Golub Capital BDC, Inc.

Hello, everyone, and welcome to GBDC's June 30th, 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.gollubcapitalbdc.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 CFO, and Matt Benton, our Chief Operating Officer. For those of you who are new to GBDC, our investment strategy is, and since inception, it's been fighting first lien senior secured loans to healthy middle market companies that are backed by strong partnership-oriented private equity sponsors. We have a lot to talk about today. It was an eventful quarter. Record-adjusted net investment income of 44 cents per share, strong credit results, an eight-cent per share dividend increase, four cents of that from an increase in the base dividend, and four cents from implementation of the new variable supplemental dividend framework. a 10 cent per share increase in NAV, and a permanent reduction in the base management fee going forward to 1%. Yesterday, we issued press releases describing both GBDC's quarterly earnings and the management fee reduction. We also posted two presentations on our website, and we'll be referring to both of them in this call. I'm going to start by discussing the management fee reduction, and then my colleagues and I will walk you through the quarter. We'll questions at the end. On August 3rd, GBDC's board approved a permanent reduction in the base management fee rate from 1.375% per annum to 1% per annum, effective July 1. The basis for computing the management fee is unchanged. It's based on the fair value of assets other than cash. As you can see from the chart, all other terms of the company's investment advisory agreement remain unchanged. in addition to the existing best-in-class features of GBDC's fee structure, and that includes one of the highest hurdle rates in the industry and a cumulative incentive fee cap that looks back to the company's inception. Slide four illustrates how the new lower management fee permanently increases GBDC's earnings power. I want to walk you through the chart. The left column reflects GBDC's actual results for the quarter ended June 30th. and the right column reflects GBDC's pro forma results as if the lower fee rate had applied for the quarter. The rows outlined in gold show the key differences between the actual and pro forma results. So, you'll see the base management fee decreases significantly in the pro forma analysis, and at the same time, the NII incentive fee increases slightly because pre-incentive fee earnings are higher. Pro forma for the management fee reduction, GBDC's adjusted NII increases by between 2 and 3 cents per share on a quarterly basis, or over 10 cents per share on an annualized basis. Now, the exact impact of the fee change is going to depend on a number of assumptions, but one way to interpret this analysis is that the lower management fee rate increases GBDC's expected profitability both today and its average level of profitability across various market and interest rate cycles. So that covers the what. Now let's turn to slide five and talk about the why. Since GBDC's IPO 13 years ago, we've always sought to be at the front end of raising the bar for alignment between the company's shareholders and its investment advisor. GBDC pioneered the cumulative incentive fee cap, and that set the standard for aligning BDCs and investment advisors on long-term credit performance. Now, many things haven't changed since 2010. Our investment strategy I started out today's call describing, it's the same. So is our focus on delivering the attributes that we think BDC investors care most about, including strong risk-adjusted returns on equity, a stable and well-covered dividend, and consistent NAV growth over time. What has changed is GBDC scale. In terms of total asset, that's GBDC at the time of the IPO. With that growth has come higher management fee revenues for Gallup Capital. Consistent with Gallup Capital's focus on win-win solutions, Gallup Capital proposed to GBDC's board last week that it share the benefits of GBDC's growth by lowering its management fee. We believe this move is consistent with Gallup Capital's longstanding commitment to having a BDC industry-leading, shareholder-friendly fee structure. Let's turn to slide six to wrap up this part of today's call. In our view, GBDC's value proposition to shareholders was compelling before this change. Now, it's even more compelling. GBDC has the right strategy for today's environment, putting rate senior secured loans to resilient sponsor-backed companies. With base rates and spreads both high, now is a particularly attractive time for sponsor finance. Second, we think GBDC's investment advisor is the right manager to execute on the company's strategy. Gallup Capital has powerful competitive advantages you've heard me talk about on many prior calls. These competitive advantages include scale and sponsor relationships and incumbencies. a wide breadth of solutions, and industry expertise. Gallup Capital has also proven its credit prowess through a 20-year track record of low defaults and low credit losses. There's a reason private debt investor just named Gallup Capital both lender of the decade and senior lender of the decade. Third, we think GBDC's funding model gives it low-cost leverage and structural resilience. And finally, we believe GBDC's fee structure is very attractive, even more attractive going forward, and that it creates strong alignment between the company's shareholders and its investment advisor on the goal of long-term shared success. I'll now turn the floor over to Matt to start us off in the earnings presentation.

Thanks, David. Now let's turn to our usual earnings presentation. I'm going to start on slide six. GBDC's earnings for the quarter ended June 30th were record-setting. Adjusted NII per share increased to 44 cents from 42 cents per share in the quarter ended March 31st. This equates to an adjusted NII ROAE of 11.9%. Adjusted NII per share significantly exceeded the company's quarterly dividend. We'll come back to that point in a moment. Net income per share increased to 43 cents from 34 cents per share in the prior quarter. This equates to an ROE of 11.6%. GBDC's NAD per share increased by 10 cents to $14.83 per share as of June 30th. The portfolio and balance sheet update generally reflects a continuation of trend from the March 31st quarter. Net funds growth remained muted as the market-wide deal drought continued. Overall credit performance of the GBDC portfolio remained solid despite rising interest rates and slower economic growth. We've been anticipating a degree of credit migration, but today we've seen less credit migration than we expected. Internal performance ratings remained stable and non-accruals decreased to 1.5% of total debt investments at fair value. On the right side of the balance sheet, GBDC's debt funding remained low cost and highly flexible, with unsecured debt representing about 46% of the mix. GBDC ended the quarter with nearly $900 million of total available liquidity. The last highlight on the page is an exciting change to GBDC's dividend policy. The board raised GBDC's regular quarterly distribution by $0.04 to $0.37 per share. This higher distribution is well covered with a coverage ratio of 119%. The board also authorized a supplemental distribution of $0.04 per share on top of the new higher base dividends. The supplemental dividend was consistent with the new variable supplemental distribution framework that GBDC expects to implement going forward. Chris will discuss this in more detail shortly. In total, the board approved 41 cents per share of distributions in respect of fiscal Q3 performance. This corresponds to an annualized dividend yield of more than 11% based on GBDC's NAD per share as of June 30th. I'm going to turn it over to Chris now to provide more detail on our results.