Golub Capital BDC, Inc.

Welcome to GBDC's June 30, 2020 quarterly earnings conference call. Before we begin, I would like to take a moment to remind our listeners that remarks made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation and Reform Act of 1995. Other than statements of historical facts, may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in GBDC's filings with the SEC. For materials the company intends to refer to on today's earnings conference call, Please visit the investor resources tab on the homepage of the company's website, www.golubcapitalbdc.com, and click on the events slash presentations link. GBDC's earnings release is also available on the company's website in the investor resources section. As a reminder, this call has been recorded for replay purposes. I will now turn the call over to David Golub, Chief Executive Officer of Golub Capital BDC.

Thank you, Ingrid. Hello, everybody, and thanks for joining us. I'm joined virtually today by Ross Tooney, our Chief Financial Officer, and Greg Robbins and John Simmons, both Managing Directors at Golub Capital. We and the rest of the Golub Capital team hope that you and your loved ones are all safe in these challenging times. This morning, we issued our earnings press release for the quarter ended June 30th, and we posted an earnings presentation on our website. We'll be referring to that presentation throughout today's call. Let me start with two headlines. The first headline is that GBDC's results for fiscal Q3 were consistent with the estimates we filed on July 15th. Adjusted net investment income per share was 28 cents, adjusted EPS was 94 cents, and NAV per share was $14.05. The second headline is that our fiscal Q3 results were strong. The portfolio generated solid adjusted net investment income, and demonstrated strong, resilient credit results, including the reversal of a meaningful portion of the unrealized losses that depressed performance in fiscal Q2. I'm going to start by reviewing key performance drivers for fiscal Q3, and then I'm going to go through GBDC's results for the quarter in detail with a lot of help from my colleagues on the phone. After that, we'll take your questions. On slide six, we've outlined three themes beyond good underwriting that we believe drove GBDC's strong fiscal third quarter. First, the U.S. economy began reopening sooner than expected. Second, GBDC's portfolio companies generally performed better than expected, especially the ones in COVID-impacted subsectors. And third, our private equity sponsors have generally stepped up to support their portfolio companies. Let me elaborate on each of these three. Thank you for joining us. But we believe the earlier reopening gave a substantial boost to many borrowers in GBDC's portfolio. Second theme, within GBDC's portfolio in general, borrowers perform better than expected, especially those in COVID impacted subsectors. You'll recall from our fiscal second quarter earnings presentation that we focused on five industry subsectors where we saw more risk of COVID impact. restaurants, dental care, eye care, fitness franchises, and retail. In fiscal Q3, we're encouraged to see that many of GBDC's obligors in these industry subsectors perform better than expected. In general, most of GBDC's restaurant and retail obligors found ways to stay open, to cut costs, to pivot, to emphasize takeout, delivery, curbside, or Internet-based models. Some of the obligors in these industry subsectors actually posted same-store sales gains during the quarter. And our dental and eye care obligors, who were closed for a period of time, have also in general opened stronger and better than we expected. Third theme, our private equity sponsors are generally stepping up to support their portfolio companies. We worried in March and April at the beginning of COVID that sponsors would have so many problem children that they wouldn't have Thank you for joining us. On the right-hand side of slide six, we've highlighted four impacts on GBDC that we'll discuss further over the course of today's presentation. Let's start with the first of those impacts, improved internal performance ratings for the GBDC portfolio as a whole. Please turn to slide seven. You'll recall we highlighted in last quarter's earnings presentation the downward migration in our internal performance ratings from categories four and five. Those are loans that are performing at or better than expectations at underwriting. to Category 3, which are loans that are performing or expected to perform below expectations. Category 3 increased from 7.2% of the portfolio at fair value at December 31 to 26.5% of the portfolio at March 31. The percentage of the portfolio performing materially below expectations in Categories 1 and 2 was essentially unchanged in the March 31 quarter. In the quarter ended June 30th, Consistent with borrowers performing better than our expectations, we saw improved performance ratings. Specifically, we saw loans in Categories 4 and 5 increase from 71.5% of the portfolio at fair value at March 31 to 76% of the portfolio at June 30. Category 3 loans went down from 26.5% of the portfolio at March 31 to 22.3% of the portfolio at June 30. Even better, the percentage of the portfolio in categories 1 and 2, those are loans performing materially below expectations, decreased. While the improvement in risk ratings is encouraging, I don't want to gloss over the fact that the proportion of the portfolio rated 3 is still higher than the range we typically saw pre-COVID. But I want to put that difference in context. Given today's unusually uncertain environment, we're quick to downgrade loans to category 3. When a loan migrates to Category 3, it automatically triggers an increased level of scrutiny and oversight. Our approach is designed to take full advantage of the breadth and depth of resources of the Golub Capital platform. Category 3 doesn't mean defaults or losses are necessarily going to occur, case in point being the material subset of GBDC's loans rated 3 in the March 31 quarter that migrated this quarter up to Categories 4 and 5. We've always believed that early identification of problems or potential problems leads to better outcomes down the road. Let's continue our discussion of how the key themes we highlighted earlier impacted GBDC's fiscal Q3 results. We mentioned that new non-accruals remained low. We'll come back to that point in our usual discussion of GBDC's financial results. But in brief, non-accruals as a percentage of total investments at fair value increased modestly to 2%. Net realized losses also remain low, and we saw a reversal in net unrealized losses. You can see both the low net realized losses and the high unrealized gains in the NAV bridge on slide eight. We start with March 31 NAV per share of 1349. That's pro forma for the dilution from the rights offering. From there, we add adjusted NII of 28 cents per share. We deduct our dividend of 29 cents per share, and you can see in the next column that Realized credit losses during the quarter were very low at 3 cents per share. The big driver of the improvement in NAP per share was net unrealized gains. Net unrealized gains of 74 cents per share in fiscal Q3 reversed a meaningful amount of the net unrealized loss in fiscal Q2. Now, we continue to see our job as being all about minimizing realized losses and generating more of these unrealized losses. I want to spend a little time on this call describing our approach for this task. And to do that, let me hand the microphone to Greg Robbins, who's going to offer us an update. Thank you, David.

Let's start by reviewing GBDC's strategic response to COVID-19 on slide 10. Last time, we talked about three key goals GBDC has pursued while navigating the COVID-19 crisis. First, proactively managing its highly diversified Thank you for joining us. Slide 11 shows the overall composition of GBDC's portfolio as of June 30th. The data on the left shows that GBDC's portfolio remains large, diversified, granular, and focused at the top of the capital structure. The portfolio has over 250 investments with an average investment size of less than 40 basis points of the portfolio at fair value. On the right, you can see that GBDC's portfolio was designed to be resilient. We've focused since inception on lending to companies we believe will retain value, even in a downside recession scenario. In most cases, these borrowers are also COVID-19 resistant. Over 80% of the portfolio on June 30th consisted of investments in industries we believe are relatively insulated from COVID-19, areas like enterprise software, business services, financial services, and more. By the same token, less than 1% of the portfolio consisted of investments in sectors we know have been particularly hard hit by COVID-19, like airlines, entertainment, hotels, energy, and others. Most of our proactive portfolio management has focused on the roughly 20% of the portfolio in industry subsectors we identified as less insulated from COVID-19. Turning to slide 12, you will recall that we described a three-part strategy for proactive portfolio management. First, gather information. Second, develop strategic plans. And third, execute those strategic plans. Over the period since March, we first gathered information and dealt with our most impacted borrowers. We're now in phase three of our strategy, and we are implementing game plans for each borrower working with sponsors, management teams, and junior capital lenders. This strategy has also and already produced meaningful results. Our team has executed more than 50 credit-enhancing amendments. We define credit-enhancing as any amendment involving a pricing increase, improved documentation terms, or an incremental equity infusion by the sponsor. Our proactive engagement with sponsors and their encouraging degree of support for their portfolio companies meant that we had only one default on principal and interest payments in the quarter. Slide 13 provides two illustrative examples of the types of credit enhancing activities we've completed and expect to complete in the coming months. Slide 14 shows how GBDC has fortified its balance sheet. On June 30th, GAAP leverage was 0.86 times which is at the low end of our target range, regulatory leverage was less than 0.75 times. GBDC had $435 million of liquidity in the form of cash and borrowing capacity at quarter end. GBDC also took steps to optimize its debt capital structure. We amended the Morgan Stanley Credit Facility in late June to increase long-term borrowing capacity from $200 million to $400 million. We also fully repaid and terminated the two SLF credit facilities with Wells Fargo that were in wind down. And finally, we priced a new low-cost $300 million CLO last week. As a result of these initiatives, GBDC has substantial flexibility in firepower. This flexibility in firepower puts GBDC in a great position to capitalize on attractive opportunities. As illustrated on slide 15, Leverage levels decreased dramatically after the global financial crisis, and Golub Capital was able to capitalize significantly on those opportunities. We believe recent market events will likely lead to a sustained lender-friendly environment, much like we saw from the last recession. Lower leverage, higher spreads, improved covenants, and enhanced downside protection are components of what we expect to see come out of the current market environment. and as we've discussed in prior quarters and illustrated on slide 16, we believe GBDC has powerful competitive advantages, which will help us deliver premium shareholder returns going forward. So with that, let me hand it over to John Simmons to go through our financial results for the quarter ended June 30th and more detail. John?