinancing strategy.
- Senior Credit Fund Performance: Assess the performance and leverage metrics of the Senior Credit Fund, which represents a significant portion of the portfolio (approx. 8.1% at fair value).
- Dividend Sustainability: Analyze the ratio of Net Investment Income to distributions declared to ensure the $0.45 quarterly distribution remains sustainable given the recent realized losses.