Golub Capital BDC, Inc.

Hello, everyone, and welcome to GBDC's March 31st, 2023 quarterly earnings call. Before we begin, I'd 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 SEC filings. For materials we intend to refer to on today's earnings call, please visit the Investor Resources tab on the homepage of our website, which is www.gollupcapitalbdc.com, and click on the Events Presentations link. Our earnings release is also available on our website in the Investor Resources section. As a reminder, this call is being recorded. With that, I'm pleased to turn the call over to David Golub, Chief Executive Officer of GBDC.

Hello, everybody, and thanks for joining us today. I'm joined by Chris Erickson, our Chief Financial Officer, and by Matt Benton, our Chief Operating Officer. For those of you who are new to GBDC, our investment strategy is 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. Yesterday, we issued our earnings press release for the quarter ended March 31, 2023, and we posted an earnings presentation on our website. We'll be referring to that presentation during the call today. I'm going to start as usual with headlines and a summary of performance for the quarter. Then I want to talk about our outlook. Good news, I'm going to be less long-winded than last quarter. Next, Matt and Chris will go through our financial results for the quarter in detail. And finally, I'm going to come back to make some closing remarks and take questions. Before we jump in, I also want to mention that we intend to publish another update to our equity investor presentation over the next couple of weeks. It'll be available to you on our GBDC website. We hope you find these presentations a useful source of additional information on GBDC and on Golub Capital. Okay, let me start with headlines. GBDC's performance for the quarter ended March 31, 2023 was solid, and it was consistent with recent trends. Four highlights. First, Adjusted net investment income per share increased by 14% to 42 cents from 37 cents per share in the quarter ended December 31. That's a record for GBDC and equates to an adjusted NII ROE of 11.5%. We believe this adjusted NII per share reflects how higher base rates and higher spreads have both materially increased GBDC's earnings power. Second, Quarterly dividend coverage. Quarterly dividend coverage increased to 127% as adjusted NII per share significantly exceeded GBDC's dividend of 33 cents per share. Third, overall credit performance of GBDC's portfolio remained strong, and it remained strong despite rising interest rates and slower economic growth. Adjusted net realized and unrealized losses for fiscal Q2 came to 8 cents per share and Non-accruals did not meaningfully change, and migration in performance ratings was in line with and, in fact, it was somewhat better than our expectations. Fourth highlight, GBDC executed on its share repurchase program during the quarter, purchasing 750,000 shares at a weighted average price of $1,284 per share. This is the first time that we've repurchased shares, and we believe this speaks to the conviction we have in GBDC's value propositions. Together, the results drove a $0.02 increase in NAV per share quarter over quarter to $14.73 per share. While we're pleased with GBDC's performance for the quarter, I want to be clear that we don't view our calendar Q1 results as a reason for complacency. We anticipate and we're preparing for more challenging conditions. Now, I'm not saying a recession is coming, and I'm not predicting a soft landing. as we'll talk about over the course of this call, we see conflicting signals today. We want to talk about those conflicting signals, and we want to talk about what we're doing in response to them. Let me start by describing the conflicting signals. On the one hand, we see indicators that are 22 rough patch ahead. GDP growth has slowed. It's barely above 1% for calendar Q1 on an annualized basis. There are lots of layoffs in the news. A recent report by Challenger, an outplacement firm, said that employers have announced more than 330,000 layoffs year-to-date. We've seen high-profile companies announce week Q1 results, including the likes of Eli Lilly and Paramount. And the chorus of economists and commentators predicting recession has grown louder. On the other hand, the Gallup Capital middle market report for calendar Q1 showed double-digit revenue and earnings growth, the second consecutive quarter of surprisingly strong results. Our default rate also remains low. We haven't seen material movement in non-accruals or significant migration in performance ratings. So what do these conflicting signals mean? Well, I think the right way to think about these conflicting signals is to think about them in terms of potential scenarios. I'll talk about two, a good case scenario and a bad case scenario. A good case scenario is that inflation continues to decelerate and puts the Fed in a position to start cutting rates later this year, or in my judgment, more likely early next year. In this scenario, we'd expect to see muddling growth for the rest of 2023, and we'd expect to see an acceleration in growth when rates start to decline. The bad case scenario I want to talk about is that macro conditions keep getting worse. One potential culprit for this bad case scenario relates to the string of recent bank failures. Not yet clear what the full impact of these failures is going to be, but it's easy to imagine that the bank failures are going to cause a reduction in consumer spending, a dampening of business investment, a tightening of bank lending activity, or all three of those outcomes. What are we seeing in the portfolio right now? Well, most of our borrowers are adapting well despite a challenging environment. We're generally seeing borrowers take steps to raise prices, to cut costs, and to shore up liquidity. Now, this isn't surprising. We're very selective about the companies we lend to. We look for companies that are capable of adapting ably even under changing conditions and under challenging conditions. In our view, this is the kind of market where strong management teams and strong sponsors are particularly valuable partners. On the other hand, this is also the kind of market where we expect to see some credit migration. We expect to see this in credit markets generally. We expect to see it in the BBC market generally, and we expect to see it in GBDC's portfolio. To date, we've seen less credit migration in GBDC's portfolio than we expected to see. We'll discuss this in more detail when we look at GBDC's internal portfolio performance ratings later in the presentation. The point I want to emphasize here is that based on Golub Capital's 28-plus years of experience, a more challenging environment typically leads to greater dispersion in borrower performance. And that typically leads to greater dispersion in lender performance. And that, in turn, leads to different outcomes for investors based on which managers they're invested in. Let me say that differently. While we expect most of our borrowers to continue to navigate the coming period successfully, we also expect to see more credit stress. Last quarter, we talked about some of the things we're doing to prepare for that more credit stress. I want to reiterate some of that in this quarter's call. On last quarter's call, we described in detail the enhanced portfolio monitoring procedures that we put in place last summer, which we continue to use These procedures help us identify less resilient borrowers and to allocate additional resources to those borrowers. To refresh your recollection, in our enhanced procedures, we focused on six key risk factors, higher interest rates, higher inflation, recession resistance, international exposure, quality of earnings, and software sector specific issues. We evaluated Gallup Capital's entire middle market loan portfolio on a company-by-company basis against these six factors, and we were looking for potential vulnerabilities. We did this because, in the words of Gallup Capital's head of direct lending, Greg Cashman, there's just no substitute for granular credit analysis. So we keep revisiting our resiliency analysis. We're laser-focused on the relatively small tail of vulnerable borrowers in GBDC's portfolio and We're monitoring the performance of those borrowers closely, and we're working with sponsors and management teams to increase their margin for error. One final thought before I pass the mic to Matt. This isn't our first rodeo. We believe the power of the Gallup Capital platform is going to help GBDC navigate the coming period successfully, much as we've successfully navigated prior bumpy periods.

Thanks, David. Let's turn to slide four now. GBDC's adjusted NII per share increased by 5 cents quarter over quarter to 42 cents, which represents a sequential increase of approximately 14%. On an annualized basis, the 42 cents per share of adjusted NII represents an ROAE of 11.5%. This increase was primarily driven by the impact of higher base rates and increased spreads on GBDC's portfolio, as well as GBDC's low cost of funding. GBDC had an adjusted net realized and unrealized loss per share of $0.08, primarily from unrealized appreciation due to the limited credit migration David discussed earlier. Adjusted EPS was $0.34 per share, representing an annualized ROAE of 9.4%. This represented a sequential increase of approximately 127% quarter over quarter. Finally, NAV per share increased by $0.02 to $14.73%. Overall, we are pleased with GBDC's results and believe the quarter reflected solid performance, especially in the context of the current macro and market backdrop. I'm going to turn to slide seven now to walk through the drivers of the changes to NAV this quarter. On slide seven, you can see the NAV increased quarter over quarter to $14.73 per share. Let's walk through the components. Adjusted NII was $0.42 per share, and the company paid $0.33 per share of dividends. Adjusted NII was offset by a loss of $0.04 per share from net unrealized depreciation on investments. And finally, net realized depreciation drove a loss of $0.03 per share. I think there are a couple key takeaways from this slide. First, GBDC's strong growth in adjusted NII enabled GBDC to generate $0.09 per share of excess income above its dividend. This excess income allowed us to grow GBDC's NAV per share despite some net realized and unrealized depreciation. Given our cautious near-term economic outlook, we think it's prudent to hold the quarterly dividend constant at $0.33 per share for now. At the same time, we continue to believe in the strength of GBDC's forward-looking earnings potential, so we plan to reassess our approach to dividends in future quarters. Second, there's a new line item on our NAV bridge this quarter, share repurchases. Simply put, we think the stock is undervalued. Share repurchases in calendar Q1 were accreted to NAD by a penny per share. We believe GBDC's strong balance sheet gives us valuable flexibility to continue to buy back shares opportunistically. Turning now to slide 10, this summarizes our origination activity for the quarter. Net funds increased modestly as new investment commitments and delayed draw term loan funding exceeded exit sales and fair value changes of existing investments. The asset mix of new investments shown in the middle of the slide remain predominantly one-stop loans. Looking at the bottom of the slide, the weighted average rate on new investments increased by 70 basis points this quarter due to a combination of higher base rates and wider asset spreads on new originations. The weighted average spread on new investments increased by 40 basis points over the prior quarter, from 6.7% to 7.1%. While overall deal volume remained muted, we believe market conditions remained lender-friendly for the deals that did happen, and we expect that to continue for the foreseeable future. Slide 11 shows GBDC's overall portfolio mix. As you can see, the portfolio breakdown by investment type remained consistent quarter over quarter. with one-stop loans continuing to represent around 85% of the portfolio at fair value. On slide 12, this shows that GBDC's portfolio remained highly diversified by obligor, with an average investment size of approximately 30 basis points. As of March 31, 2023, 94% of our investment portfolio was comprised of first lien senior secured floating rate loans, and defensively positioned in what we believe to be resilient industries. Now let's turn to slide 13. As we explored in detail over the prior couple of quarters, the rising interest rate environment highlights the asset-sensitive nature of TVDC's balance sheet. Let's start with the dark blue line, which is our investment income. As a reminder, investment income includes the amortization of fees and discounts. GBDC's investment income increased by 100 basis points, primarily from rising interest rates. By contrast, our cost of debt, the teal line, only increased 40 basis points. Our cost of debt benefits meaningfully from our approximately $1.5 billion of unsecured notes that are fixed rate and have a weighted average coupon of 2.7%. Combining these two factors, our weighted average net investment spread, the gold line, increased by 60 basis points over the prior quarter. We believe GBDC's adjusted NII per share still has some room to grow as existing loans reset to higher base rates and given the most recent Fed funds increase. However, we believe the growth from here will likely be modest unless the Fed decides to raise rates further. You'll see additional details on GBDC's asset sensitivity in the Form 10-Q. Finally, I'd note that the current lender-friendly environment also provides us opportunities from time to time to reprice existing loans at higher spreads. For example, when borrowers want additional financing or flexibility. This is a dynamic in the existing portfolio we anticipate will continue to provide additional upside over the near term. I'll turn it over to Chris now to cover credit quality.