Golub Capital BDC, Inc.

Hello, everyone, and welcome to GBDC's earnings call for the fiscal quarter ended December 31st, 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. and click the Invents 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 am 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 focused on providing first lien senior secured loans to healthy, resilient middle market companies that are backed by strong partnership-oriented private equity sponsors. So yesterday, we issued our earnings press release for the December 31 quarter, and we posted an earnings presentation on our website. We'll be referring to that presentation during today's call. I'm going to start as usual with headlines, and then Matt and Chris are going to go through our operating and financial performance for the quarter in more detail. And finally, I'll wrap up with our outlook for the coming period, and we'll open the floor for some questions. So headlines. The headline is that GBDC had a strong quarter and a strong start to fiscal year 2025. We hit our aspiration to be good-born. Here are the highlights. Adjusted NII per share was 39 cents. This corresponds to an adjusted NII return on equity of 10.1%. If you exclude the impact of some non-cash interest expense that was related to our interest rate swap, adjusted NII for the quarter was actually 40 cents per share. Adjusted net income per share was 42 cents per share. This corresponds to an adjusted return on equity of 11%. Adjusted net income per share included $0.03 of adjusted net realized and unrealized gains. The vast majority of GBDC's portfolio has been performing well and continue to perform well in the December 31 quarter. In fact, we saw a nice lift in GBDC's overall portfolio credit metrics this quarter. And we also saw a nice growth in GBDC's investment portfolios. New deal activity continued to pick up in the market, and GBDC was able to find attractive investment opportunities while remaining highly selective, enabling us to get back to our target leverage. With that, let me pass the call over to Matt Benton to discuss the quarter in more detail. Thanks, David.

I'm going to start on slide four. GBDC's earnings were driven by three key factors. First, overall credit performance was solid. We recognize some realized losses on three non-accrual investments that were restructured in the quarter. These investments were all non-accrual as of September 30th, 2024. But these losses were more than offset by gains elsewhere. Overall, we're pleased with the credit picture at GBDC and will share how the progress is visible in GBDC's quarter end credit metrics. Second, earnings continue to be supported by high base rates and attractive spreads, consistent with recent quarters. Having said this, we did see some reduction in yields this quarter, primarily from a decrease in SOFR and to a lesser extent from some continued spread compression. The spread compression was more pronounced and visible in new investments, but we have seen some repricing of existing investments, particularly in the large market of our portfolio. Repricing dynamics in the core middle market are less prolific than the large market, where drive-by repricings are more common. At quarter end, we analyzed GVDC's portfolio in the context of current market spreads and believe there is limited repricing risk left within the existing load book. Third, we realized a reduction in borrowing costs in the quarter, both from base rate decline and because of the funding cost benefits associated with the November 2024 funding structure initiatives that we discussed on last quarter's earnings call. We didn't get a full quarter's benefit of those lower funding costs, We'll get that in the March 31st quarter. Fourth, earnings continue to benefit from lower expenses due to GBDC's fee structure. And fifth, earnings were negatively impacted in the quarter by a penny per share related to non-cash interest expense associated with interest rate swaps on our fixed rate unsecured notes. Adding back the penny per share impact on adjusted NII from non-cash interest expense implies approximately $0.40 of adjusted NII per share. Let me summarize portfolio activity and credit quality in the quarter. Gross originations were $1.2 billion up from last quarter as we sought to continue to increase leverage post-merger. After factoring in repayments and unfunded commitments associated with originations, net funds increased by $450 million sequentially. This represented net portfolio growth of approximately 5.5% quarter over quarter. GBDC did not receive the full benefit of the earnings power of this portfolio growth because a lot of the growth was back-end weighted. Last quarter, I said the lending environment was getting more borrower-friendly across all credit markets. This continued in the December 31st quarter, especially in the large market segment where we saw more spread compression looser deal documentation, and higher leverage. Despite this, Golub Capital's origination stats in calendar Q4 continued to depict our conservatism. One, a selectivity rate of less than 4%. Two, a repeat borrower percentage in excess of 70%. Three, Golub acted as the lead or sole book runner in 88% of our transactions. Four, our average LTVs at the time of origination have generally been in the mid-30% to mid-40% range. And five, given the risk-adjusted pricing dynamics we see across the entire middle market, we are choosing to primarily play in the core middle market. The median EBITDA for our calendar Q4 2024 originations was $53 million. We believe this is a nice differentiator for Gala versus many of our peers solely focused on the large borrower market. Credit statistics improved quarter over quarter. Investments in ratings category four and five increased to nearly 90% of the portfolio at fair value as of December 31st, 2024, from approximately 87% the prior quarter. For context, this marks the highest combined level but four and five rated investments at GBDC since the September 2022 quarter. Investments in rating category three declined from 11.6% of the portfolio at fair value as of September 30th, 2024 to 8.8%. And investments in rating categories one and two remain very low, representing just 1.3% of the total portfolio at fair value. As a percentage of total investments at share value, non-accrual investments declined from a very low 1.2% at September 30th, 2024, to just 50 basis points, the lowest level at GBDC since 2019. In the quarter, the number of non-accrual investments decreased to nine, following the restructuring of three former non-accrual investments. Continuing on slide four, let me briefly summarize distributions paid and certain balance sheet changes in the quarter. Total distributions paid in the quarter were $0.48 per share. This included, one, the quarterly base distribution of $0.39 per share, two, a $0.04 per share quarterly variable supplemental distribution that we declared in November 2024, and finally, the final $0.05 per share special distribution declared in June 2024 in conjunction with the GBDC-3 merger closing. NAV per share decreased by 6 cents on a sequential basis to $15.13, primarily because distributions paid, including the special distribution, exceeded earnings. Net debt to equity increased quarter over quarter to 1.19 turns. This reflects leverage net of available cash and cash-trapped debt securitizations for the purposes of paying down principal on outstanding notes. Similar to last quarter, the increase in net leverage largely happened in the last few weeks of the 1231 quarter. GBDC's average net leverage during the quarter was just 1.14 turns. As a result, we expect GBDC to recognize the full run rate profitability benefit of its larger investment portfolio next quarter. Further, we expect GBDC to maintain average net leverage near our current target of 1.15 turns. In November 2024, we executed a series of debt funding-related transactions we expect to drive down GBDC's weighted average cost of debt, including a $2.2 billion GBDC term debt securitization with AAA notes priced at SOFR plus 158 basis points. In conjunction with the CLO pricing, we redeemed some higher-cost debt securitizations and debt facilities. We expect to recognize the full run rate profitability benefit from these transactions in the March 31st, 2025 order, which we believe will add incremental adjusted NII that we think will be a valuable forward profitability cushion to the extent that we get further base rate or investment spread reductions. There are several other drivers of higher profits that we are working on, including further borrowing cost optimization as we look across our existing funding structure, GBDC was upgraded by Moody's this quarter to a BAA2 rating with a stable outlook, which we believe enhances our ability to issue low-cost unsecured debt. For four-year rotation, we believe the successful monetization of certain non-earning equity investments and low-yielding loans associated with prior restructured names with the subsequent redeployment of those proceeds into new or middle market originations could generate incremental NII. I'll include the obvious caveat that we have work to do to successfully resolve these names and it won't all happen overnight, but we have the skills and resources to do this. Let's turn to distributions declared in the quarter. The Board declared a regular quarterly distribution of 39 cents per share representing an annualized dividend yield of 10.3% based on GBDC's NAV per share as of December 31st, 2024. Adjusted NNI per share adjusted for the $0.01 per share impact from non-cash interest expense related to interest rate swaps, continues to provide a comfortable cushion above our regular quarterly distribution, providing us distribution coverage of 103%. We expect the profitability drivers I discussed earlier to provide incremental cushion going forward. Typically, I skip slide five, but I want to cover it this quarter as I do think some perspective on GBDC's quarter-over-quarter profitability would be helpful since we've had some moving pieces these last couple of quarters. In the 9-30-20-24 quarter, GBDC generated 47 cents of adjusted NII per share, which is shown on slide five. What you don't see on the page is that the 47 cents included a positive benefit of $0.03 per share from the non-cash impact from our interest rate swaps, which we discussed last quarter. It also included a $0.03 per share partial waiver of the income incentive fee. Adjusting for those two items, GBDC's 9-30-2024 adjusted NII was $0.41 per share. This quarter, as I mentioned, GBDC generated $0.40 of adjusted NII after eliminating the non-cash impact from the interest rate swaps I mentioned earlier. There was not an income incentive fee waiver this quarter. So on an apples-to-apples basis, GBDC saw a modest decrease in adjusted NII quarter-over-quarter from $0.41 to $0.40. We think this is a solid result given the base rate and spread movements during the quarter. So how was GBDC able to minimize the reduction to adjusted NII quarter-over-quarter given the headwinds on the rate side? First, 81% of its liabilities are floating rates. so our borrowing costs benefited from SOFR decreases. We have meaningfully reduced GBDC's asset sensitivity over the past year, and we've now seen the benefits as base rates decreased. We do think GBDC is an outlier in the sector and is better positioned than most for a neutral, decreasing base rate environment. Second, GBDC modestly increased financial leverage, and third, GBDC's leading fee structure structurally creates a higher return buffer. I'm going to turn it over to Chris now to continue our presentation.