Goldman Sachs BDC, Inc. 2019 10-K Summary
Business Context and Reporting Period
Company: Goldman Sachs BDC, Inc. (GSBD)
Reporting Period: Fiscal year ended December 31, 2019
Business Model: 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, primarily through direct originations of secured debt (first lien, unitranche, second lien) and select equity investments.
Key Event: On December 9, 2019, the Company entered into a Merger Agreement to acquire Goldman Sachs Middle Market Lending Corp. (GS MMLC). The merger is subject to stockholder approval and other closing conditions.
Key Financial Metrics
| Metric | 2019 | 2018 |
|---|---|---|
| Total Investment Income | $147.26 million | $146.73 million |
| Net Investment Income (After Tax) | $79.72 million | $82.84 million |
| Net Realized Gain (Loss) | ($39.13 million) | $1.73 million |
| Net Unrealized Appreciation (Depreciation) | ($5.48 million) | ($30.76 million) |
| Net Increase in Net Assets from Operations | $36.15 million | $53.68 million |
| Total Assets | $1,475.28 million | $1,396.98 million |
| Total Investments (Fair Value) | $1,454.25 million | $1,375.44 million |
| Total Debt (Net) | $769.73 million | $659.10 million |
| Net Assets | $676.13 million | $709.89 million |
| Net Asset Value (NAV) per Share | $16.75 | $17.65 |
| Weighted Average Portfolio Yield (Fair Value) | 8.9% | 10.1% |
| Asset Coverage Ratio | 187% | 206% |
Material Changes vs. Prior Period
- Portfolio Composition: The portfolio grew to 106 companies (from 72 in 2018). First Lien/Senior Secured Debt increased to 74.3% of the portfolio (from 53.0%), while Second Lien debt decreased to 16.1% (from 28.5%). This shift was partly due to the liquidation of the Senior Credit Fund in May 2019, which resulted in the Company receiving its pro-rata share of senior secured loans.
- Yield Decline: The weighted average yield on the portfolio decreased from 10.1% to 8.9% (at fair value), primarily driven by lower LIBOR rates on variable-rate debt and the receipt of lower-yielding senior secured loans from the Senior Credit Fund liquidation.
- Realized Losses: The Company recorded a net realized loss of $39.13 million in 2019, compared to a gain of $1.73 million in 2018. Significant losses were driven by debt-to-equity exchanges in ASC Acquisition Holdings, LLC ($24.72 million loss) and Country Fresh Holdings, LLC ($8.41 million loss), and a full exit from NTS Communications, Inc. ($7.22 million loss).
- Expense Reduction: Management fees decreased to $14.70 million (from $15.97 million) due to a rate reduction from 1.50% to 1.00% effective June 2018. Incentive fees dropped to $9.22 million (from $13.99 million) due to net capital losses.
- Liquidity: Cash and cash equivalents increased to $9.41 million from $6.11 million.
Guidance, Outlook, and Risks
- Merger Outlook: The Company is pursuing a merger with GS MMLC. Upon completion, GS BDC stockholders will own approximately 45.1% of the combined entity. The merger is expected to generate cost savings and scale, though integration risks and potential dilution exist.
- Distributions: The Company declared quarterly distributions of $0.45 per share throughout 2019. In December 2019, the Board approved special distributions of $0.15 per share, payable in three installments starting in late 2020, subject to the merger closing.
- Interest Rate Risk: Approximately 99.4% of performing debt bears floating rates. A 100 basis point increase in interest rates is estimated to increase net income by $6.31 million, while a 100 basis point decrease would reduce net income by $4.37 million.
- Key Risks:
- Credit Risk: Investments are primarily in middle-market companies with below-investment-grade credit profiles. Non-accrual investments represented 2.0% of the portfolio at amortized cost.
- LIBOR Transition: The phase-out of LIBOR after 2021 may require renegotiation of credit agreements, potentially impacting yields.
- Merger Uncertainty: Failure to close the merger could result in significant expenses without realizing anticipated benefits.
- Leverage: The Company utilizes leverage to enhance returns, which magnifies both gains and losses. The asset coverage ratio was 187% at year-end.
Investor Verification Checklist
- Merger Approval: Verify the status of stockholder votes required to approve the merger with GS MMLC and the New Investment Management Agreement.
- Portfolio Quality: Review the specific details of the three portfolio companies on non-accrual status (representing 2.0% of amortized cost) and the impact of the debt-to-equity exchanges on future recovery potential.
- Yield Sustainability: Assess the impact of the declining LIBOR environment on future net investment income, given that 99.4% of the portfolio is floating-rate.
- Capital Structure: Confirm the terms of the $360 million 3.75% Notes due 2025 issued in February 2020 and the resulting leverage ratios post-issuance.
- Fee Waivers: Note that the Investment Adviser agreed to waive a portion of its incentive fee for five quarters following the merger to ensure a minimum net investment income per share of $0.48.