Golub Capital BDC, Inc.

Hello, everyone, and welcome to GBDC's earnings call for the fiscal quarter ended June 30th, 2024. 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 Matt Benton, our Chief Operating Officer. For those of you who are new to GBDC, our investment strategy is focused on providing first lien senior secured loans to healthy, resilient middle market companies, companies that are backed by strong partnership-oriented private equity sponsors. This is the same strategy we've had since our IPO 14 years ago. Yesterday, 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 during the call today. I'm going to start as usual with headlines and with a summary of performance for the quarter. Then Matt and Chris are going to go through our financial results for the quarter in more detail. And finally, I'll wrap up with our outlook for the coming period, and then we'll take questions. So let me start with headlines. The headline is that GBDC's quarter ended June 30th was great in part and disappointing in part. And we're going to talk about all of it in detail in today's call. Let me start with a brief summary. I'll start with the great part. First, we closed our second win-win-win affiliate merger in early June. We believe the merger was good for GBDC shareholders, good for GBDC3 shareholders, and good for GBDC as a business. The completion of the merger was accretive to NAV. We ended the quarter with NAV per share of $15.32. That's up 1.3% from March 31st. It also made permanent the reduction in GBDC's incentive fee rate from 20% to 15%, giving GBDC what we believe to be an industry-leading fee structure and increasing GBDC's go-forward earnings power. GBDC also declared and began paying a series of special distributions. Second, origination volume picked up. It built on the recovery in middle market M&A that began in the quarter-ended December 31, 2023. New investment commitments for the June 30th quarter totaled $435 million, up $111 million from the same quarter the prior year. Originations were concentrated, as expected, in areas of Golub Capital's competitive advantages, lots of repeat sponsors, repeat borrowers, and industry sectors we know well. Third, most of GBDC's borrowers perform well. The Gallup Capital middle market report showed median borrower revenue and EBITDA up strongly for the seventh consecutive quarter, and performance ratings across the portfolio also improved. So what was the disappointing part? GBDC had negative outcomes in two credits, Imperial Optical and Pluralsight, and this led to meaningful write downs on both of them. Now we're very proud of our long track record of low defaults and low credit losses. But we're not perfect, and this quarter, GBDC saw 17 cents per share of net realized and unrealized losses adjusted for the merger, primarily from these two credits. In both cases, the losses were not reflective of patterns or themes we're seeing across the portfolio. In the case of Imperial Optical, an advanced sale process fell apart, and we decided to pivot to a restructuring. And Pluralsight, a leading sponsor with over $4 billion of equity invested in a company with about $1.7 billion in debt, decided not to continue to support it. Both developments were surprising and frustrating. So where did we end up in the June 30th quarter? Adjusted net investment income for the quarter was $0.48 per share. Adjusted earnings per share was $0.31 per share, a return on equity of about 8% annualized. For the first three quarters of the fiscal year, GBDC has delivered a return on equity of 11.4% annualized. Included in this quarter's results were some one-time merger-related items. And continuing our tradition of being shareholder-friendly, Golub Capital decided to proactively waive on a one-time basis the incentive fee this quarter to support returns to our shareholders. Matt and Chris are going to describe the quarter and fiscal year to date in more detail, including a variety of one-time impacts to the P&L and how we think about how GBDC would have performed from a profitability perspective for the quarter adjusted for these one-time items. I'll come back at the end and offer some thoughts on GBDC's outlook. Matt?

Thanks, David. I'm going to start on slide four. As David just previewed, adjusted NII per share was 48 cents. corresponding to an adjusted NII ROE of 12.7%. Compared to fiscal Q3 of 2023, GBDC's adjusted NII per share increased by 4 cents year over year, or about 9%. Adjusted earnings per share was 31 cents, corresponding to an adjusted net income ROE of 8.1%. Taking a step back, GBDC's earnings were driven by multiple key factors. First, credit performance was solid generally, with the exceptions of markdowns on Imperial Optical and Pluralsight that drove the majority of the 17 cent per share that realized an unrealized loss. I'll go into more detail in a moment. Second, we continue to experience high base rates consistent with recent quarters. Third, GBDC's leading investment advisory fee structure drives sustainably lower expenses. This includes the reduction in the incentive fee rate from 20% to 15%, which became permanent with the closing of the GBDC-3 merger on June 3, 2024. And finally, Gallup Capital, GBDC's investment manager, elected to voluntarily waive the manager's incentive fee this quarter. This equated to approximately $0.07 per share benefit to net investment income and earnings. This fee waiver continues the long tradition of Gallup Capital taking shareholder-friendly actions. Let me summarize portfolio activity and credit quality in the quarter. Net funds increased by $2.5 billion sequentially, primarily the result of the closing of the GBDC3 merger, bringing the size of the total portfolio at fair value to $7.9 billion. The overall credit performance of GBDC's investment portfolio remained strong, with internal performance ratings improving from the prior quarter. Investments in rating categories 4 and 5 increased to 89.2% from 87.2% in the prior quarter, and investments in rating categories 1 and 2 represented just 70 basis points of the total portfolio at fair value. As a percentage of total debt investments at fair value, non-accruals increased slightly to 1% at June 30, 2024, from 90 basis points, at March 31st, 2024, and continue to be well below the BDC sector average. In the quarter, the number of non-accrual investments increased to 10 as the return to accrual status of one portfolio company was offset by the addition of two portfolio companies. We continue to believe the overall portfolio is well positioned from a credit perspective. The weighted average loan-to-value of the portfolio was 45%, which we believe provides very nice downside protections. Despite these generally positive credit trends, we did have the two negative surprises in the quarter that David highlighted in his opening remarks. We don't think they are representative of the broader health of the portfolio, and it's probably worth a moment to really discuss Imperial Optical in more detail, given its relative size and impact on this quarter's results. Imperial Optical is a full-service vision care platform that offers optometric patient care and and retail eyewear products through 280 locations across the U.S. Our exposure to Impair Optical at March 31, 2024, consisted of $96.9 million base amount of senior secured debt at pre-merger GBDC and $41.7 million base amount at pre-merger GBDC3. The company has been underperforming our and the sponsor's expectations for some time. With the support of the sponsor, last year we undertook a two-pronged strategy. First, the company implemented an operating turnaround plan, including a new CEO. Second, it explores strategic alternatives. As of 3-31-2024, we believed there was a high probability of a strategic exit. However, over the course of the quarter end at 6-30, it became clear this was not going to happen. Accordingly, we shifted to a singular focus on the operating turnaround plan, We right-sized its capital structure and took control of the equity and board. We worked closely with existing management and other key stakeholders to ensure alignment. This restructuring drove the majority of GBDC's net realized and unrealized loss in the quarter. Continuing on slide four, let me briefly summarize certain balance sheet changes in the quarter. Nav per share increased by 20 cents on a sequential basis to $15.32. NAB per share is now 49 cents higher than the prior year, even as GBDC delivered higher distributions to shareholders during this period. As David described earlier, one of the benefits of the recently closed merger with GBDC3 is that shares issued in the merger, approximately $92 million, were issued at a price in excess of the current NAB, resulting in material NAB accretion for existing GBDC shareholders. Leverage decreased materially quarter over quarter to one spot zero five times on a debt to equity basis net of available cash and to one spot zero zero times net of available cash and cash drafted debt securitizations for the purposes of paying down principal on outstanding notes. We described last quarter that we expected a level of deleveraging in connection with the merger and we got it. Let's turn to distributions now. The Board approved $0.44 per share of distributions, comprised of a regular quarterly distribution of $0.39 per share and a fiscal Q3 supplemental distribution of $0.05 per share. Taken together, these distributions correspond to an annualized dividend yield of 11.9% based on GVDC's NAV per share as of June 30, 2024. Adjusted M&I per share continues to significantly exceed the company's regular quarterly distribution, resulting in regular distribution coverage of 123%. In addition, our board declared additional special distributions to be paid in three equal installments of 5 cents per share, which began in June 2024 following the merger close on June 3rd. The remaining two special distributions of 5 cents per share will be paid on September 13, 2024, for stockholders of record as of August 16, 2024, and December 13, 2024, for stockholders of record as of November 29, 2024. You can find more information about the record dates and payment dates for fiscal Q3 distributions on slide 25 of the earnings presentation, and about the variable supplemental distribution framework on slide 26. Lastly, and before I turn it over to Chris to walk through the financial results in more detail, we've outlined on slide six, which is a new slide, the key non-recurring items that impacted the P&L in the June 30th quarter. The intent of this analysis is to better show what we believe is a more normalized GBDT core earnings profile before the impacts of modestly re-leveraging the balance sheet. First, the reversal of interest income recognized in prior quarters on investments restructured or placed on non-accrual status this quarter reduced adjusted NII per share by a cent. Second, in the quarter, GBDC recognized an additional three cents per share of non-cash interest expense associated with market-to-market interest rate swaps. Again, these are non-cash charges that should sum to zero over time. And lastly, the incentive fee waiver contributed to a 7 cent per share increase in adjusted NII. The net results of these adjustments for non-recurring items is an adjusted NII per share of 45 cents or an 11.7% adjusted NII ROE. Further, as I mentioned earlier, we expect that re-leveraging GBDC's balance sheet to target levels in response to the deleveraging impacts of the GBDC-3 merger would be an NII talent. I'm going to turn it to Chris now to provide more detail on our results.