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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, this is Ian and I’ll be your conference facilitator today. I would like to welcome everyone to the Goldman Sachs BDC third quarter 2018 earnings conference call. Please note that all participants will be in a listen-only mode until the end of the call, when we will open up the line for questions.
I will now turn the call over to Ms. Katherine Schneider, Head of Investor Relations at Goldman Sachs BDC. Katherine, you may begin your conference.
Thanks Ian. Good morning everyone. 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 beliefs 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 the 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 copyright 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. These documents should be reviewed in conjunction with the company’s Form 10-Q filed yesterday with the SEC. This conference call is being recorded today, November 2 for replay purposes.
With that, I’ll turn the call over to Brendan McGovern, CEO of Goldman Sachs BDC.
Great, thank you, Katherine. Good morning everyone and thank you for joining us for our third quarter earnings conference call. In terms of the agenda for the call, I’ll start by providing our Q3 results as well as an update on the progress we have made to position the company to benefit from the Small Business Credit Availability Act. From there, Jon Yoder and Jonathan Lamm will discuss our investment activity and financial results in greater detail.
With that, we are pleased to report a strong quarter for our shareholders. Net investment income per share was $0.54 in Q3, up from $0.50 in Q2. The quarter over quarter increase in NII was driven primarily from elevated income from prepayments coupled with decreased management fee expense. Net asset value per share at the end of Q3 was $18.13, an increase from $18.08 as of the end of Q2. In addition, our board declared a $0.45 dividend per share payable to shareholders of record as of December 31, 2018.
While we are very pleased to report such strong results, there are a few things worth noting. First, while prepayment fees were quite strong this quarter, we have observed a lower level of transaction activity thus far in the fourth quarter, underscoring the inherently unpredictable nature of prepayment income. Second, you’ll note that yields on new originations were lower than yields on repayments. This is a trend that may continue in the current environment, particularly as we are currently focused on better risk-adjusted returns in first lien assets. Still, we believe the strong results this quarter validate all the actions we have taken as a management team to position the company for success following the recent regulatory changes impacting the BDC industry.
As a reminder, at the end of the second quarter, shareholders approved the company’s proposal to reduce the minimum asset covered requirement to 150% and GSAM agreed to reduce its management fee from 1.5% to 1% on gross assets. In Q3, we turn our attention to obtaining approval from lenders of the company’s senior secured revolving credit facility to reduce the company’s minimum asset coverage covenants to align with the same level approved by our shareholders. We appreciated the constructive response we received from our lenders and were able to execute the amendment we sought without incremental fees or any increase in borrowing costs. As a result, we believe the company is well positioned to enjoy increased operating and balance sheet flexibility.
As we have said before, we are not planning to utilize this additional flexibility to change our core investment strategy of direct lending to middle market businesses. Our approach to investing will continue to be rooted in seeking the best risk-adjusted returns in a borrowers capital structure based on a fundamental bottom-up review.
The third quarter represented the first full quarter of operations following shareholder approval to operate with higher leverage. We believe that the company is already benefiting from the increased flexibility. In particular, we are currently seeing better risk-adjusted returns in first lien senior debt, and during the quarter nearly 89% of new investments were in first lien loans. In general, these loans are carrying lower yields but we believe that they also have lower risk.
We also modestly increased the size of our balance sheet during this quarter. Our ending debt to equity ratio was 0.79 times, which was up from the prior quarter at 0.7 times. We would expect our leverage ratio to continue to gradually increase if we continue to find attractive first lien senior loans; however, if this does not come to pass or our asset mix is otherwise unchanged, then our leverage profile is unlikely to significantly change. We expect that over time, the composition of our assets will be dynamic, reflecting the lending environment and where we are seeing the best risk-adjusted returns. Asset composition in turn will drive our [indiscernible] profile. This is a reflection of prudent risk management practices which we believe are a core competency of Goldman Sachs. As we have in the past, we will endeavor to maintain a meaningful cushion to the statutory minimum asset coverage requirement.
With that, let me turn it over to Jon Yoder.
Great, thanks Brendan. During the third quarter, we saw very strong deal activity in the middle markets, particularly by private equity sponsors and sponsor-backed companies. We believe the deal flow continues to be driven by significant fundraising activity in the private equity sector in recent years combined with high levels of business confident by U.S.-based companies. The fundamentals appear to justify this confidence as job creation and unemployment trends are favorable while growth in gross domestic product is near multi-year highs. These factors tend to resonate more strongly in the middle market segment of the U.S. economy where businesses are generally more focused on domestic customers.
Middle market lenders like us benefit from these strong fundamentals through higher collateral values, but we are also benefiting from increasing interest rates driving higher income on our existing portfolio of mostly floating rate loans. As we look forward and notwithstanding some of the market volatility that we witnessed in October, the macro backdrop is not showing signs of material fundamental weakening; however, there have been some statements made by high level policymakers expressing concern about the state of the leveraged lending market. If these comments slow or even reverse capital flows into the space, we would welcome this development as it would positively differentiate the company’s structure with its stable capital base.
Turning to specific investment activity for the quarter, we have previously said that one of the key benefits of the co-invest order that we obtained more than a year ago was to provide for increased single-name diversification through cross-allocating investments with other GSAM funds. This quarter was another example of this benefit as two of our largest single name investments, our $57 million first lien last out loan to Associations and our $47 million second lien loan to Medplast were repaid, and we participated in the new financing in reliance on our co-investment order. This allowed us to cross-allocate the loans and reduce the single name exposure to $15 million and $8 million respectively.
While both of these investments performed very well, we are pleased to be part of the lender group that refinanced these loans. We also believe that a reduction in the size of these two investments is consistent with our goal to increase single name diversification.
Another single name we’ve discussed in the past is our investment in NTS Communications. As a reminder, NTS is a telecom operating both a [indiscernible] and a fiber network primarily in West Texas. Our long term shareholders will recall that back in July of 2016, we amended the terms of our loan to allow for the payment of PIC interest instead of cash and provided additional capital to the company in an effort to support its growth initiatives. We’ve been pleased with how NTS has utilized our support to improve financial performance over the last few years, though it continues to underperform our initial underwrite as consolidated EBITDA is modestly below where it was at the time of the initial investment.
Given that our loan is set to mature in June of 2019, we’ve engaged in constructive dialog with NTS and its private equity sponsor on a variety of options, including a potential path to monetize our investment for an amount at or near our current blended mark on our revolver and term loan, which is approximately $0.91 on the dollar. We look forward to updating shareholders further on this investment as we draw closer to maturity.
For the quarter, new investment commitments and fundings were $205.6 million and $190.1 million respectively. Regarding placement in the capital structure, new originations this quarter were comprised of 89% first lien loans, 11% second lien loans and less than 1% in unsecured debt. These new investments were across seven new portfolio companies and eight existing portfolio companies. Sales and repayment activity totaled $111.7 million, driven primarily by the full repayment of the two investments I mentioned. Our sales and repayment activity was elevated this quarter as compared to historical averages in recent years. This is a trend that, as Brendan mentioned, we do not expect to continue throughout the remainder of the year.
During the quarter, the yields on our investment portfolio were relatively steady. The weighted average yield on our investment portfolio at cost at the end of the third quarter was 10.8% as compared to 10.9% at the end of the second quarter
Regarding portfolio composition, as of the end of the quarter, total investments in our portfolio were $1,318,300,000 at fair value comprised of 89.6% senior secured loans, including 46.3% in first lien, 10% in first lien last out unitranche and 33.3% in second line debt, as well as 0.5% in unsecured debt, 2.9% in preferred and common stock, and 7% in our senior credit fund. We also had $72.8 million of unfunded commitments as of September 30, bringing our total investments and commitments to $1,391,100,000.
We increased the company’s single name diversity by 12% quarter over quarter and 29% year over year. As of quarter end, the company has 121 investments across 66 portfolio companies operating across 32 different industries.
Turning to credit quality, the underlying performance of our portfolio companies was stable quarter over quarter as measured by weighted average net debt to EBITDA, which was 5.3 times at quarter end versus 5.2 times at the end of the second quarter. The weighted average interest coverage of the companies in our investment portfolio at quarter end was 2.2 times, which is unchanged from the prior quarter. The senior credit fund continues to be the company’s largest investment at 7% of the company’s total investment portfolio. Over the trailing 12 months, the senior credit fund produced an 11% return on invested capital.
During the quarter, the senior credit fund had new originations of $63.7 million across three new companies and three existing companies. Sales and repayments were $62.7 million, resulting in a change in net funded portfolio of negative $3.9 million during the quarter. The total size of the investment portfolio was $488 million at quarter end.
As of the end of the third quarter, the weighted average yield at cost on investments in the senior credit fund was 7.5%, which was relatively unchanged from the prior quarter at 7.6%. First lien loans comprised 96.9% of the total investment portfolio in the senior credit fund and all of our investments are floating rate. The senior credit fund portfolio remains well diversified with investments in 35 portfolio companies operating across 20 different industries.
I’ll now turn the call over to Jonathan to walk through our financial results.
Thanks Jon. We ended the third quarter of 2018 with total portfolio investments at fair value of $1.318 billion, outstanding debt of $579 million, and net assets of $729 million. Our net investment income per share was $0.54 as compared to $0.50 in the prior quarter. The quarter over quarter increase in NII was driven by elevated income from prepayments, including in the senior credit fund, and a decrease in management fee expense resulting from our reduction in the management fee to 1% on assets from 1.5%. Earnings per share were $0.47 as compared to $0.43 in the prior quarter.
During the quarter, our average debt to equity ratio was 0.7 times versus 0.72 times in the prior quarter. We ended the third quarter with a debt to equity ratio of 0.79 times versus 0.7 at the end of Q2. As Brendan mentioned earlier during the call, our utilization of higher balance sheet leverage will be dictated by underlying asset selection each quarter. As a result, we have not set forth a specific target leverage range for the company as the reduced asset coverage requirement provides the company with overall greater balance sheet flexibility. However, we will seek to maintain a meaningful cushion relative to the regulatory asset coverage requirements, as we have done historically.
Turning to the income statement, our total investment income for the third quarter was $38 million, which was up from $37.2 million last quarter. The increase quarter over quarter was primarily driven by elevated income from prepayments, including in the senior credit fund. Total expenses were $16 million for the third quarter as compared to $16.8 million in the prior quarter. Expenses were down quarter over quarter primarily driven by a decrease in investment advisory fees and other operating expenses which was partially offset by an increase in interest and other debt expenses.
NAV was up quarter over quarter as we ended Q3 with a net asset value per share of $18.13 versus $18.08 in the prior quarter. Our supplemental earnings presentation provides a NAV bridge to walk you through these changes.
The company had $38.3 million in accumulated undistributed net investment income at quarter end resulting from net investment income that has consistently exceeded our dividend. This equates to $0.95 per share on current shares outstanding.
During the quarter, we closed on an issuance of $40 million in principal amount of 4.5% convertible notes due April 2022. These notes have identical terms and are part of the company’s outstanding $115 million principal amount of convertible notes. We were very pleased with the terms that we were able to achieve in this reopening.
This quarter, as Brendan mentioned earlier, we were pleased to execute an amendment with our lenders in our revolving credit facility. We expect to continue to finance the company in a prudent manner. Our current debt capacity provides the company with sufficient runway to gradually increase our balance sheet over time. That said, as part of our overall financing strategy, we continue to evaluate other sources of debt with a particular emphasis on continuing to diversify our sources of funding.
With that, I will turn it back to Brendan.
Great, thanks Jonathan. Overall, we believe this quarter was characterized by solid execution on multiple fronts. In addition to producing strong net investment income and an uptick in NAV, we completed important changes to our lending agreements which will allow us to take advantage of the recent relaxation of the leverage rules for BDCs. As we look forward to the remainder of the year and 2019, we hope to continue to maintain the positive momentum.
As always, we thank you for the privilege of managing your capital, and with that, let’s open it up for Q&A.
[Operator instructions]
Our first question comes from the line of Finian O’Shea from Wells Fargo Securities.
Hi guys, good morning, and thanks for taking my question. Just wanted to start on your comments on how the platform and strategy is evolving pursuant to the higher leverage regime and perhaps lower fees. You talk about a more dynamic and flexible composition of originations. Can you touch on how flexible that will be, specifically addressing will you be butting up against the upper middle market senior deals that at this time go into the senior credit fund, or will you be just focusing on the best stuff or better stuff in the core middle market?
Sure I get the crux of the question. A few things in there. One, the word you used and which we’ve used many times is flexibility. As we look at the changes in the regulation, the first thing that strikes us is availing ourselves of that change allows for a lot more flexibility. In certain environments, we may choose to be very focused on senior originations and with the benefit of leverage, we can continue to produce returns on equity consistent with our historical returns and consistent with our shareholders’ expectations. In different environments, there may be a different opportunity set, so by moving as assertively as we have to take advantage of these opportunities, we think we’ve put the company in a great spot.
One of your questions was with respect to the senior credit fund, and you characterized, I think, upper middle market was part of your discussion point there. We continue to be focused on the core of the middle market. If you look at the underlying EBITDA of the companies in our book, I think it’s about $36 million of EBITDA - that’s the heart of the middle market, that’s where we see the best opportunities, so now we can continue to serve that part of the market with a different product set, including some unitranche products which is high yielding. I wouldn’t look at what we’ve done and assume that we’re going to start going up market and competing with the parts of the market that are straddling the syndicated parts of the market. In fact, when you look at our senior credit fund, I don’t think that’s really what we’ve done there as well. I think the average EBITDA there is probably around $65 million or so - I may be off by a bit, but we have historically across all of the vehicles that we manage really been focused on the heart of the middle market. That will continue to be the case. That’s where we have seen the best opportunities and returns, and nothing that we’ve done changes that approach.
Okay, and do you also, at this time at least, intend to keep that structure intact, or is there any discussion of collapsing?
Yes, so look - when you look at our senior credit fund, if you go back in time and look at what we and others who have those fund structures in place, a lot of what they were designed to do was to have the ability to get off balance sheet leverage. The structure is we don’t control it, therefore we don’t consolidate it, and therefore the debt at the senior credit fund does not count against our statutory leverage limits, so you’ve seen us do first lien yielding assets within that fund. On the back of the regulatory changes, fair to say that the utility of that structure is less than it once was to us, and in fact when you look at the financing markets, the financing markets value first lien collateral, and so there may be some sensibility to unwinding that structure and putting those assets on our balance sheet.
We’re in no rush in that regard. We have a great relationship with [indiscernible]. We have ongoing conversations, so there may be more to come; but I do think it’s worth in light of the changes looking to overall the asset composition where and how we invest, and I think there is some elegance in simplicity.
Sure, appreciate all that as well. Just another item on the lower fee, it’s obviously very well received and appreciated by the market and shareholders and even sell-side research analysts. You’re entering sort of a new frontier on the public BDC side, providing direct lending with what traditionally on BDCs would have the fee structure you have for the more senior floating asset funds. Can you talk about any pressure on human capital, systems, just keeping the machine going and improving the machine to stay competitive in the direct lending asset class, which of course as we all know is very difficult to continue to on-board the best assets and maintain and monitor those, etc.?
Hey Finian, it’s Jon Yoder. Great question, appreciate the question. Certainly we thought all that through before we proposed the changes. One of the things that I would highlight about that is that if you look at what the market is in terms of asset management fees for managing private credit assets, the vast bulk of private credit assets are not in BDCs. They’re in private fund structures, separate accounts for large institutional investors and whatnot, where frankly I think the fee levels that we have in our public BDC are much more consistent with that level where, frankly, most managers are managing the bulk of their assets. We don’t think we’re in a disadvantaged position relative to others just because in our BDC, we have a slightly lower fee level than other public BCD managers. Rather, I think it’s really a lot more consistent with what we see the market doing in terms of what they charge for private vehicles and institutional separate accounts. We don’t think, that said, that there creates any particular pressure on human capital.
I would just add, Finian, when you look at what we did effectively by going from 1.5% on assets to 1% on assets, in some respects what we’ve done is foregone the asset management fees that we might have earned with higher balances with more leverage, but that’s ignoring the fact that we had the opportunity as a platform to actually earn more incentive fee in that calculus as well. That’s what our investors want to pay us for - they want to pay us for performance. That’s what other vehicles, our LPs want, and that’s a positive thing that actually has the opportunity for us to expand the platform in a way that makes us a really robust place to be, a robust place for investment professionals. When you consider that factor, more capital on the platform and frankly more flexibility with that capital to be solutions providers to our clients, that’s a very, very powerful story, one that resonates across all of our discussions. Yes, as we look again at the results of this quarter, it’s further validation that we think we’re really doing the right thing here. Very good quarter, in part driven by some of that change in those fees.
Furthermore, I’d say as we simply take out pen and paper and think through different investing environments, absent that change in fees, we struggle to see how we can improve our returns on equity under a different fee regime. We want to be able to have a flexible pool of capital that can do some second lien rate environment, do more senior investments in a different environment, but in any event if we’re going to be competitive, for example, in certain parts of the senior market, we want to make sure that when we put those assets on our balance sheet and finance them appropriately, that we’ll still generate returns on equity that will attract more capital.
All of that together is what caused us to make the changes that we did, and it’s been a very overwhelmingly positive response across the board.
Thanks so much, guys.
Your next question is from the line of Leslie Vandegrift from Raymond James.
Hi guys, good morning. Thank you for taking my questions, and congrats on the strong quarter.
Thank you.
You’ve answered a few of my questions already with that, but you talked about increasing to the new target leverage now that you have that ability. Obviously this quarter was really strong on originations, but correct me if I’m wrong, but all of the repayments were then--those portfolio companies were reinvested in this quarter, correct?
The two large repayments this quarter, Leslie, were both--we reinvested into the new loan that refinanced the old loan, effectively. But as I mentioned in the prepared remarks, the size of our position, we decided to bring down.
Okay, and then for fourth quarter and into the beginning of ‘19, then, for the outlook on originations, you feel like it will be as strong as it was this quarter, or maybe back a little bit because of those reinvestments?
I think that as we look forward to the fourth quarter, and we touched a little bit on this in the prepared remarks, but the first three quarters of this year have really been a record sort of year to date in the first three quarters for middle market transaction volumes, and I think we and others in the space have benefited from the high levels of transaction activity. We are detecting, as we sit here in the fourth quarter, obviously we’re only a month into it, we’ve got a couple months to go and, frankly, the last two months of the quarter are usually a bit more active than the first month of the quarter. But all that being said, we are detecting a bit of a slowdown in transaction activities here in the fourth quarter. I don’t know that it’s attributable to anything. I don’t think it’s attributable to some of the volatility that we’re seeing in the public markets. I don’t think that it would filter into the private markets so quickly, so I wouldn’t--I can’t say that I think there’s any obvious reason for why that slowdown may be occurring. I think it could just be a little bit of a breather, where there’s been just so much transaction activity that it’s part of the natural ebb and flow, it takes a little time to restock deal flow pipelines and so on and so forth.
Again, it could change. Sometimes we see things become very active in the last month or six weeks of the quarter that you weren’t expecting, but as we sit here today, we would expect there to be lower levels of transaction activity, less growth in the portfolio in the fourth quarter than what we saw in the third.
Okay, thank you. On Associations, one of the reinvestments after it paid, it went from a unitranche to a couple of first lien investments, but the yields actually went up from a unitranche product to a sheer first lien. Could you give me some color on that, on why or how that was restructured that way?
Yes, sure. This is a transaction that we actually have talked about on prior calls. It’s an investment that we initially were introduced to through our private wealth management network. It’s a really--we think a really, really strong company that effectively manages homeowners associations and community associations, which we think provides very sticky recurring revenue insulated from a lot of economic cycles and so on.
The initial deal we did, I believe was back in 2014, and that deal was structured as a first out last out unitranche, and there was also a piece of mezz behind that. The company has performed well and executed its strategy that we expected. It did get an offer of refinancing that was put together by another platform. It’s now a straight unitranche transaction which would refinanced both the initial first out last out plus that mezz piece, so it allowed the company, because it is inclusive of probably a larger capital structure than what we had initially underwrote back in 2014, the structure goes a little bit deeper in terms of the unitranche, it did allow for a little bit of an increase in pricing relative to what it was before. But again, we think this company is deserving of bit of a higher leverage level just given the nature of its business and how it’s performed.
Okay, but the pieces you hold now are pure first lien, right, not part of the new unitranche?
Correct.
Okay.
Well no, sorry - Leslie, just to be clear, it is first lien, but it’s first lien unitranche. It’s not a last out piece, it’s just a regular, straightforward unitranche.
Okay. Then on the new portfolio companies, the new investments, it looks like the yields were L plus 550 to L plus 750. Is that the range you’re seeing now, what we can kind of look at for new yields?
I think that we always are a little reluctant to provide that guidance, Leslie, in terms of what we’re going to see going forward because every quarter, every--you know, we did seven new deals this quarter, that’s probably, as we were saying, a bit on the higher end. If you look at our historical average, it’s probably more like three to eight. You can have a very small, a couple of deals that make it seem as though--that kind of drives your weighted average yield on your new investments higher or lower just because there’s a small sample size. I would say the deals that we did this quarter, perhaps if anything, were skewed a little bit higher. There’s a couple of deals that we did that were a little bit higher yielding deals. Whether we’re going to be able to continue to find those, again I wouldn’t necessarily guide you to say it will always be in that range. But I think the range that you gave is certainly something that we aim to get and we’ll continue to try to be there.
Okay. Given that other BDCs also have been using the increased leverage capacity, have you guys noticed a change in your direct competitors for deals? Are there more people at the table that before were some of the smaller names, or have some even moved farther into the upper middle market, out of what you guys have been looking at?
Good question. Interestingly, because I know there’s been a lot of focus, and rightly so, on capital flows into the private credit space, we haven’t really seen a lot of new competitors over the last 12 to 24 months. We have seen some of the same competitors get larger as capital has flowed in, so I wouldn’t say that there’s a lot of new people in the space or people that used to be smaller that were kind of below our market segment that are suddenly into our market segment. If anything, and you kind of alluded to this, perhaps there’s a few folks that we used to compete with more regularly that have raised capital and are going upmarket a little bit to deploy that capital, but we really haven’t seen an influx of new competitors. It’s really, for the most part I would say, the same folks we’ve been competing with for years.
The only thing I would add, Leslie, is oftentimes when we get that questions, it’s hard in any one particular quarter to divine what’s going on. The most objective way for us to think through that competitive dynamic is to look at what we did, look what we accomplished in the quarter. As you alluded to, it was a very strong origination quarter. We were able to grow the balance sheet consistent with the leverage that’s available to us now. We were also able to change the asset mix to be much more skewed towards senior loans, so the number we gave was 89% of those originations in first liens, and as you described the target yields are still quite healthy.
So yes, competitive environment, I think when you look at the size of our platform and what’s also a growing market opportunity, we continue to find deals that are meeting our criteria, that are meeting a structure and a yield that we think is consistent with the returns over the long term.
Perfect, thank you. One last modeling question. On the dividend from the senior credit fund, it was higher this quarter than it has been, and the fund itself did not grow. It had net prepayments in the quarter, and so looking for an outlook on the payout ratio. I remember last quarter you all mentioned something about second quarter payout ratio being a bit higher than the long term run rate, but then it went up again this quarter.
Yes Leslie, with respect to the senior credit fund, that incremental dividend income was primarily driven by significantly elevated prepayments versus the prior quarter and prepayment fees that we would not necessarily expect to occur again. That number was an elevated number - we talked about that in our prepared remarks.
Okay, perfect. Thank you for taking my questions.
Once again if you would like to ask an audio question, you may do so by pressing star then the number one on your telephone keypad. If you are asking a question with your hands-free unit or speakerphone, we would like to ask that you use your handset when asking your question.
Our next question is from the line of Christopher Testa from National Securities.
Hi, good morning, guys. Thanks for taking my questions. Just curious, how do you guys view the unitranche composition of the portfolio in the context of debt to equity? What I’m getting as is, are you kind of breaking this out into first out and last out, and if there’s more first outs combined with more first lien loans, you take up more balance sheet leverage? I’m just wondering how you view that.
Chris, your question is exactly right. As you saw, we’re really not doing much by way of taking last outs in unitranches anymore, and that’s largely a function of the fact that there’s not really a need to do that, given the greater flexibility we have at the lower minimum asset coverage requirement. You probably won’t see us do a lot of last outs; in fact we had, as we talked about earlier, one of our largest last outs get repaid this quarter and we participated in a true unitranche where there isn’t the bifurcation in a loan to that same borrower.
You know, the way you alluded to in your question is in fact exactly how we think about it, and as Brendan mentioned, when we think about debt to equity ratios and we think about expanding the size of our balance sheet, it’s completely a function of what is the nature of the assets that we have, and so if we’re going to expand the size of our balance sheet, we’re going to be more focused on first liens, true first liens, not last outs of unitranches and so on.
To say it even more bluntly, we would not take the exact same static portfolio and just say, hey, we’re going to put on more leverage just because we can now. Just the opposite - we think through what we think is the overall risk in the portfolio and match the leverage levels accordingly, so I hope that answers your question.
Yes, that’s great detail, thank you. With regards to moving into, I guess, safer credits if you’re able to, should we expect the sponsor-backed composition of the borrowers to increase as well?
No, I wouldn’t say that, actually. I mean, I think there is as much opportunity to do first liens with non-sponsored as there is for sponsored; in fact, I might even argue that there’s more opportunity in the non-sponsored space in first liens than there is in the sponsored space. I think that, and we’ve talked about this a bit before, over the last couple of years, certainly the last 18 to 24 months, we’ve really seen a lot more activity on the sponsored side than the non-sponsored side, and I think that’s been a function of just elevated enterprise values. If you’re the owner of a business and you’re thinking about what you want to do next, whether that’s raise capital to continue to grow the business, whether that’s sell the business and monetize and move on, the weight of the analysis has been shifting towards look, if I can get 12 or 14 times EBITDA right now cash on the barrelhead for selling my business, that’s pretty attractive relative to what it was some years ago when maybe that business was only worth 9 or 10 times EBITDA. You might just take advantage of a high level of valuations instead of continuing to try to grow the business and potentially erode value because valuations decline even if you are growing EBITDA.
That’s kind of a dynamic that has continued to persist, but I think that, as I say, on the balance we’re probably going to be more attracted to--between first lien and second lien, likely more attracted to first liens and non-sponsored deals, so I would think that going forward, we would not expect an increase in sponsored deals, at least a trajectory of sponsored deals compared to non-sponsored deals.
Okay, thank you for that. That’s good detail. Just switching gears and looking at the other side of the balance sheet, I’m just curious, you guys have alluded to maybe looking for a different financing source, which I think many would take to maybe be another bond issuance. But have you guys given any thought to the securitization market as that’s back open for BDCs, and with you guys having more of a first lien composition in the portfolio and obviously a good brand name, it seems like this might be something that would give you guys very good terms and obviously not have any covenants or restrictions on it in terms of what you could actually fund with it.
Yes Chris, great question. We continue to really evaluate both incremental sources of financing both looking at the unsecured markets, which certainly afford great balance sheet flexibility, as well as the securitization markets, which are very, very attractively priced, and certainly with a more first lien-oriented portfolio, you can drop assets into that. The way that we structured the amendment with our lenders, we have the flexibility really to look at all of those possibilities from a financing perspective.
Got it. Okay, great. That’s all for me. Thank you for taking my questions.
At this time, there are no further questions. Please continue with any closing remarks.
As always, we thank you for joining us and attending our conference call. To the extent you do have additional questions, please feel free to reach out directly to the team, and have a great weekend.
Ladies and gentlemen, this does conclude the Goldman Sachs BDC Inc. third quarter 2018 earnings conference call. Thank you for your participation. You may now disconnect.