Goldman Sachs BDC Inc

NYSE:GSBD

Q1-2025 Earnings Call

[Austin Neri, executive]

Good morning. This is Austin Neri, a member of the Investor Relations team for Goldman Sachs BDC, Inc. And I would also like to welcome everyone to the Goldman Sachs BDC, Inc. First Quarter 2025 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 audiocast 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, May 9, 2025, for replay purposes. I'll now turn the call over to Alex Chi, Co-Chief Executive Officer of Goldman Sachs BDC, Inc.

[Alex Chi, executive]

Thank you, Austin. Good morning, everyone, and thank you for joining us for our first quarter 2025 earnings conference call. I'm here today with our Co-CEO, David Miller; our COO, Tucker Greene; and our CFO, Stan Matuszewski. We'll start the call with our thoughts on recent performance in light of a challenging macro environment and pivot to our investing activity while framing how GSBD is positioned heading into the second quarter.

I'll then turn the call over to David and Tucker to describe our portfolio activity and performance in more detail before handing it over to Stan to take us through our financial results. And then finally, we'll open the line for Q&A.

Let's start by addressing macroeconomic conditions, tariffs and their potential impact on the portfolio and deal flow. With respect to the portfolio, as mentioned on our previous call, we conducted an in-depth company-by-company analysis across our entire direct lending portfolio with respect to tariff exposure and a potential recessionary or even stagflationary environment.

While the second and third order effects remain difficult to quantify, the initial diagnosis is that only 4 out of our 163 companies within GSBD or approximately 3% of fair value are considered to have high exposure, primarily due to their supply chain dependencies in China. The results of our analysis are not surprising as the vast majority of our portfolio companies are asset-light with minimal exposure to international supply chains, are domiciled in the U.S. serving predominantly U.S. customers and operate primarily within service-based industries such as software, health care and mission-critical business services.

In addition, we find comfort in where the GSBD portfolio sits in the capital stack with over 96% of the investments in first lien risk and an attractive loan to value. With respect to deal flow, as a result of the tariff-induced market volatility, the long-awaited resurgence of new M&A activity has been further pushed back. However, the deals that were already in process generally pivoted their financing back from the public syndicated market to direct lending.

In addition, we continue to see deal flow for businesses that are shielded from tariff exposure, again, primarily in services-related industries where private equity buyers are still prepared to pay healthy multiples. We've continued to use our proximity to our investment banking franchise as a competitive advantage for origination.

In addition, market fundamentals continue to suggest the current lack of deal flow will eventually change as sponsors face mounting DPI pressure. With respect to all-in yields, our focus for new investments is in the low- to mid-9% range with weighted average spreads of our broader platform new investments widening modestly quarter-over-quarter from 479 basis points to 510 basis points.

Now turning to our first quarter results. Our net investment income per share for the quarter was $0.42 and net asset value per share was $13.20 as of quarter end, a decrease of 1.6% relative to the fourth quarter NAV, which was largely due to the $0.16 per share special dividend and net realized and unrealized losses in the quarter.

On the topic of dividends, as you'll recall from the last quarter, the Board of GSBD enacted a revised dividend structure, consisting of a base dividend of $0.32 per share with upside via supplemental variable distributions of at least 50% of net investment income in excess of the amount of base dividend and incentive fee reduction from 20% to 17.5% over a 7% hurdle in the interest of aligning the long-term earnings power of the portfolio to increase shareholder value.

And over the subsequent 3 quarters, including the quarter ended March 31, 2025, the Board authorized a special dividend of $0.16 per share. The Board declared a first quarter 2025 supplemental dividend of $0.05 per share payable on or about June 13, 2025, to shareholders of record as of May 30, 2025.

Adjusted for the impact of the supplemental dividend related to the first quarter's earnings, the company's first quarter adjusted NAV per share is $13.15, which to note is a non-GAAP financial measure introduced as a result of the dividend policy change.

The Board also declared a base dividend per share of $0.32 and a special dividend of $0.16 per share to shareholders of record as of June 30, 2025. As anticipated, we made these distributions while remaining below our targeted debt-to-equity leverage ratio of 1.25x. We ended the quarter with a net debt-to-equity ratio of 1.16x as of March 31, 2025, as compared to 1.17x as of December 31, 2024.

We remain focused on delivering on our new dividend structure, the core earnings power of the portfolio and realizing exits of legacy portfolio companies while rotating into new vintage credits. With that, let me turn it over to my co-CEO, David Miller.

[David Miller, executive]

Thanks, Alex. During the quarter, we made new investment commitments of approximately $87.8 million across 14 portfolio companies comprised of 6 new and 8 existing portfolio companies. Of the 6 new portfolio companies, we served as lead on 5 or 72% at fair value. 100% of our originations during the quarter were in first lien loans, which reflects our continued bias in maintaining exposure to the top of the capital stack.

We believe our platform thrives in times of market volatility to unique opportunities that channels to Goldman Sachs ecosystem, which is beneficial to GSBD shareholders. One notable investment during the quarter that illustrated how our strong sponsor relationship secured us the role of admin agent [indiscernible] and cemented us as the largest lender to the company amidst a competitive consortium was supporting the acquisition of Vermont Information Processing.

The company provides mission-critical, vertical-specific software and data services to distributors, suppliers and retailers in the regulated beverage industry. While maintaining long-standing relationship with sponsors shows its worth in choppy markets, so does retaining our position as an incumbent and admin agency in a high-quality company, which was the case with Celero Commerce. Celero is a provider of integrated payment processing and business management solutions to small and midsized businesses across the United States. The GS Private Credit platform has invested in the company since October 2020, and their business has grown both organically and inorganically through acquisitions.

Sales and repayment activity totaled $179.3 million during the quarter, down slightly quarter-over-quarter despite stagnant capital markets, primarily driven by the full repayment and refinancing of 6 portfolio companies. It's also worth noting that 88% of the repayment amount was with existing legacy portfolio companies and will be redeployed into new originations post Q1.

For our portfolio composition, as of March 31, 2025, total investments in our portfolio were $3.38 billion at fair value, comprised of 96.1% in senior secured loans, including 90.7% in first lien, 5.4% in first lien/last-out unitranche, 2% in a combination of preferred and common stock, 1.4% in second lien debt as well as a negligible amount in unsecured debt.

With that, let me turn it over to Tucker to discuss portfolio fundamentals and credit quality.

[Tucker Greene, executive]

Thanks, David. At the end of the first quarter, the company held investments in 163 portfolio companies operating across 38 different industries. The weighted average yield of our debt and income-producing investments at amortized cost and at the end of the first quarter was 10.8% as compared to 11.2% at the end of the fourth quarter.

Despite a modest tightening in portfolio yield quarter-over-quarter, our portfolio companies have both top line growth and EBITDA growth quarter-over-quarter and year-over-year on a weighted average basis. The EBITDA growth of the portfolio, combined with repayments of investments to companies with higher leverage levels drove a decrease in the weighted average net debt to EBITDA of the companies in our investment portfolio to 5.8x during the first quarter from 6.2x during the fourth quarter.

At the same time, the current weighted average interest coverage of the companies in our investment portfolio at quarter end increased to 1.9x in the first quarter compared to 1.8x during the fourth quarter. And finally, turning to asset quality. During the quarter, the Pluralsight first lien senior secured debt position was restored back to accrual due to performance since restructure. Additionally, Animal Supply Intermediate, LLC's second lien senior secured debt position, which was on nonaccrual since Q3 2022 was exited.

On the other hand, MPI Engineered Technologies' second lien senior secured debt position and ATX Networks' first lien senior secured debt position was placed on nonaccrual. At the end of the first quarter, investments on nonaccrual status decreased to 1.9% of the total investment portfolio at fair value from 2% as of December 31, 2024.

I will now turn the call over to Stan to walk through our financial results.

[Stanley Matuszewski, executive]

Thank you, Tucker. We ended the first quarter of 2025 with total portfolio investments at fair value of $3.4 billion, outstanding debt of $1.9 billion and net assets of $1.5 billion. Our ending net debt-to-equity ratio as of the end of the first quarter was 1.16x, which continues to be below our target leverage ratio of 1.25x. At quarter end, approximately 48% of our total principal amount of debt outstanding was in unsecured debt.

As of March 31, 2025, the company had approximately $720 million of borrowing capacity remaining under the revolving credit facility. Before continuing to the income statement, as a reminder, in addition to GAAP financial measures, we 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 first quarter, GAAP and adjusted after-tax net investment income were $49.6 million and $48.8 million, respectively, as compared to $56.6 million and $55.6 million, respectively, in the prior quarter.

On a per share basis, GAAP net investment income was $0.42. Excluding the impact of asset acquisition accounting in connection with the merger with MMLC, adjusted net investment income for the quarter was $0.41 per share, equating to an annualized net investment income yield on book value of 12.4%. Total investment income for the 3 months ended March 31, 2025, and December 31, 2024, was $96.9 million and $103.8 million, respectively.

We observed PIK as a percentage of total investment income decreased to 11% for the first quarter ended March 31, 2025, from 15% in the fourth quarter of 2024. As a reminder, excluding onetime adjustments for 2 portfolio companies, Q4 2024 PIK income as a percentage of total investment income would have been 12%, representing a 1% decrease from Q4 2024 to Q1 2025.

With that, I'll turn it back to Alex for closing remarks.

[Alex Chi, executive]

Thanks, Stan, and thanks, everyone, for joining our earnings call. Although the environment for new M&A activity and deployment has not exhibited the further we all expected coming into the year, we're all encouraged by the backlog of transactions, resilience of our portfolio and our commitment to delivering on our refreshed dividend structure. With that, let's open the line for Q&A.

[Operator]

[Operator Instructions] And we can take our first question from Derek Hewett with Bank of America.

[Derek Hewett, analyst]

The portfolio yield declined about 40 basis points on a cost basis quarter-over-quarter. I was expecting that to maybe stabilize a little kind of relative to what we've seen thus far for the first quarter for the BDC earnings season. So could you talk about that the 40 basis point decline? And has the portfolio largely kind of repriced now based off of the base rate cuts in the back half of last year?

[Alex Chi, executive]

Derek, thanks for the question. With respect to repricing, I think that's largely subsided. Most of the borrowers, who wanted to reprice their loans took advantage of a more robust environment in the prior quarters. And so with respect to more of the new activity that we're seeing, it's, again, more heavily weighted towards buyouts and refinancings.

And so I don't think you're going to see that. What you did see, though, was within the spreads for the deals that we did this year, it actually widened out by about 25 basis points. And we took advantage of the incumbency within our portfolio in order to get a bit more spread. So that's why you saw our average spreads go up a bit this quarter. But...

[David Miller, executive]

Yes. I mean the other thing I would just add on there is when you see overall portfolio, the yield coming down, that was driven by the exit of a couple of the nonaccrual positions that had very high coupons on them, but we were happy to see those go as evidenced by our nonaccruals going down.

[Derek Hewett, analyst]

Okay. And then in regards to the -- I believe there was 5 identifiable loans that had direct tariff exposure. Was that reflected in the fair value of those investments as of the first quarter? Or will that be determined in the subsequent quarters?

[Alex Chi, executive]

And when we looked at the exposure, it doesn't necessarily mean that those companies were immediately impacted by tariffs. We just look at -- we took a prospective look with respect to where there could be impacts and just from high exposure. For example, we have a couple of companies, who have supply chain exposure to China and to Mexico. And therefore, that's why it was just for conservative purposes, just put in that category. Now to the extent we do see any performance deterioration, that would be reflected in the market, but we have not seen it yet.

[David Miller, executive]

Keep in mind, we have a lot more clarity on what potential tariffs could be post quarter end, right, on April 2 versus on March 31 as well. So there could be more to come when we get some certainty on what the final tariffs are going to be.

[Operator]

[Operator Instructions] All right. It does appear that there are no further questions at this time. Mr. Chi, I will turn the conference back to you for any closing remarks.

[Alex Chi, executive]

Thank you. Well, thanks, everyone, for joining our call. We look forward to executing the second quarter continue to navigate this environment. Have a great weekend.