Goldman Sachs BDC, Inc. — Q1 2023 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022. Goldman Sachs BDC is a business development company (BDC) that primarily originates secured loans to middle-market companies, with a smaller allocation to equity investments. Its investment objective is current income and, to a lesser extent, capital appreciation.
Key financial and portfolio metrics
| Metric | Q1 2023 / March 31, 2023 | Comparable / prior date |
|---|---|---|
| Total investment income | $107.4 million | $78.3 million in Q1 2022 |
| Net investment income after taxes | $48.0 million; $0.46 per weighted-average share | $50.2 million; $0.49 per share in Q1 2022 |
| Net increase in net assets from operations | $28.1 million; $0.27 per share | $40.2 million; $0.39 per share in Q1 2022 |
| Total investments, at fair value | $3.515 billion | $3.506 billion at December 31, 2022 |
| Net assets / NAV per share | $1.580 billion / $14.44 | $1.502 billion / $14.61 at December 31, 2022 |
| Cash / debt carrying value | $47.2 million / $1.935 billion | $39.6 million / $2.013 billion at December 31, 2022 |
| Operating cash flow | $32.3 million | $39.3 million in Q1 2022 |
| Quarterly distribution | $0.45 per share declared | $0.45 per share in Q1 2022 |
Total investment income rose about 37% year over year, largely as higher base rates on floating-rate loans and portfolio growth lifted interest income. Net investment income after taxes fell about 4%, as higher borrowing costs and incentive fees more than offset income growth. Net operating results declined year over year, including a $36.3 million realized loss on the exit of National Spine and Pain Centers; unrealized investment appreciation of $18.2 million partly offset losses.
Interest and other debt expenses were $27.3 million, versus $15.7 million in Q1 2022; incentive fees were $22.3 million, versus $8.2 million. The adviser waived $2.0 million of incentive fees, compared with $7.5 million a year earlier. Operating cash flow exceeded distributions paid of $44.6 million, while the quarter-end distribution payable was $49.3 million.
Material changes and portfolio condition
- The company issued 6.5 million shares in a March follow-on offering at $15.09 per share to the underwriters, receiving $97.6 million net of offering and underwriting costs. Shares outstanding rose to 109.5 million from 102.9 million at year-end.
- Portfolio fair value increased modestly, while amortized cost declined to $3.682 billion from $3.691 billion. New investment commitments at cost were $2.1 million and repayments or sales totaled $12.6 million, a net portfolio decrease of $10.5 million.
- Weighted-average portfolio yield increased to 11.6% at amortized cost and 12.8% at fair value, from 11.0% and 12.1%, respectively, at year-end. Management attributed the increase primarily to rising rates, market volatility and wider credit spreads.
- Of performing debt investments, 99.7% bore floating rates. Portfolio-company weighted-average net debt to EBITDA was 6.0x and interest coverage was 1.6x. The portfolio comprised 133 companies; software, healthcare and diversified financial services were among the largest industry exposures.
- Eight portfolio companies had investments on non-accrual, representing 1.6% of investments at amortized cost and 0.6% at fair value. Unfunded commitments totaled $325.2 million, down from $371.0 million at year-end; management said it believed resources were adequate to meet them.
Debt, liquidity, outlook and risks
Debt carrying value was $1.935 billion, with $612.0 million available under the $1.695 billion committed revolving credit facility. The facility also has an uncommitted accordion feature. Asset coverage was 181%, compared with 174% at year-end; the company reported compliance with its credit facility covenants. The revolving facility matures in May 2027, while $360 million of 3.75% notes mature in 2025 and $500 million of 2.875% notes mature in 2026.
Borrowing costs are exposed to floating rates: the weighted-average rate on aggregate borrowings was 5.09% in Q1 2023, compared with 3.55% for 2022. The filing’s sensitivity analysis estimates that a 100-basis-point increase in base rates would raise annual net income by $18.6 million, while a 100-basis-point decrease would reduce it by the same amount, assuming no change in the investment or borrowing structure. This is a scenario, not guidance.
No specific earnings or portfolio guidance is provided. Management highlighted market volatility, widening credit spreads, inflation and recession risk, and the effect of rising rates on portfolio companies. A newly cited risk is dependence on bank relationships amid strain in the banking system. Other disclosed risks include portfolio-company underperformance, illiquid investments and fair-value estimation uncertainty, leverage and funding access, foreign currency exposure, and the potential impact of PIK income, which is accrued rather than received in cash. The quarter included a $36.3 million realized loss on National Spine and Pain Centers; its exit also drove a reversal of unrealized depreciation. The company reported no material legal proceedings. The stock repurchase plan was suspended in connection with the March offering and remained suspended as of May 4, 2023.
Subsequent to quarter-end, the board declared a $0.45-per-share distribution payable July 27, 2023 to holders of record June 30, 2023. The company cautions that quarterly results are not necessarily indicative of future results and provides no assurance of future distributions.
Most important facts for investors to verify
- Whether interest income growth can continue to exceed higher funding costs and incentive fees, supporting net investment income and the distribution.
- Trends in non-accrual loans, credit grades and portfolio-company leverage and interest coverage, especially given the 6.0x portfolio weighted-average net debt to EBITDA.
- Whether portfolio fair values and reported unrealized gains are supported by borrower performance and eventual recoveries; most investments rely on significant unobservable valuation inputs.
- Liquidity and leverage headroom after considering $325.2 million of unfunded commitments, $47.2 million of cash, debt maturities and the 181% asset coverage ratio.
- The effect of the March equity issuance on per-share NAV and returns, and the tax character and sustainability of future distributions.