Goldman Sachs BDC, Inc.

Austin Neary Good morning. This is Austin Neary, a member of the Investor Relations Team for Goldman Sachs BDC, Inc. I would like to welcome everyone to the Goldman Sachs BDC, Inc. Third Quarter 2024 Earnings Conference Call. Please note that all participants will be in listener-only mode until the end of the call, when we will open up the line for questions. Before we begin today's call, I would like to remind our listeners that today's remarks may include forward-looking statements. These statements represent the company's belief regarding future events that, by their nature, are uncertain and outside of the company's control. The company's actual results and financial condition may differ, possibly materially, from what is indicated in those forward-looking statements as a result of a number of factors, including those described from time to time in the company's SEC filings. This audio cast is copyrighted material of Goldman Sachs BDC, Inc. and may not be duplicated, reproduced, or rebroadcast without our consent. Yesterday, after the market closed, the company issued an earnings press release and posted a supplemental earnings presentation, both of which can be found on the homepage of our website at www.GoldmanSachsBDC.com under the Investor Resources section, and which include reconciliations of non-GAAP measures to the most directly comparable GAAP measures. These documents should be reviewed in conjunction with the company's quarterly report on Form 10-Q filed yesterday with the SEC. This conference call is being recorded today, Friday, November 8th, 2024, for replay purposes. I'll now turn the call over to Alex Chee, Co-Chief Executive Officer of Goldman Sachs BDC, Inc.

Thank you, Austin. Good morning, everyone, and thank you for joining us for our third quarter 2024 earnings conference call. I'm here today with David Miller, our Co-Chief Executive Officer, Tucker Green, our Chief Operating Officer, and Stan Medeshevsky, our Chief Financial Officer. I'll begin the call by providing a brief overview of our third quarter results and then discuss the current market environment in more detail. I'll then turn the call over to David and Tucker to describe our portfolio activity and performance before handing it off to Stan to take us through our financial results. And then finally, we'll open the line for Q&A. With that, let's get to our third quarter results. Our net investment income per share for the quarter was 58 cents and net asset value per share was $13.54 a decrease of approximately 1% relative to the second quarter NAV, which was largely due to net realized and unrealized losses in the quarter. As we announced after market close yesterday, our board declared a fourth quarter dividend of 45 cents per share payable to shareholders of record as of December 31st, 2024. This marks the company's 39th consecutive quarter of a 45 cent per share dividend totaling $17.55 per share since our IPO, excluding the special dividends we paid in 2021 following the merger with MMLC. Now, with respect to broader market conditions, M&A continued to recover in the third quarter with growth of 17.5% year-over-year in sponsor M&A volumes. We noted earlier in the year that we anticipated a rebound in sponsor M&A driven by the $1.4 trillion of private equity dry powder and the DPI pressure that private equity firms were facing to return capital to LP investors. We saw these factors drive higher activity in the second and third quarter, and although we expect the fourth quarter to be somewhat muted as market participants took a pause given the election, we anticipate that this dynamic will continue to enhance M&A volumes in 2025. GSBD has certainly benefited from this overall trend, which was further enhanced by our platform capabilities. Our third quarter gross originations more than doubled year over year, and it's the second largest deployment quarter since the integration of GSBD into the broader Goldman Sachs private credit platform, with the highest being this past second quarter of 2024. We continue to originate new investments with sound credit fundamentals and low LTVs. Finally, our sales and repayments activity increased 45% from the prior quarter, totaling $329 million. we're focused on harvesting older vintage investments and recycling into new originations. To that end, 72% of our payments were 2021 and older vintages. Our recycling efforts are enhanced by our proactive portfolio management and the breadth of our private credit platform to consistently originate new and attractive investment opportunities. With that, let me turn it over to my co-CEO, David Miller.

Thanks, Alex. During the quarter, we originated at approximately 376.6 million in 34 new investment commitments comprised of 15 new and 19 existing portfolio companies. As Alex mentioned, this was indeed the second highest level of quarterly originations for GSBD since the integration of our platform in early 2022. 98.1% of our originations were in first lien loans. which continues to reflect our bias at primarily maintaining exposure to investments that are higher up in the capital structure. Sales and repayment activity totaled 329.1 million, primarily driven by the repayment and refinancing of our investments in 10 portfolio companies. During the quarter, we also selectively sold names in the portfolio with majority at or above their mark. When we received an attractive bid, and sought to rotate out of legacy names, all with a focus on recycling the book into new originations. As the portfolio continues to turnover, we will lean into our position within the Goldman Sachs ecosystem for what we believe should be a rebound in M&A activity volume into 2025. Turning to portfolio composition. As of September 30, 2024, total investments in our portfolio were $3.44 billion at fair value. comprised of 97.6% in senior secured loans, including 91.6% in first lien, 4.7% in first lien last out unit tranche, and 1.3% in second lien debt, as well as a negligible amount of unsecured debt, and 1.9% in a combination of preferred and common stock. With that, let me turn it over to our Chief Operating Officer, Tucker Green, to discuss new investments this quarter and our overall credit quality.

Thanks, David. As of September 30th, 2024, the company held investments in 167 portfolio companies operating across 41 different industries. The weighted average yield of our investment portfolio at amortized cost at the end of the third quarter was 10.9% as compared to 11% from the prior quarter. The weighted average yield of our total debt and income-producing investments at amortized cost at the end of the third quarter was 11.8%, as compared to 12.3% at the end of Q2. The weighted average net debt to EBITDA of the companies in our investment portfolio increased slightly at 6.3 times during the third quarter compared to 6.1 times during the second quarter. Importantly, our portfolio companies have both top line growth and EBITDA growth quarter over quarter and year over year on a weighted average basis. At the same time, the current weighted average interest coverage of the companies in our investment portfolio That quarter end increased to 1.7 times in the third quarter compared to 1.5 times during the second quarter. And finally, turning to asset quality, during the quarter there were changes to accrual status for two portfolio companies. The accrual site was restructured and one first lien position remained on non-accrual status and another first lien position was restored to accrual status. Additionally, we exited Zodiac Intermediate, also known as APARI, which had previously been on non-accrual status through a sale of the company. As of September 30th, 2024, investments on non-accrual status decreased to 2.2% of the total investment portfolio at fair value from 3.4% as of June 30, 2024, and to 4.5% of the total investment portfolio at amortized cost from 7.6% as of June 30, 2024. I'll now turn the call over to Stan Medeshevsky to walk through our financial results.

Thank you, Tucker. We ended the third quarter of 2024 with total portfolio investments at fair value of $3.4 billion, outstanding debt of $1.9 billion, and net assets of $1.6 billion. Our ending net debt to equity ratio as of the end of the third quarter was 1.16 times, which continues to be below our target leverage of 1.25 times. At quarter end, approximately 66.7% of the company's total principal amount of debt outstanding was in unsecured debt, and we had $1.1 billion of capacity available under our secured revolving credit facility. Before continuing to the income statement, as a reminder, in addition to GAAP financial measures, we will also reference certain non-GAAP or adjusted measures. This is intended to make our financial results easier to compare to results prior to our October 2020 merger with Goldman Sachs Middle Market Lending Corp., or MMLC. These non-GAAP measures remove the purchase discount amortization impact from our financial results. For the third quarter, GAAP and adjusted after-tax net investment income were $68.2 million and $67.2 million, respectively, as compared to $67 million and $65.2 million, respectively, in the prior quarter. On a per-share basis, GAAP net investment income was 58 cents, Excluding the impact of asset acquisition accounting in connection with the merger with MMLC, adjusted net investment income for the quarter was $0.57 per share, equating to an annualized net investment income yield on book value of 16.8%. Total investment income for the three months ended September 30, 2024, and June 30, 2024, was $110.4 million and $108.6 million, respectively. The increase in total investment income was primarily due to the incremental deployment during Q2 and Q3. We would also note that we saw PIC as a percent of total recurring investment income decreased to 9% for the third quarter ended September 30, 2024, from 11% in the second quarter of 2024. Distributions during the quarter remained consistent at 45 cents per share, Our spillover taxable income is approximately $158.8 million, or $1.36 on a per share basis. With that, I'll turn it back to Alex for closing remarks.

Thanks, Stan, and thanks, everyone, for joining our earnings call. We're excited by our pipeline prospects and remain focused on turning over the portfolio into new, attractive opportunities using the full breadth of the Goldman Sachs platform. With that, let's open the line for Q&A.

Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, that is star 1 to ask a question. We will pause for just a moment to allow everyone an opportunity to signal for questions. We will take our first question from Mark Hughes with Truist.

Yeah, thank you. Good morning. Alex, you had spoken about your recycling effort. How much more opportunity do you have there to recycle, improve the portfolio?

Yeah, so we had a very strong quarter of sales and repayments, as you heard. It's the largest quarter we've had in over a year. So we were able to have full exits in at least four portfolio companies, all of which were originated in 2021 or earlier. So, you know, we feel good about the pace of repayments and recycling. And just given also the very strong quarter of originations we had, just the outlook we also have for M&A that's coming, you know, we feel good about that. just the shift in the portfolio. And we also added a net 12 new names, as you saw as well, which further diversified the portfolio.

Understood. How about the repricing activity? How much have you seen in the portfolio? How much more can we expect, perhaps?

Well, we saw a pretty decent wave just across the industry as we saw spreads compress. But In the quarter, we saw spreads stabilize. And so just the level of repricing activity also came down versus the flurry that we saw earlier in the year. And so, you know, there may still be some room to go. But having said that, you know, we would expect the pace of repricings to slow down.

Yeah. And then, uh, anything, uh, your view, the, uh, vibe, uh, immediately following the election last, uh, couple of days, uh, as it pertains to potential deal activity, do you feel like there's more energy in the air last, um, to sort of curious your subjective impressions?

Okay. The market obviously has been, uh, pretty exciting post-election, um, You know, we've all been circling up and talking to our bankers within Goldman Sachs and just other participants in the industry. And again, people feel quite energetic and optimistic about the level of M&A, particularly from the sponsor community, that's going to come in 2025. So I think just broadly speaking, there just continues to be optimism.

Thank you.

Thank you.

We will take our next question from Derek Hewitt with Bank of America.

Good morning. I have a question on credit, specifically on looking at slide seven. And it shows that risk-rated three and four totals increased despite kind of what we saw with the meaningful reduction in non-accruals. So could you provide some additional color on kind of where you were seeing that negative credit migration? And then were there any specific sectors where you saw that decline?

I mean, really, if you look at the aggregate of our rating three and four buckets, it ticked up around 1% period over period. And it's really due to one name that had some underperformance that continued throughout the quarter that we thought prudent to reassign to a risk rating three.

And could you provide the sector that was in?

It was in the business services sector.

Okay. Thank you. Yeah, so it was not related to ARR or healthcare. Okay.

Understood. Thank you. Thank you.

We will take our next question from Robert Dodd with Raymond James.

Hi, guys. First, on the kind of pipeline, I mean, you point to – being optimistic about that 2025 now and Q4 being muted should we expect the 25 to be unusual I mean is it going to be a relatively strong Q1 i.e. an early 25 because it's deals that maybe we're waiting for the election and going to happen early in 25 instead of or is it going to be normal like it's still the first half is going to be soft and yeah it's a really good question Robert and

Thanks for the question, and thanks for joining again. And so we're absolutely optimistic about overall M&A volumes in 2025. Having said that, private credit, as you know, deployment is highly correlated to sponsor M&A activity. And if you look at the cycle of how these processes play out, we would expect that there are going to be many opportunities that pop up in the first quarter. But having said that, it takes a little bit of time for these companies to actually transact, to get to a deal, and then to fund. So if we had to guess, we would expect our teams to be very busy assessing new opportunities in the first quarter. But in terms of actually the deployment, it's likely going to be the second quarter or later when you start to see a real tick up in activity.

Got it. Thank you. And then on the recycling, you know, you're recycling, you're 21 and older. So what The question is really adverse selection, right? Should I now, when I look at your portfolio by vintage, be more concerned about the remaining older assets because those haven't been – it's harder to get rid of a more tricky asset than it is a good asset. So is there – how are you dealing with the adverse selection risk in the recycling and concentration aspect? of risk in the older vintages on some of those assets, if that's going to occur.

Yeah, no, I mean, look, in the last couple of quarters, we saw a very healthy activity of that. I think we'll continue to see that play out over the next 12 months from now. I'm not too concerned with the adverse selection issue as we continue to address it. Look, I mean, as you know, some of these private equity firms have paid pretty high multiples of these way back when. They're, you know, we're continuing to see nice top line as well as EBITDA growth in the portfolio. They'll kind of earn their way into those valuations. And then you should see some M&A activity to, you know, either those companies will sell or get refinanced as they earn into some of those higher valuations. Got it. Thank you.

Thank you, Robert.

We do not have any further questions. I would like to turn the call back to Alex Chee for closing remarks.

Thanks, everyone, for joining our call, and we look forward to speaking with you at the end of next quarter.

Goodbye. This concludes today's call. Thank you for your participation. You may now disconnect.