Golub Capital BDC, Inc.

Welcome to GBDC's September 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 Reform Act of 1995. Statements other than statements of historical facts made during this call 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 or Presentations link. GBDC's earnings release is also available on the company's website in the Investor Resources section. As a reminder, this call is being recorded for replay purposes. I will now turn the call over to David Golub, Chief Executive Officer at Golub Capital BDC. Please go ahead.

Thanks, Alicia. Hello, everybody, and thanks for joining us today. I'm joined by Russ Tooney, our CFO, 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 family are safe and that, like us, you're all recovering from eating too much over Thanksgiving. Yesterday afternoon, we issued our earnings press release for the quarter and fiscal year ended September 30th, and we posted an earnings presentation on our website, We're going to refer to that presentation throughout the call today. For those of you who are new to GBDC, our investment strategy is and since inception has been to focus on providing first lien senior secured loans to healthy, resilient middle market companies that are backed by strong partnership oriented private equity sponsors. Let me start today's meeting by sharing with you two headlines. The first headline is that GBDC's results for fiscal Q4 were strong and were in line with the preliminary estimates that we filed on October 19th. The primary driver of the results was the continuation of trends that we described on last quarter's earnings call, and I'll discuss those trends in a minute. The second headline is that GBDC is very well positioned as we head into fiscal 2021 with Ample Dry Powder, Liquidity, and Flexibility to capitalize on what we expect will be an attractive investment environment in fiscal 2021. I'll discuss this in more detail in my closing remarks, and after that, we'll take your questions. Let's now take a closer look at GBDC's results for the quarter and for the fiscal year and the key drivers of those results. Please turn to slide four. For fiscal Q4, GBDC's adjusted net investment income per share was $0.28. Adjusted EPS was $0.57 and ending NAV per share was $14.33. All of these were at the midpoint as we published previously. I said that the primary driver of these results was the continuation of trends that we talked about last quarter. What do I mean by that? Slide 6 outlines three key themes beyond just simple good underwriting that we believe drove GBDC's strong fiscal fourth quarter. First, in calendar Q3, the U.S. economy strongly rebounded from The story of this quarter was largely a continuation of the story of the prior quarter. and just like fiscal Q3, these themes are reflected in the positive credit quality trends listed on the right-hand side of the slide. Let's take a closer look at each of the indicators on that slide, starting with performance ratings. Please turn to slide seven. In fiscal Q4, internal performance ratings continue to improve. Let me start with some context. You'll recall we highlighted in last quarter's earnings presentation The upward migration in internal performance ratings in fiscal Q3. There was an increase in loans in categories 4 and 5. Those are loans that are performing at or better than expectations at underwriting. And there was a decrease in category 3 loans. Those are loans that are performing or are expected to perform below expectations. The percentage of the portfolio performing materially below expectations, those that are in categories 1 and 2, also declined significantly between fiscal Q2 and fiscal Q3. All of these positive trends continued in fiscal Q4. In fiscal Q4, loans in categories four and five continued to increase. They went from 76% of the portfolio as of 630 to 78.9% of the portfolio at 930. Category three loans continued to decrease. They went from 22.3% at 630 to 19.7% at 930. and Category 1 and 2 loans also declined quarter over quarter from 1.7% to 1.4%. The very small proportion of the portfolio that's in Categories 1 and 2, I think that's particularly important because it indicates that even in this COVID-stressed environment, significant credit impairment in the portfolio remains rare and idiosyncratic. The proportion of the portfolio rated 3 is still higher than we typically saw pre-COVID But it's meaningfully improved from 331 and continues to go in the right direction. The second key indicator of improving credit quality is non-accruals. Non-accruals at fair value also declined. They went from 2% at June 30 to 1.7%. We'll come back to this point in our usual discussion of GBDC's financial results. Slide 8 shows two other key indicators of improving credit quality. Low Net Realized Losses and Solid Net Unrealized Gains. So this slide shows a bridge from GBDC's $14.05 NAV per share as of 6-30 to the 14-33 NAV per share as of 9-30. Let's just quickly walk through the bridge. Adjusted NII per share of $0.28 was in line with our dividend of $0.29 and consistent with prior quarter. Net realized losses were very low at $0.02 per share and net unrealized gains were $0.36 per share. These unrealized gains reflect a reversal of another portion of the unrealized losses that were created in the March quarter. You've heard me say before that our top priority since COVID has been and continues to be to minimize GBDC's permanent or realized credit losses. In the long run, unrealized gains and losses wash out all that matters for Lenders like us who tend to hold their loans to maturity is whether or not those loans get repaid. So we're pleased to report that in fiscal Q4, GBDC kept realized credit losses low and enjoyed another meaningful reversal of unrealized losses. With that, let me hand the call over to Greg Robbins. He's gonna offer an update on our strategic response to COVID-19. Thank you, David.

Starting on slide 10, You can see that GBDC continues to execute on its three key goals for navigating the COVID-19 crisis. First, proactive management of our highly diversified first lien senior secured investment portfolio. Second, continued optimization of our balance sheet. And third, capitalizing on attractive new investment opportunities. Turning to slide 11, you'll recall that we described a three-phase strategy for proactively managing our portfolio during COVID-19. That entailed gathering information, developing strategic plans, and executing those strategic plans. We're now in phase three of our strategy, and we have been implementing game plans for each affected borrower, working collaboratively with sponsors, management teams, and junior capital lenders. This strategy has produced meaningful results. Our team has executed more than 90 credit enhancing amendments. We define a credit enhancing amendment as one involving a spread increase, improved documentation terms, or an incremental equity infusion. We have talked at length about the strong sponsor support for our portfolio companies. Let me describe one flavor of this. Since COVID began, sponsors have put in over $700 million of new equity