Goldman Sachs BDC, Inc. 2016 Annual Report (10-K) Summary
Business Context and Reporting Period
Company: Goldman Sachs BDC, Inc. (GSBD)
Reporting Period: Fiscal year ended December 31, 2016
Business Model: A closed-end management investment company regulated as a Business Development Company (BDC) and taxed as a Regulated Investment Company (RIC). The Company focuses on lending to U.S. middle-market companies, primarily through direct originations of secured debt (first lien, unitranche, second lien) and select equity investments. It is advised by Goldman Sachs Asset Management, L.P. (GSAM).
Key Financial Metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Total Investment Income | $125.11 million | $118.44 million |
| Net Investment Income (after tax) | $76.23 million | $74.58 million |
| Net Realized Gain (Loss) | ($21.99 million) | ($0.07 million) |
| Net Unrealized Appreciation (Depreciation) | ($13.58 million) | ($27.88 million) |
| Net Increase in Net Assets from Operations | $40.65 million | $46.63 million |
| Net Asset Value (NAV) per Share | $18.31 | $18.97 |
| Total Portfolio (Fair Value) | $1,167.29 million | $1,081.06 million |
| Total Debt (Net) | $498.15 million | $419.00 million |
| Asset Coverage Ratio | 2.32 to 1 | 2.64 to 1 |
| Weighted Average Portfolio Yield (Fair Value) | 11.8% | 11.7% |
| Distributions Declared per Share | $1.80 | $1.80 |
Material Changes vs. Prior Period
- Portfolio Growth: Total investments at fair value increased by approximately 8% to $1.17 billion, driven by net new investment commitments of $317.05 million.
- Realized Losses: The Company reported a net realized loss of $21.99 million, primarily due to a $22.12 million loss on the restructuring of Hunter Defense Technologies, Inc., where second lien debt was converted to non-interest bearing equity.
- Expense Increases: Total expenses rose to $47.85 million from $43.34 million. Interest and debt expense increased to $14.30 million due to higher average borrowings ($464.44 million vs. $358.44 million). Management fees increased to $17.01 million due to higher gross assets.
- Non-Accrual Status: As of December 31, 2016, 3.8% of the portfolio (at amortized cost) was on non-accrual status, compared to 0% in 2015. This includes investments in Iracore International Holdings, Inc. and Washington Inventory Service.
- Convertible Notes: In October 2016, the Company issued $115.00 million of 4.50% Convertible Notes due 2022, using proceeds to pay down the Revolving Credit Facility.
Guidance, Outlook, and Risks
Management Commentary: Management continues to focus on originating secured debt to middle-market companies. The portfolio yield remains stable at 11.8% (fair value). The Company maintains a strong asset coverage ratio of 2.32 to 1, well above the regulatory minimum of 2.0 to 1.
Risks and Contingencies:
- Interest Rate Risk: Approximately 92.8% of performing debt bears floating rates. Rising rates increase interest income but also increase borrowing costs on the Revolving Credit Facility.
- Concentration Risk: The portfolio is concentrated in specific industries, with Software and Internet Software & Services representing 18.1% of the portfolio at fair value.
- Valuation Risk: The majority of investments are Level 3 assets (unobservable inputs), requiring significant management judgment and independent valuation.
- Regulatory Risk: The Company must maintain RIC status by distributing at least 90% of taxable income annually. Failure to do so would result in corporate-level taxation.
Key Facts for Investor Verification
- Realized Loss Driver: Verify the specific terms and impact of the Hunter Defense Technologies restructuring, which accounted for the vast majority of the year's realized losses.
- Non-Accrual Exposure: Review the specific details of the two investments placed on non-accrual status (Iracore and Washington Inventory Service) and the Company's recovery strategy.
- Debt Structure: Confirm the terms of the new $115 million Convertible Notes and the remaining capacity under the $605 million Revolving Credit Facility.
- Senior Credit Fund: Assess the performance of the joint venture with Cal Regents, which represents 6.7% of the portfolio and contributed significantly to dividend income.
- Dividend Sustainability: Compare the $1.80 per share distribution against the $2.10 per share net investment income to evaluate the coverage ratio and potential for future distribution growth.