Golub Capital BDC, Inc.

Hello everyone and welcome to GBDC's earnings call for the fiscal quarter and its June 30th, 2025. 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 home page of our website, which is .gullabcapitalbdc.com and click on the events and 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 Gallup, Chief Executive Officer of GBDC.

Hello everybody and thanks for joining us today. I'm joined by Matt Ten, our Chief Operating Officer, and Chris Erickson, our Chief Financial Officer. For those of you who are new to GBDC, our investment strategy is focused on providing first-time, 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 June 30th and we posted an earnings presentation on our website. We're going to be referring to this presentation over the course of today's call. I'm going to start 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 take some questions. The headline is that GBDC had another good, boring quarter. Here's a highlight. Adjusted NII per share was 39 cents. This corresponds to an adjusted NII return on equity of 10.4 percent. Adjusted net income per share was 34 cents, and that's an adjusted return on equity of 9.1 percent. This brings the since IPO internal rate return for GBDC shareholders to 9.6 percent over 15 years. Adjusted net income per share included five cents per share of adjusted net realized and unrealized losses, primarily unrealized losses in the small tail of underperforming borrowers that you've heard us speak about previously. Our new investment activity increased from prior quarters, but the overall M&A environment remained muted and we continue to see an encouraging level of resilience across our borrowers with internal performance ratings remaining strong and generally consistent quarter over quarter. With that, I'll pass the call over to Matt then to discuss the quarter in more detail.

Thanks, David. I'm going to start on slide four. GBDC's 39 cents per share of adjusted NII and 34 cents per share of adjusted earnings were driven by four key factors. First, overall credit performance remained solid. Nearly 90 percent of GBDC's investment portfolio at their value remains in our highest performing internal rating categories. The five cents of adjusted net unrealized and realized losses were primarily related to their value markdowns on a small number of underperforming investments, the majority of which were in equity investments in these portfolio companies. Investments on non-accrual status remained very low at 60 basis points of total investment portfolio at their value. This level is well below the BDC peer industry average. Second, earnings were supported by historically high base rates and attractive spreads consistent with recent quarters. GBDC's investment income yield was 10.6 percent, a sequential decline of about 20 basis points primarily driven by one modestly lower base rate mostly related to a modest spread compression during the quarter. Third, a decline in GBDC's borrowing costs largely offset the sequential decline in investment income yield. The refricing of GBDC's syndicated corporate lower, which took effect in mid-May, reduced the pick of borrowing costs during the quarter. And fourth, earnings benefited from lower operating expenses due to GBDC's market and C structure. GBDC's investment portfolio grew modestly quarter over quarter, an increase of four percent to just under nine billion dollars at their value, the increase was the result of five hundred and fifty seven million dollars of new investment commitments in the quarter, four hundred and eleven million of which funded in the quarter, a net of three hundred and six million in repayments. We continue to remain highly selective and conservative in our underwriting, closing on just 3.1 percent of yields reviewed in the quarter at a weighted average LTD of approximately 34 percent. We continue to lean in on existing sponsor relationships and portfolio company and companies for approximately half of our origination volume and delivered an uptake in deal activity with new borrowers. We continue to leverage scale to lead deals acting as the sole or lead lender in 88 percent of our transactions. We focus on the four middle markets which we believe continue to offer better risk adjusted return potential than the large borrow market. The median needed offer our calendar Q2 2025 originations is 79 million dollars. We believe our ability to play across the size spectrum is a particularly valuable differentiator today versus many of our peers that are limited to the large borrow market. 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 39 cents per share. NAS per share decreased by four cents on a sequential basis to fifteen dollars primarily because of net unrealized losses. Net debt to the quarter. On average throughout the quarter GBDC's net leverage was 1.21 terms well within our targeted range of 0.85 to 1.25 terms. During the quarter we opportunistically repurchased cotton stock on an accretive basis. GBDC's board declared a regular quarterly distribution of 39 cents per share representing an annualized dividend yield of 10.4 percent based on GBDC's NAV per share as of June 30th 2025. I'm going to turn it over to Chris now to take us through our financial results in more detail. Chris?

Thanks Matt. Turning to slide seven you can see how the earnings drivers Matt just described and distributions paid in the quarter translated into GBDC's June 30th 2025 NAV per share of fifteen dollars. Adjusted NII per share of 39 cents was in line with the 39 cents per share base distribution paid out during the quarter. Adjusted net realized and unrealized losses were five cents per share and repurchases of cotton stock during the quarter resulted in a penny per share of NAV accretion. Together these results drove a net asset value per share decrease to fifteen dollars. We will turn to slide ten which details our origination activity for the quarter. Net funds quarter over quarter increased modestly by 340 million as a combination of funded new originations and DDTL and revolver draws outpaced repayments in the quarter. Looking at the bottom of the slide the weighted average rate on new investments was 9.2 percent. Investments that paid in the quarter were at a weighted average rate of 9.8 percent. You did see some spread widening immediately after liberation day that was followed by some spread tightening over the remainder of the quarter. Slide 11 shows QDC's overall portfolio mix and as you can see the portfolio breakdown by investment type remained consistent quarter over quarter with one stop loans continuing to represent around 87 percent of the portfolio at fair value. Slide 12 shows that QDC's portfolio remains highly diversified by portfolio company with an average investment size of approximately 20 basis points consistent with prior quarters. Additionally our largest borrower represents just 1.5 percent of the debt investment portfolio and our top 10 largest borrowers represent below 12 percent of the portfolio. We are big believers in modulating credit risk through position size which we believe has served QDC well in previous credit cycles and as of June 30, 2025 92 percent of our investment portfolio consists of first clean, senior secured floating rate loans to borrowers across a diversified range of what we believe to be resilient industries. The economic analysis on slide 13 highlights the drivers of QDC's net investment spread of 4.9 percent. Let's walk through the slide in detail. We'll start with blue line which is our investment income yield. As a reminder the investment income yield includes the amortization of fees and discounts. QDC's investment income yield fell 20 basis points sequentially to 10.6 percent. The decline was primarily the result of a lower rated average spread on debt investments in the portfolio and the result of a portion of QDC's 99 percent floating rate investment portfolio re-indexing in the quarter to lower reference rates. Our cost of the steel line decreased 20 basis points to 5.7 percent reflecting our approximately 80 percent floating rate debt funding structure and the partial quarter contribution of the amendment of our syndicated corporate revolver. Net net QDC's weighted average net investment spread the gold line remained stable quarter over quarter at 4.9 percent. Moving on to slide 14 and 15 as we take a closer look at our credit quality metrics. On slide 14 you can see that non-accrual decreased slightly to 60 basis points of total investments at fair value. The number of investments on non-accrual status remained at 9. Slide 15 shows the trend in internal performance ratings. As Matt noted earlier nearly 90 percent of the total investment portfolio remained in our top two internal performance rating categories and investments rated three signaling a borrower is or has the potential to be performing below expectations at underwriting remain low at just nine percent of the total investment portfolio. The proportion of loans rated one and two which are the loans we believe are most likely to see significant credit impairment remain very low at 1.3 percent of the portfolio at fair value. As we usually do we're going to skip past slides 16 through 19. These slides have more detail on GBC financial statements dividend history and other key metrics. I'll wrap up this section by reviewing GBC's liquidity and investment capacity on slides 20 to 21. First let's focus on the key structure remains highly diversified and flexible. Our debt maturity profile remains well positioned with 42 percent of our debt funding in the form of unsecured notes with no near-term maturities. The April 2025 corporate revolver amendment further enhance our debt maturity profile extending final maturity on the nearly two billion of total commitments under the facility through 2030 and we expect to operate at the lowest pricing tier of 1.525 percent over one sofa given the level of over collateralization in the facility. The following quarter end we elected to repay and pull the outstanding notes under the GBC 3 2022 debt securitization with available borrowing capacity under GBC's corporate revolver. This action represented the final step in transitioning the post GBC 3 merger debt funding structure and we expected to result in a modest borrowing cost reduction beginning in the quarter ended 930 2025. Consistent with our asset liability matching principle 82 percent of GBC's total debt funding is floating rate or swapped to a floating rate. The portion of the debt funding that remains fixed rate are the 2026 and 2027 notes that were issued with a weighted average coupon of 2.3 percent and as you heard say on prior occasions we did not swap them out for floating rate disclosure. Overall our liquidity position remains strong and we ended the quarter with approximately 950 million of liquidity from unrestricted cash, undrawn commitments on our corporate revolver and the unused unsecured revolver provided by our advisor. We're well positioned with the level of capital and significant amount of liquidity for the period ahead. Now I'll hand it back over to David for remarks.

Thanks Chris. So to sum up, GBC posted another quarter of good boring results but these results happened in the quarter that from a macro perspective wasn't boring at all. It saw big market swings and it saw another example of a bad consensus forecast. You'll recall in prior quarters I talked about how many bad consensus forecasts we've seen since the beginning of COVID. At the end of the year we saw a big uncertainty would be a big drag on the U.S. economy and it would probably result in slowing growth but that's not what happened. Instead the U.S. economy has at least so far demonstrated considerable resilience. So I'm now going to offer up some observations and some predictions about the future but I want to acknowledge in doing so that we're in a period that's proved very difficult for forecasters. I advised last quarter given this that we should all stay humble, we should all choose resilient strategies and we should prepare for multiple scenarios. I think that was good advice then and it's good advice now. With that context let me touch briefly on two topics on our outlook for credit performance and our outlook for the deal environment. First credit performance. I expect what is already a protracted credit cycle to become even more protracted. Traditionally credit cycles are typically spiked. Something bad happens, there's a collapse in confidence or there's too much inventory or there's a geopolitical shock and you get a spike in credit defaults where defaults rise to an unusual height and then quickly fall. That's not what we've seen this credit cycle. In 2022 when we saw the dramatic increase in interest rates a lot of smart people pretty much expected that we'd see a sudden significant increase in default in response to that increase in rates but that didn't happen. Instead almost two years later we started to see a slow increase in default and we brought across the private syndicated market, the high yield market and private credit markets and we continue to see that slow increase sustained increase today. Defaults in the the private syndicated market a place where the data is reasonably clean once you factor in liability management exercises. They've been running at about four and a half percent for about 18 months. That's about 2x historical average levels. We think this elevated level of credit stress across public and private credit markets is likely to continue for a considerable period. With Apologies for Tool Stories who then as we wrote that that every unhappy family is unhappy in its own way, every unhappy credit is unhappy in its own way but there are few common themes that cover a large number of the stress companies that we see today. Three examples some haven't grown into aggressive capital structures that were put in place in 2021. Some are on the wrong side of some changing post-COVID consumer case and for some the adjustments in their original business plan haven't played out the way the way that they were expected to play out. Our observation is that many of these companies have not yet gone through restructuring and fix their balance sheets. Some have done liability management exercises but those LMEs haven't solved their issues they've just kicked the can. So we expect high yield, DSL and private credit default rates to stay elevated for some time from this year. We also anticipate that there will continue to be very substantial dispersion in credit manager performance. We call these winners and whiners. Some firms are going to continue to produce really solid ROEs and some won't. We think this will be directly related to whether the firms have solid competitive advantages. So accordingly we expect the same winners to keep winning and the whiners to keep well you get the idea. So that's topic one. We expect a protracted credit cycle to become even more protracted. Second topic, what do you think is my view on when the muted M&A environment is going to get less muted? Now here there there's some reasons for optimism. The recent enactment of the big beautiful bill provides a significant degree of clarity on tax spending changes. The regulatory environment is also becoming clearer and there remains as we talked about in prior quarters there remains very significant pressure on private equity firms to be sellers in order to make distribution sell fees and to be buyers to deploy the very significant amounts of dry powder that they're behind schedule and deploying. So all that's positive. On the other hand there's still a lot of tariff uncertainty and there's still a lot of global macro issues. On balance I expect the M&A environment to improve. I think it's going to improve slowly in the rest of this year and then more quickly next year. But I also want to go back to my theme of humility. I'm humble about this prediction. We've all been pretty consistently wrong on this. No matter whether the deal markets heat up or not our playbook at Null of Capital is going to remain the same as it's been for decades. We're going to continue to be very corrective when we make new loans. We're going to continue to focus on early detection of a borrower under performance and we're going to continue to work with our sponsor friends to address problems proactively. Our approach is all about minimizing realized credit losses and being ready to play offense when opportunities arise. With that operator please open the line for questions.

Ladies and gentlemen we will now begin the question and answer session. If you'd like to ask a question please press star followed by the number one on your telephone keypad. Your first question comes from the line of Pelly Seth with Graham and James.

Please go ahead.

Hi good morning. Thanks for the question. So a quick one on leverage. So this quarter you guys ended with net leverage of 126 which is quite high by historical standards. So is it fair to say that you're expecting the significant wave of repayments to eventually lever down?

Yes and no. You're correct that we have some repayments in the pipeline and that we think the quarter end leverage was a little bit higher than if you were looking at it over time. Matt alluded to this in his comments. He alluded to the fact that average leverage over the quarter was about 1.2. We've always thought about leverage as being appropriate in the context of a target range rather than being too religious on one specific point within the range and 1.25 is the high end of our range. So you indicated in your question are we anticipating a de-leveraging? No but likewise we're not anticipating further leveraging either.

And a quick follow-up maybe a more philosophical question but spreads across the floating rate markets are quite tight right now not just with BDCs but with syndicated loan spreads as well which tend to widen when rates go down. So this BDC spreads having lagged these movements by upwards of six months. Do you think this lag time between liquid loan markets and BDCs is going to remain the same or is it more likely to respond more quickly going forward?

I'm not sure I understand your question. When you say BDCs have lagged can you elaborate on what you mean by that?

Yeah lagging like loan spread movements with the syndicated loan market.

So you're saying that the syndicated loan market has seen more spread compression than we've seen in our reported spreads on our new loans? Yeah. You're right there because I think that is an appropriate description of the pattern that we've seen. We've seen quite significant spread compression in the broadly syndicated market. It's been a pattern for some time so if you think back to the summer of 2022 when rates went up and the broadly syndicated market dislocated and we saw very significant spread widening since the 2023 we've been on a trend toward a more borrower-friendly tighter spread environment in both private credit and the broadly syndicated market. I do think you're right that private credit spreads are a little stickier especially middle market private spreads but we've seen significant degree of spread compression in our markets as well and I don't think we're immune to those trends. I think the right way to look at it is especially in the core middle market as opposed to the larger market. The core middle market is insulated but not immune from spread trends that are happening in the broadly syndicated market. The larger end of the private credit market is much insulated because BSL is a replacement. So we've seen a number of trans-Asthen's. Alton Asthen is a good example recently where credits that were in the private credit market are being refinanced at lower spreads in the broadly syndicated market. So because of that phenomenon the larger end of the market tends to respond more quickly to changes in spreads than the core middle market.

Got it. Thanks for the call. I appreciate it.

Ladies and gentlemen I have a reminder if you would like to ask a question please press star followed by the number one on your telephone.

I will

now turn the call back

over to David Gollum for

closing remarks. Please go ahead. Gosh it seems that today the reports so good boring we don't have the usual number of questions. Which is fine. Thank you all for listening. As always if you have questions after today please feel free to get in touch and we look forward to being back in front of you next quarter. Thank you. Ladies and gentlemen this concludes today's call.

Thank

you all for joining

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