Business Context and Reporting Period
Company: Goldman Sachs BDC, Inc. (GSBD)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 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 | Q1 2017 | Q1 2016 |
|---|---|---|
| Total Investment Income | $32.19 million | $31.34 million |
| Net Investment Income (After Tax) | $17.96 million | $21.21 million |
| Net Increase in Net Assets from Operations | $14.57 million | $5.40 million |
| Earnings Per Share (Basic & Diluted) | $0.40 | $0.15 |
| Net Asset Value (NAV) per Share | $18.26 | $18.31 (Dec 31, 2016) |
| Total Investments (Fair Value) | $1,164.04 million | $1,167.29 million (Dec 31, 2016) |
| Total Debt (Carrying Value) | $501.62 million | $498.15 million (Dec 31, 2016) |
| Cash and Cash Equivalents | $8.93 million | $4.57 million (Dec 31, 2016) |
| Asset Coverage Ratio | 2.31 to 1 | 2.32 to 1 (Dec 31, 2016) |
| Distribution Declared per Share | $0.45 | $0.45 |
Material Changes vs. Prior Period
- Net Investment Income: Decreased by approximately $3.25 million (15.3%) compared to Q1 2016. This decline was primarily driven by higher interest and debt expenses ($4.51 million vs. $3.03 million) due to the issuance of Convertible Notes in October 2016, and higher incentive fees ($3.73 million vs. $1.40 million).
- Unrealized Gains/Losses: Net unrealized depreciation was $3.22 million in Q1 2017, a significant improvement compared to $15.81 million in Q1 2016. The prior year included a large unrealized loss on Hunter Defense Technologies, Inc.
- Portfolio Composition: The portfolio grew slightly in terms of new commitments ($112.56 million) but saw significant repayments ($110.30 million), resulting in a net portfolio increase of $2.26 million. The number of portfolio companies increased from 40 to 43.
- Debt Structure: The Company utilized its Revolving Credit Facility and issued $115 million in Convertible Notes. Outstanding debt increased slightly, but the asset coverage ratio remained stable above the 2:1 regulatory requirement.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management continues to focus on generating current income through direct originations of secured debt. The Company maintains a dividend reinvestment plan and intends to distribute substantially all taxable income.
- Unusual Items / Subsequent Events:
- Iracore Restructuring: In April 2017, the Company exchanged first lien debt in Iracore International Holdings, Inc. (cost basis $21.40 million, fair value $7.00 million) for non-income producing common equity. This resulted in a realized loss of $14.40 million. The investment was subsequently taken off non-accrual status.
- Senior Credit Fund Contributions: In April 2017, the Company and Cal Regents each contributed $3.35 million to the Senior Credit Fund.
- Risks:
- Interest Rate Risk: Approximately 96.1% of performing debt bears floating rates. A 100 basis point increase in rates would increase net income by approximately $5.30 million annually, while a decrease would reduce it.
- Non-Accrual Status: As of March 31, 2017, two investments were on non-accrual status, representing 3.8% of total investments at amortized cost.
- Valuation Uncertainty: The majority of investments are Level 3 assets, requiring significant management judgment and independent valuation.
Key Facts for Investor Verification
- Realized Loss on Iracore: Verify the impact of the $14.40 million realized loss on the Iracore debt-for-equity swap announced in April 2017 on future earnings and NAV.
- Debt Maturities: Review the maturity profile of the Revolving Credit Facility (due Dec 2021) and Convertible Notes (due April 2022) to assess refinancing risks.
- Non-Accrual Portfolio: Monitor the performance of the two investments currently on non-accrual status (Iracore and Washington Inventory Service) and the likelihood of recovery.
- Expense Ratios: Note the increase in the ratio of net expenses to average net assets to 8.61% (annualized) in Q1 2017 compared to 5.83% in Q1 2016, driven by debt costs and incentive fees.
- Senior Credit Fund Performance: Review the specific performance of the Senior Credit Fund, which contributed significantly to dividend income ($2.45 million in Q1 2017).