Goldman Sachs BDC Inc
NYSE:GSBD
Earnings Call Analysis
Q4-2023 Analysis
Goldman Sachs BDC Inc
The company has showcased a promising financial status with both top-line (revenue) and EBITDA (earnings before interest, taxes, depreciation, and amortization) growth year-over-year, suggesting an upward trajectory for the business's profitability and operational efficiency. Even with interest coverage ratios remaining flat due to slight changes in SOFR rates, the EBITDA growth, coupled with moderate rate hikes, indicates stability in their ability to cover interest expenses.
With a total investment portfolio valued at $3.4 billion and a low net debt-to-equity ratio of 1.11x, falling under the target leverage of 1.25x, the company exhibits a strong balance sheet. The operational strategy involves a healthy mix of secured and unsecured debt, maintaining significant liquidity through their available credit facilities. This financial prudence is evident in the planned management of upcoming notes' maturities in 2025 and 2026, affirming a well-structured approach to debt obligations.
Despite a quarter-over-quarter dip in total investment income, caused by lower nonrecurring investment income, the company maintains an annualized net investment income yield on book value of 15%. The slight decrease in the PIK (payment-in-kind) percentage of total investment income and a consistent dividend distribution allude to the firm's capacity to manage income streams effectively. With spillover taxable income reaching roughly $118 million, the company ensures a stable foundation for its longstanding dividend payout consistency.
The company's portfolio companies have not only experienced revenue and EBITDA growth but also demonstrated a remarkable capacity to expand their EBITDA margins by approximately 130 basis points in the fourth quarter. This margin increase indicates an efficient pass-through of price increases to customers, underlying the strength and pricing power of the portfolio companies.
The second half of the year is looked upon with optimism, driven by robust private equity activity, such as buyouts and capital distributions required for subsequent fundraising. The company stands to benefit from a backlog at near record levels of companies poised for sale by private equity, hinting at a potential influx of deal flow and investment opportunities.
The company leverages strategic advantages, such as Goldman Sachs's connections, for sourcing deals—almost one-third of new deals originated from this synergy. While the broader market sees the return of banks in large-cap lending, the company’s focus on the middle market has shielded it from the intense competitive pressures witnessed by its large-cap counterparts.
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Good morning. This is Austin Neri, a member of the Investor Relations team for Goldman Sachs BDC Inc., and I would like to welcome everyone to the Goldman Sachs BDC, Inc. Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] 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 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 home page of our website at www.goldmansachsbdc.com, under the Investor Resources section and which includes reconciliations of non-GAAP measures to the most directly comparable GAAP measures. These documents should be reviewed in conjunction with the company's annual report on Form 10-K filed yesterday with the SEC. This conference call is being recorded today, Thursday, February 29, 2024, for replay purposes.
I'll now turn the call over to Alex Chi, Co-Chief Executive Officer of Goldman Sachs BDC, Inc.
Thank you, Austin. Good morning, everyone, and thank you for joining us for our fourth quarter and 2023 fiscal year-end earnings conference call. I'm here today with David Miller, our Co-Chief Executive Officer; Tucker Greene, our Chief Operating Officer; and Stan Matuszewski, our Chief Financial Officer. I'll begin the call by providing an update on the Goldman Sachs private credit platform before providing a brief overview of our fourth 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.
So with that, I'd like to provide a brief update of the Goldman Sachs private credit platform and the positive impact on GSBD of being part of it. We're proud to announce that next week marks the second anniversary of our platform integration process. This endeavor brought all of Goldman Sachs' private credit origination and underwriting capabilities as well as various pools of capital with track records that stretch back over 28 years under a single roof within our asset management business.
As you may recall, historically, our BDC complex, including GSBD, operated as a separate and distinct platform on the public side of the house that was walled off from the rest of the firm and could not take full advantage of being part of the Goldman Sachs ecosystem. In these 2 short years, GSBD has been able to take advantage of the full origination capabilities of the broader private credit platform and its scale, enhance our infrastructure and improve upon our underwriting capabilities. I'd like to highlight a few examples. Amidst the volatile market and muted deal environment, the Goldman Sachs private credit platform remained active deploying $12 billion in 2023. The Direct Lending Americas platform comprised the majority of activity with over $6 billion deployed. Furthermore, taking advantage of the broader scale and origination capabilities, GSBD served as agent or lead lender on well above the majority of its new deals in 2023. Second, the team has spent the past 2 years actively upgrading GSBD's portfolio quality.
As a point of reference, in the fourth quarter of 2021, just prior to the integration, GSBD had 89.3% at fair value and first lien senior secured loans, whereas as of the fourth quarter of 2023, that figure stood at 95.3% at fair value. At the same time, in the fourth quarter of 2021, second lien loans comprised 8.2% of the portfolio at fair value versus the fourth quarter of 2023 where second liens made up only 1.9% at fair value.
This is a result of actions we discussed in previous quarters, whereby repayments and junior lien positions have allowed us to redeploy capital into attractive opportunities, higher up in the capital structure, and we proactively took marks on legacy junior positions. Finally, our integration has allowed for the significant expansion of our overall deal funnel to provide more proprietary and unique direct lending opportunities for GSBD. For example, since 2004, Goldman Sachs Private credit has been the leading lender to the middle market wireless tower sector, deploying close to $7 billion of capital with no losses to date.
During the quarter, the Goldman Sachs private credit platform served as a lead arranger on a senior secured facility to Skyway. Founded in 2005, Skyway is a Florida-based wireless tower operator with 445 towers in its portfolio. The facility continues a long-standing Goldman Sachs relationship with the Skyway team, which began with the financing of the Skyways first portfolio in 2011 before its sale to American Tower, followed by the financing of multiple subsequent tower portfolios, including the current one. This is but -- one example of a new set of investment opportunities made available to GSBD, resulting from our integration efforts.
Harrington is another example of an investment in the quarter where GSBD utilized the scale of the broader senior direct lending platform to provide a commitment for the entire facility that allow the sponsor to win the asset, and we served as lead arranger. Harrington is a California-based specialty distributor of precision fluid control products across a variety of industry sectors. We are proud that we've been able to capitalize on the thesis that we communicated to our shareholders and lenders when we integrated GSBD, and we remain committed to leveraging the broader private credit platform for the benefit of GSBD shareholders in the quarters and years ahead.
As we announced after the market closed yesterday, our Board declared a first quarter $0.45 per share dividend payable to shareholders of record as of March 28, 2024. This marks the company's 36th consecutive quarter of a $0.45 per share dividend totaling $16.20 per share since our IPO, excluding the special dividends we paid in 2021 post the merger with MMLC.
Net asset value was $14.62 per share as of December 31, 2023. This increase was primarily attributable to net investment income exceeding our quarterly dividend, partially offset by net realized and unrealized losses for the quarter. We had previously expressed confidence that deal volumes would increase as the year progressed and the trend indeed continued in the fourth quarter as it did in the third quarter.
During the fourth quarter, we reviewed more than 150 investment opportunities across our direct lending Americas platform and deployed capital at strong levels, as David will expand upon in a bit. While we acknowledge that recent deal volumes have improved from recent lows in the past several quarters, we've also witnessed greater competition in the direct lending space, resulting in spread tightening over the past several months.
We anticipate that as the overall deal environment improves, supply demand for private credit will align to support spread premiums and tighter lending terms in line with historical private credit underwriting experience. At the same time, it's worth considering that while the broadly syndicated loan market has also reopened, although primarily for near-term refinancings, this is a dynamic that's more impactful to the upper middle market to larger cap segments whereas GSBD is more focused on the core of the middle market.
With that, let me turn it over to my Co-CEO, David Miller.
Thanks, Alex. During the quarter, we originated $166.2 million in new investment commitments to 14 new and 4 existing portfolio companies. Sales and repayment activity totaled $224 million, primarily driven by the full repayment and exit of investments in 7 portfolio companies. In particular, as we continue to upgrade the quality of the portfolio, we are pleased with the full repayment of one junior lean position, an exit of two equity positions, which will allow us to continue redeploying capital into new first lien-oriented opportunities.
Turning to portfolio composition. As of December 31, 2023, total investments in our portfolio were $3.4 billion at fair value, comprised of 97.2% in senior secured loans, including 91.1% first lien, 4.2% first lien last out unitranche and 1.9% in second lien debt. As well as a negligible amount in unsecured debt and 2% in a combination of preferred and common stock and warrants.
As of quarter end, the company held investments in 144 portfolio companies operating across 38 different industries. The weighted average yield of our investment portfolio at cost at the end of Q4 was 11.8% as compared to 11.6% from the prior quarter. The weighted average yield of our total debt and income-producing investments at amortized cost remained at 12.6% at the end of Q4.
I will now turn the call over to Tucker Greene to discuss our overall credit quality.
Thank you, David. The weighted average net debt-to-EBITDA of the companies in our investment portfolio increased to 6.1x from 5.9x during the third quarter. This increase is primarily attributable to a single position that had a dip in EBITDA, which we believe is onetime in nature. Excluding this onetime move, weighted average net debt-to-EBITDA would have been 5.9x. Importantly, our portfolio companies have both top line growth and EBITDA growth year-over-year on a weighted average basis.
The weighted average interest coverage of the companies in our investment portfolio at quarter end remained flat at 1.5x as SOFR rates decreased very slightly for the quarter. We continue to monitor interest coverage sensitivity at underwrite for new investments and for each name in the portfolio. The underlying borrowers EBITDA growth, combined with lower rate increases has provided stability to the coverage ratio.
And finally, turning to asset quality. As of December 31, 2023, one portfolio company was placed on nonaccrual status, LCG, Vardiman Black, LLC, also known as Specialty Dental, a first lien position, representing less than 1% of fair value. Further, certain investments in 3 portfolio companies were removed from nonaccrual, two of which were due to repayment and one due to improvement in performance. As of December 31, 2023, investments on nonaccrual status remained consistent at 2.3% of the total investment portfolio at fair value compared to 2.3% as of September 30, 2023, and decreased to 3.8% of the total investment portfolio at amortized cost from 4.2% as of September 30, 2023.
With respect to underperforming credits in the portfolio, it is worth noting that our upgraded platform also includes embedded workout resources and expertise to address the aforementioned underperforming credits that were predominantly originated prior to the integration. Of note, our restructuring team currently has an average of 13 years of industry workout experience.
Now I will now turn the call over to Stan Matuszewski to walk through our financial results.
Thank you, Tucker. We ended the fourth quarter of 2023 with total portfolio investments at fair value of $3.4 billion, outstanding debt of $1.8 billion and net assets of $1.6 billion. Our ending net debt to equity ratio as of the end of Q4 was 1.11x, which continues to be below our target leverage of 1.25x.
At quarter end, approximately 47% of the company's total principal amount of debt outstanding was in unsecured debt, and we had $724 million of capacity available under our secured revolving credit facility. As previously mentioned, during the quarter, we executed an extension of the maturity of our secured revolving credit facility from May 2027 to October 2028. As a reminder, we have two separate unsecured notes due February 2025 and January 2026, respectively. As we mentioned on last quarter's call, we plan to address these maturities at the appropriate time.
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 the company's financial results easier to compare to results prior to our October 2020 merger with MMLC. These non-GAAP measures remove the purchase discount amortization impact from our financial results. For Q4, GAAP and adjusted after-tax net investment income were $61.8 million and $60.7 million, respectively, as compared to $72.9 million and $69.7 million, respectively, in the prior quarter.
On a per share basis, GAAP net investment income was $0.56. Excluding the impact of asset acquisition accounting in connection with the merger with MMLC, adjusted net investment income for the quarter was $0.55 per share, equating to an annualized net investment income yield on book value of 15%. Importantly, we would note that while total investment income declined between the third and fourth quarters, the decline was driven by lower nonrecurring investment income, resulting from a decrease in repayment related activity despite an increase in recurring investment income.
Finally, the PIK percentage of our total investment income decreased slightly quarter-over-quarter and is only slightly up year-over-year, remaining in the single digits. Distributions during the quarter remained consistent at $0.45 per share. Our spillover taxable income is approximately $118 million or $1.08 per share on a per share basis, which we believe provides continued stability on our consistent dividend since inception. As Alex mentioned, net asset value per share on December 31, 2023, was $14.62 as compared to $14.61 last quarter.
With that, I'll turn it back to Alex for closing remarks.
Thanks, Stan, and thanks, everyone, for joining our earnings call. We remain optimistic about the performance of our portfolio, the current environment and outlook for deployment into attractive opportunities. With that, let's open the line for Q&A.
[Operator Instructions] We'll go first to Finian O'Shea with Wells Fargo Securities.
Alex, we were interested on some of your earlier comments on the private credit integration in...
Operator Can you open the lines for Q&A, please.
The line is open, sir.
Can you hear me? Can you hear me.
I can hear you, sir.
Alex. I can't hear the Goldman team.
Operator?
Yes, I am here. Can you hear me?
I can. It's been -- Okay. Can anyone hear me?
This is operator. Yes, I can hear you, Mr. O'Shea.
But can the team hear me?
It appears not. Give me just a moment. [Operator Instructions]
I don't think I'm muted.
You're not, sir.
Okay.
[Operator Instructions] We can hear you now.
All right.
Can you hear us? Can you hear us?
Yes, we can hear you now.
Can you hear us?
All right. Why don't we start over.
Sorry about that. We were experiencing some tech difficulties here.
Okay. So Alex, we were interested in some of your initial comments on the integration there are historically 3 credit franchises with distinct strategies. So does this mean it's all collapsed into one strategy now? Or is there -- or else, like what's new about the way the platform works?
That's a good question. And again, it's all part of one platform now. And to your point, just for historical reasons, we had 3 different arms of Goldman Sachs that were in the private credit direct lending business and then 2 years ago, we brought it all together.
With respect to the various vehicles that we have, they continue to pursue their own distinct strategies. So for example, we have other pockets of capital that earned the large-cap senior drop lending space, and that continues. GSBD has and will continue to focus on the core middle market. And then we have other pockets of capital that focus on mez, on hybrid special sits, et cetera. And so it all brings it together. It's all on the private side here at Goldman.
And so it just allows us to take advantage of the broader ecosystem, as I mentioned, where we can get the full benefit of all the sourcing and the origination and the army of bankers that we have, talking to companies and sponsors every single day, and it just brings a full weight of the firm, and it just allows us to have a wide funnel we've talked about proprietary deals and the benefit of just really strong due diligence. At the same time, it's one team.
So we don't have 3 different teams. So in the U.S., we have about 80 investment professionals, and they're all focused on origination and core underwriting. And then when we source a deal, an investment, we know exactly where it's going to go based upon the various vehicles and the strategies that we have. So we just want to be a direct lending solutions provider to our borrowing clients.
Sure. How -- like within the other strategies, what's the benefit of like a core middle market deal? How much more capital do you have to say, lead a deal or drive terms and all of the above, like what helps the -- go ahead, sure.
No, it's a great question. So first of all, what we couldn't do before was if the large cap pocket of the firm, originated a deal that was call it core GSBD focus area, $50 million of EBITDA. It was just -- it was too small for the large cap. We could not refer it to GSBD just even if we wanted to, just weren't allowed to. So when we obviously collapsed it, GSBD now gets the benefit of that origination. On top of that, as we've also talked about, GSBD has its own vehicle as it's capital, as you know.
But when we're in an increasingly competitive environment, where scale matters, for example, the Harrington deal that I just talked about. We have other pockets of capital that can speak for that deal in its entirety. So that allowed us as a platform to go to that sponsor and say, we can underwrite the entire deal give you a commitment for the entire financing, so you can go win at sell-side auction. And that's exactly what we did. GSBD got an allocation to that. And so that's how we go to market now.
Okay. So if I combine -- if I take this, you can do larger deals, and I think you were in the commentary, you also flagged like the nonaccrual as a pre-integration credit. Does this mean you're going to move up in EBITDA in a meaningful way?
Now look, that's something we could explore at some point in the future. But as I mentioned, in terms of the criteria for the size that we stuck to for GSBD, it's really up to businesses with EBITDA of up to $200 million. And so that's why you just really haven't seen the EBITDA move up meaningfully. It ticked up a little bit in the fourth quarter, but it's still in and around the $50 million, $55 million EBITDA range for the portfolio within GSBD. We have other pockets of capital that can pursue large cap as well as mid-market at the same time. GSBD is just -- we'll always be focused on -- we'll continue to be focused on the market.
Okay. That's helpful. And last one for me on this thread. The Group's historically sourced origination from the investment bank sponsor coverage, leverage finance, et cetera. Is that going to -- the BDC franchise, does that come into that fold, are we now going to source from the investment bank?
So first of all, I appreciate that it's certainly an advantage to have the investment bank, they're originating investment opportunities on us. But still, the vast majority of the deals that we've originated are really directly off the platform. Having said that, we get a tremendous amount of referrals that come in from investment banking, from Private Wealth, they cover the largest family of enterprises in the world. If you look at just over the course of the year, where we had the full year of the benefit of integration, roughly 1/3 of new deals that we did within GSBD, came from this one Goldman Sachs advantage as we'll talk about. So we're not certainly relying upon investment banking to source for us, but it certainly provides additional flow and allows us to be a lot more selective about what we choose to do.
We'll go next to Arren Cyganovich with Citi.
I think you mentioned in your prepared remarks that you're seeing kind of activity you're expecting it to pick up in expectations for spreads to tighten. Are you seeing, from a competitive standpoint, banks reentering into lending? Or is this still primarily just direct lenders that you are competing with?
So we're certainly seeing the BSO market reopening. We have our own leverage finance department within banking that's certainly active. But what we're also seeing is that that's really a large cap phenomena. So we have our own large-cap vehicles, and we're certainly seeing additional competitive pressure from that standpoint. In addition to the large amount of private capital that's just been raised overall. But we had not seen banks really get back into the core middle market, which is where GSBD plays. So although we have seen a bit of spread compression over the course of the year and quarter-over-quarter, it has not been to the magnitude of what we've seen on the large cap side of the business.
Okay. And then you had mentioned that you had I think one company that had dip in EBITDA from a broader perspective in your portfolio companies, are you seeing continued EBITDA growth? Or is that starting to slow or something?
We're certainly seeing continued EBITDA growth. So if you look at the fourth quarter on an LTM basis, our top line for the portfolio grew on a weighted average basis, about 16.5%. And on an EBITDA basis, it grew about 7.5%. But what's also interesting is if you look at EBITDA margins quarter-over-quarter, we're certainly seeing how our portfolio companies are passing along price increases to their customers. So EBITDA margin actually expanded about 130 basis points in the fourth quarter over the third. So we were really happy to see that.
We'll go next to Mark Hughes with Truist.
Just looking at your spread of rating, just looking at the percentage of the portfolio, kind of the 1 through 4, a little bit of movement in there, still high quality, but a little bit of erosion. Is that kind of the higher for longer, just interest coverage issue? What would account for a little bit of movement? And then do you think that's kind of hit it, it's worse. Is it -- should it stabilize from here given the interest rate environment, given the economy? How do you see that?
I think with respect to the portfolio, there might be some movements from name to name. But in terms of the overall quality of the portfolio, we really haven't seen much movement. It's actually quite stable. As you saw, we moved 1 name reading 2 to reading 3, and we took a mark on that particular position. But we also moved a number of names off of nonaccrual as well as we exit those investments, two of them and another one, actually, we put back on accrual, which is based upon good performance. So I wouldn't call out anything idiosyncratic about our portfolio. It's just really quarter-to-quarter just based upon the dynamics that we've talked about.
Understood. And then on your net investment activity sounds like more opportunities that you're looking at, you've had some decent repayment activity here lately. How do you think that's going to shake out in the near term? Is it still kind of a push or when do you start to get ahead of that?
Look, in terms of activity, we remain quite optimistic about the second half of this year. Lots of different factors, which I'm sure you've heard of from us as well as other managers in space. But private credit continues to be driven really by private equity activity, leverage buyouts, add-on activity. It's well known, just the sheer amount of dry powder that's out there. In addition, there is a significant amount of company that are owned by private equity firms that really just have to be monetized, believe last year, it was the second lowest amount of distributions from private equity firms to their LPs in a quarter century.
So in order for private equity firms to really raise their next fund, they're going to have to distribute capital. So at the same time, just going back to Fin's question, we had the benefit of speaking with our investment bankers who sell many companies to private equity firms, and they will tell us that the backlog of companies that they've been mandated to sell just continues to sit at near record levels. So for all those reasons, we remain optimistic. If rates do start to come down later in the year, that should signal more confidence. And so that will also just open the floodgates a bit more on M&A activity, and we will get our share of that.
[Operator Instructions] We'll go to our next question from Robert Dodd with Raymond James.
On the repayment activity in the quarter, obviously, that was pretty significant, but the repayment fees accelerated OID, et cetera, were down. Was that just coincidental or was there any effort by you to encourage the -- some of the older assets, which would have lower accelerated OID to migrate out of the portfolio? I mean, is this a part of the rotation or just coincidence?
Robert, yes, it's just coincidence. I'd say last quarter, we had some investments that exited that were some larger investments with a greater amount of OID, which was unamortized some deals that had come over in the MMLC merger that had large unamortized balances, and that was really what was kind of driving up that nonrecurring income last quarter. We did still see some accelerated amortization and repayment related interest income this quarter, but it just wasn't to the magnitude coincidentally with the handful of investments last quarter with the larger balances unamortized.
Got it. Got it. On leverage, I mean you are half below target right now. I mean, obviously, with rates where they are, you don't need to be pushing the envelope on the leverage to -- to produce earnings well in excess of the dividend. But so is that -- should we expect leverage to ramp up rapidly? Or is it going to be relatively rapid depending on the market and activity or is the intent to ramp it up a little slower as maybe as rates come down as kind of offset factor?
Robert, it's David. No, I think you'll see us take that up slightly. I don't think you're going to see a rapid increase. As you know, it's 1.25x is our target leverage. So I think you'll see us in future quarters, probably approach that level, but it's going to bounce around up and down a little bit from our target level depending on activity in the portfolio.
Got it. And then on the -- last one for me on the unsecured side, obviously, you don't have maturities until '25, '26. But would you be looking to potentially come to market if that opens up in maybe this year to increase your unsecured mix or pre-refund the '25? And how did that if you did, would you be looking to do that at fix rate or what, it would be a fixed rate? But would you be looking to swap that to manage the exposure to rate differentials? Or are you going to stay with your historic pattern of unsecured space fixed?
Yes. I mean, look, we're actively monitoring the market as you point out, we have some 2025 maturities. So I think you'll see us address those at the right time. As far as fixed versus floating, we're going to evaluate that at a time based on where the curve is and what's most beneficial to our investors, depending on when we execute a transaction.
There are no other questions at this time.
Thank you very much, everybody.
Appreciate it. Thank you.
This does conclude today's conference call. Thank you for your participation. You may now disconnect.