Business Context and Reporting Period
Company: Goldman Sachs BDC, Inc. (GSBD)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three and six months ended June 30, 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 secured debt (first lien, unitranche, second lien) and select equity investments.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2018 | Six Months Ended June 30, 2017 |
|---|---|---|
| Total Investment Income | $72.78 million | $68.21 million |
| Net Investment Income (After Taxes) | $38.90 million | $42.05 million |
| Net Increase in Net Assets from Operations | $35.92 million | $19.15 million |
| Net Realized Gain (Loss) | $1.78 million | $(38.28) million |
| Net Change in Unrealized Appreciation (Depreciation) | $(4.31) million | $15.38 million |
| Earnings Per Share (Basic & Diluted) | $0.89 | $0.52 |
| Net Asset Value (NAV) Per Share | $18.08 | $18.23 |
| Total Debt Outstanding | $508.00 million | $546.25 million |
| Asset Coverage Ratio | 243% | 233% |
| Cash and Cash Equivalents | $9.21 million | $37.49 million |
Material Changes vs. Prior Period
- Investment Income: Increased by $4.57 million (6.7%) year-over-year, driven primarily by higher LIBOR rates on variable-rate debt and an increase in total investments.
- Net Investment Income: Decreased by $3.15 million (7.5%) due to a significant rise in expenses, particularly incentive fees and interest costs.
- Expenses: Total expenses increased to $33.29 million from $25.43 million.
- Incentive Fees: Rose to $9.02 million from $4.97 million, attributed to an increase in the Incentive Fee Cap resulting from a decrease in net capital losses.
- Interest and Debt Expenses: Increased to $11.90 million from $9.35 million due to higher weighted average interest rates on the Revolving Credit Facility and increased average daily borrowings.
- Realized Gains/Losses: The Company recorded a net realized gain of $1.78 million, a significant improvement from the $38.28 million net realized loss in the prior year period. The prior year loss was driven by exits from Iracore International Holdings, Inc. and Washington Inventory Service.
- Unrealized Changes: The portfolio experienced a net unrealized depreciation of $4.31 million, compared to appreciation of $15.38 million in the prior year. This was primarily driven by unrealized depreciation in Conergy Asia Holdings, Ltd.
Guidance, Outlook, and Management Commentary
- Management Fee Reduction: Effective June 15, 2018, the Management Fee was reduced from 1.50% to 1.00% annually on average gross assets (excluding cash) following stockholder approval of modified asset coverage requirements.
- Leverage Capacity: Stockholders approved the application of reduced asset coverage requirements (150% instead of 200%) under the Investment Company Act, allowing for increased leverage capacity.
- Portfolio Yield: The weighted average yield on the total portfolio increased to 11.7% (at fair value) from 11.3% at year-end 2017, driven by rising LIBOR rates.
- Recent Developments:
- On July 2, 2018, the Company closed an offering of $40 million in additional 4.50% Convertible Notes due 2022, using proceeds to pay down the Revolving Credit Facility.
- On July 31, 2018, the Board declared a quarterly distribution of $0.45 per share.
- Risks: The Company faces risks related to interest rate fluctuations, as 96.1% of performing debt bears floating rates. A 100 basis point increase in rates would increase net income by approximately $5.89 million annually, while a decrease would reduce it by the same amount.
Key Facts for Investor Verification
- Asset Coverage Ratio: Verify the current ratio (243%) against the new regulatory minimum (150%) and the Revolving Credit Facility covenant (200%) to assess leverage flexibility.
- Non-Accrual Status: Confirm the status of the two investments on non-accrual (0.8% of total investments at amortized cost), specifically Kawa Solar Holdings Limited and Professional Physical Therapy.
- Convertible Notes: Review the terms of the $155 million aggregate principal amount of Convertible Notes (including the July 2018 issuance) and their impact on potential dilution.
- Unfunded Commitments: Note the $58.56 million in unfunded commitments as of June 30, 2018, which represents a significant increase from $30.23 million at year-end 2017.
- Senior Credit Fund: Verify the performance of the joint venture with Cal Regents, which holds $490.49 million in senior secured debt and had one investment on non-accrual status.