Goldman Sachs BDC Q3 2024 Earnings Call Transcript

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November 8, 2024

There are 7 speakers on the call.

Operator

Good morning. This is Austin Neary, 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. 3rd Quarter 2024 Earnings Conference Call. Please note that all participants will be in listen only mode until the end of the call when we will open up the line for questions.

Operator

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.

Operator

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.bulmansachsbdc.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 8, 2024, for replay purposes. I'll now turn the call over to Alex Chi, Co Chief Executive Officer of Goldman Sachs BDC, Inc.

Speaker 1

Thank you, Austin. Good morning, everyone, and thank you for joining us for our Q3 2024 earnings conference call. I'm here today with David Miller, our Co Chief Executive Officer Tucker Green, our Chief Operating Officer and Stan Myshevsky, our Chief Financial Officer. I'll begin the call by providing a brief overview of our Q3 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.

Speaker 1

And then finally, we'll open the line for Q and A. With that, let's get to our Q3 results. Our net investment income per share for the quarter was $0.58 and net asset value per share was $13.54 a decrease of approximately 1% relative to the 2nd quarter NAV, which was largely due to net realized and unrealized losses in the quarter. As we announced aftermarket close yesterday, our Board declared a 4th quarter dividend of $0.45 per share payable to shareholders of record as of December 31, 2024. This marks the company's 39th consecutive quarter of a $0.45 per share dividend totaling $17.55 per share since our IPO, excluding the special dividends we paid in 2021 following the merger with MMLC.

Speaker 1

Now with respect to broader market conditions, M and A continued to recover in the 3rd quarter with growth of 17.5% year over year in sponsor M and A volumes. We noted earlier in the year that we anticipated a rebound in sponsor M and A driven by the $1,400,000,000,000 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 4th quarter to be somewhat muted as market participants took a pause given the election, we anticipate that this dynamic will continue to enhance M and A volumes in 2025. GSBD has certainly benefited from this overall trend, which was further enhanced by our platform capabilities.

Speaker 1

Our Q3 gross originations more than doubled year over year and is the 2nd largest deployment quarter since the integration of GSBD into the broader Goldman Sachs private credit platform, with the highest being this past Q2 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 $329,000,000 We're focused on harvesting older vintage investments and recycling into new originations. To that end, 72% of our repayments 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.

Operator

With that, let me turn it over to my co CEO, David Miller. Thanks, Alex. During the quarter, we originated approximately $376,600,000 in 34 new investment commitments comprised of 15 new and 19 existing portfolio companies. As Alex mentioned, this was indeed the 2nd highest level of quarterly originations for GSBD since the integration of our platform in early 2022. 98.1% of our originations were in 1st lien loans, which continues to reflect our bias and primarily maintaining exposure to investments that are higher up in the capital structure.

Operator

Sales and repayment activity totaled $329,100,000 dollars 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 turn over, we will lean into our position within the Goldman Sachs ecosystem for what we believe should be a rebound in M and A activity volume into 2025. Turning to portfolio composition.

Operator

As of September 30, 2024, total investments in our portfolio were $3,440,000,000 at fair value, comprised of 97.6% in senior secured loans, including 91.6% in 1st lien, 4.7% in 1st lien last out unit tranche and 1.3% in 2nd lien debt, as well as the 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 30, 2024, the company held investments in 167 portfolio companies operating across 41 different industries. The weighted average yield of our investment portfolio to amortize cost at the end of the 3rd quarter was 10.9% as compared to 11% from the prior quarter.

Operator

The weighted average yield of our total debt and income producing investments at amortized cost at the end of the 3rd 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 6.3x during the Q3 compared to 6.1x during the Q2. 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 at quarter end increased to 1.7x in the 3rd quarter compared to 1.5x during the 2nd quarter. And finally, turning to asset quality.

Operator

During the quarter, there were changes to accrual status for 2 portfolio companies. Earl site was restructured and 1 1st lien position remained on non accrual status and another 1st lien position was restored to accrual status. Additionally, we exited Zodiac Intermediate also known as Zappari, which had previously been on non accrual status through a sale of the company. As of September 30, 2024, investments on non accrual status decreased to 2.2 percent 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 to amortize cost from 7.6% as of June 30, 2024. I will now turn the call over to Stan Medishevsky to walk through our financial results.

Speaker 2

Thank you, Tucker. We ended the Q3 of 2024 with total portfolio investments at fair value of $3,400,000,000 outstanding debt of $1,900,000,000 and net assets of $1,600,000,000 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 1.25x. At quarter end, approximately 66.7% of the company's total principal amount of debt outstanding was in unsecured debt, and we had 1.1000000000 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.

Speaker 2

These non GAAP measures remove the purchase discount amortization impact from our financial results. For the Q3, GAAP and adjusted after tax net investment income were $68,200,000 $67,200,000 respectively, as compared to $67,000,000 $65,200,000 respectively, in the prior quarter. On a per share basis, GAAP net investment income was $0.58 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 3 months ended September 30, 2024 June 30, 2024 was 1 $110,400,000 $108,600,000 respectively. The increase in total investment income was primarily due to the incremental deployment during Q2 and Q3.

Speaker 2

We would also note that we saw PIK as a percent of total recurring investment income decrease to 9% for the Q3 ended September 30, 2024 from 11% in the Q2 of 2024. Distributions during the quarter remained consistent at $0.45 per share. Our spillover taxable income is approximately $158,800,000 or $1.36 on a per share basis. With that, I'll turn it back to Alex for closing remarks.

Speaker 1

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 and A.

Speaker 3

Thank We will take our first question from Mark Hughes with Truist.

Speaker 4

Yes. Thank you. Good morning. Good morning. Alex, you had spoken about your recycling effort.

Speaker 4

How much more opportunity do you have there to recycle, improve the portfolio?

Speaker 1

Yes. So we had a very strong quarter of sales and repayments. As you heard, it's the largest quarter we had in over a year. So we were able to have full exits in at least 4 portfolio companies, all of which were originated in 2021 or earlier. So we feel good about the pace of repayments and recycling.

Speaker 1

And just given also the very strong quarter originations we had, just the outlook we also have for M and A that's coming, we feel good about 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.

Speaker 4

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

Speaker 1

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 there may still be some room to go, but having said that, we would expect the pace of pricings to slow down.

Speaker 4

Yes. And then anything your view, the Vibe immediately following the election last couple of days as it pertains to potential deal activity? Do you feel like there's more energy in the air, less? Just sort of curious your subjective impressions.

Speaker 1

Look, the market obviously has been pretty exciting post election. 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 and 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.

Operator

Thank you.

Speaker 1

Thank you.

Speaker 3

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

Speaker 2

Good morning. I have a question on credit, specifically on looking at Slide 7. And it shows that risk rated 34 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?

Speaker 2

I mean, really, if you look at the aggregate of our rating 3 and 4 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 3.

Speaker 1

Okay.

Speaker 2

And then And could you provide the sector that was in?

Speaker 4

It was in the business services sector.

Speaker 1

Okay. Thank you. It was not related to ARR or healthcare. Okay, understood. Thank you.

Speaker 1

Thank you.

Speaker 3

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

Speaker 5

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.

Speaker 5

An early 25 because it's deals that maybe we're waiting for the election and going to happen early in 2025? Instead of it or is it going to be normal like, but still the first half is going to be and, yes,

Speaker 1

seasonally soft? It's a really good question, Robert. Thanks for the question and thanks for joining again. So look, we're absolutely optimistic about overall M and A volumes in 2025. Having said that, private credit, as you know, deployment is highly correlated to sponsor M and A activity.

Speaker 1

And if you look at the cycle of how these processes play out, we would expect that there are going to be any opportunities that pop up, in the Q1. 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 team to be very busy assessing new opportunities in the Q1. But in terms of actual deployment, it's likely going to be the Q2 or later when you start to see a real tick up in activity.

Speaker 5

Got it. Thank you. And then on the recycling, you're recycling the 21s and older. So 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.

Speaker 5

So is there how are you dealing with the adverse selection risk in the recycling and concentration of risk in the older vintages on some of those assets, if that's going to occur?

Speaker 6

Yes. 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 there were continuing to see nice top line as well as EBITDA growth in the portfolio.

Speaker 6

They'll kind of earn their way into those valuations and then you should see some M and

Operator

A activity to either those companies will sell or get refinanced as

Speaker 6

they earn in some of those higher valuations.

Speaker 5

Got it. Thank you.

Speaker 1

Thank you, Robert.

Speaker 3

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

Speaker 1

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

Operator

next quarter.

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Earnings Conference Call
Goldman Sachs BDC Q3 2024
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