Golub Capital BDC - Earnings Call - Q2 2020

Transcript

Speaker 0

Welcome to the Golub Capital BDC, Inc. 03/31/2020 Quarterly Meeting Conference Call. Before we begin, I would like to take a moment to remind our listeners that remarks made during this call may contain forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical facts made during this call may constitute forward looking statements and are not guarantees for future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward looking statements as a result of a number of factors, including those described from time to time in Golub Capital BDC, Inc.

Filings with Securities and Exchange Commission. For material the company intends to refer to on today's earnings conference call, please visit the Investor Resources tab on the homepage of the company's website, uppercaseu,www.gallopcapitalbdc.com, uppercaseu, and click on the Events Presentation link. Gallup Capital BDC's earnings release is also available on the company's website in the Investor Resources section. As a reminder, this call is being recorded for replay purposes. I would now turn the call over to David Golub, Chief Executive Officer of Golub Capital BDC.

Speaker 1

Thanks, Selena. Hello, everyone, and thanks for joining us today. I'm joined virtually today by Ross Cooney, our Chief Financial Officer Greg Robbins and John Simmons, both Managing Directors of Golub Capital. We and the rest of the Golub Capital team hope that you and your loved ones are all safe in these challenging times. We're grateful that our team is healthy, safe, and and working effectively from home.

Rina talked a lot today about the economic impacts of COVID nineteen, but first, I wanna take a moment to acknowledge the the human impact. About half of Golf Capital's team, myself included, would enter near New York City. And I'm sure everyone on this call's read about how New York City's been hurt by COVID with over a hundred seventy thousand documented cases and over a hundred forty thousand, I'm sorry, and over fourteen thousand confirmed deaths. The the impact of COVID nineteen in in our community is palpable. We we all know folks who've been sick or or worse.

What's also palpable is a spirit of resilience and and solidarity. In in my neighborhood and across the city, we open our windows at 7PM every night to clap and cheer for the health care workers who are on the front lines. We've been doing it for weeks, and it's still a very emotional moment for for me, I think, for most people. The New York Times recently featured Notbed by my friend Nick Kristoff that highlighted a number of exceptional organizations that are involved in COVID nineteen relief. We're proud to support their work, and I hope you'll consider joining us.

This morning, we issued our earnings press release for the quarter ended March 31, and we posted an earnings presentation on our website. We'll refer to that presentation through the call today. Let me start with the headline on Slide four. The headline is that GBDC's results for fiscal Q2 were in line with the preliminary estimates that we filed on April 13. Adjusted net investment income per share was $0.33 Adjusted EPS was a loss of $1.71 and NAV per share was $14.62 which was toward the high end of the NAV range we published previously.

Before I go on to discuss these results in more detail, I think it's important to put them in context. COVID nineteen's already and and it's gonna continue to have a significant impact on virtually every US company, including GBDC. Following the the closing of the rights offering, we think GBDC will be even more well equipped to navigate in a COVID nineteen world. Our goal today is to give all of you a a transparent and analytical assessment of the impact of COVID nineteen on GBDC to date and to review the risks and opportunities that we see for GBDC going forward. We'll then go through GBDC's results for the quarter in detail.

So let's move to Slide six. Slide six, you can see we think it's difficult to overstate the impact of COVID-nineteen on The U. S. Economy in March. After a long steady run of GDP growth of 2% to 3%, the economy contracted by nearly 5% in calendar Q1.

What's interesting is almost all of that contraction occurred in March. A key cause and effect of the q one contraction was an unprecedented spike in job losses. In late March and continuing into April, the economy lost jobs at a rate of over 5,000,000 per week, causing the unemployment rate to spike. It's continued to spike post quarter end. Most recent number I saw was 14.7%, a level not seen since the Great Depression.

As large portions of the economy effectively shut down, financial markets sold off, as you can see on Slide seven. So against this backdrop, how did GBDC fare? We start with two pieces of good news. Turning to Slide nine. The first piece of good news is that GBDC's portfolio was designed to be resilient.

The portfolio is largely exposed to industries that have been relatively insulated from COVID nineteen, like enterprise software and technology, business services, financial services, and more. Loans to companies in these industries constitute over 75% of GBDC's portfolio. Moreover, the size, diversification and granularity of GBDC's portfolio mitigate the potential impact of idiosyncratic COVID-nineteen issues that may affect specific borrowers. The average size of each investment in GBDC's portfolio was less than 40 bps as of March 31. Second piece of good news shown on slide 10 is that GBDC has minimal exposure to many of the areas that have been hardest hit by COVID nineteen, sectors like airlines and aircraft finance, energy, hotels, entertainment and gaming.

Investments in these COVID nineteen impacted industries represented less than 1% of GBDC's portfolio at fair value at March 31. Similarly, GBDC's focus on lending at the top of the capital structure to sponsored by companies means that the portfolio has minimal exposure to second lien debt, mezzanine debt and other asset classes that we believe are particularly vulnerable in today's environment. GBDC's accurate exposure to these asset classes also represented less than 1% of the portfolio at fair value as of March 31. But I don't mean to be arguing that GBDC is immune to COVID-nineteen. Turning to slide 11, you can see that GBDC has exposure to several industry subsectors that have experienced and likely will continue to experience material COVID nineteen impact.

Areas we're particularly focused on include restaurants, dental care, eye care, fitness franchises and retail. These subsectors represent a bit less than 20% of GBDC's portfolio at fair value at March 31. We believe many of the borrowers in these sectors are well positioned and that they're going to be fine. And let me explain why. In restaurants, we focused on proven concepts, mostly in quick service and fast casual, both of which have historically done well in recessions.

Many of our borrowers offer drive through or carryout or they pivoted to doing so. In fact, one of our restaurant obligors reported their highest ever sales day last week with no traditional sit down customers. In dental and eye care, we've focused on market leading regional franchises, and we believe they'll recover when they're permitted to reopen. In some cases, we believe they may even capture pent up demand when they reopen. In fitness franchises, we focused on low cost, high value concepts that we believe are well matched to an environment where consumers are more cost conscious.

And in retail, we focused on consumer staples and franchisors that we believe are relatively insulated from cyclical pressure. In fact, the majority of our portfolio has been deemed essential and has remained open during COVID-nineteen. And others in the portfolio that have been subject to some store closures have seen a significant increase in e commerce revenue. These are all mitigants, let me be clear that there's been COVID-nineteen challenges, particularly in this portion of the portfolio, and we're proactively managing GBDC's portfolio to address these issues. But before I and my colleagues describe those initiatives, let's first review how these challenges affected GBDC's results for the second fiscal quarter, for the quarter ended March 31.

In short, we saw two main impacts. First, on Slide 12, there was a downward migration in our internal performance ratings from categories four and five, which are loans performing at or better than our expectations at underwriting, to category three, which are loans that are performing or are expected to perform below expectations. Category three increased from 7.2% of the portfolio at fair value at twelvethirty onenineteen to 26.5% of the portfolio at threethirty one. The majority of that increase was driven by investments in the subsectors that I identified earlier as the most exposed to COVID-nineteen challenges. The percentage of the portfolio performing materially below expectations in categories one and two was essentially unchanged quarter over quarter.

Turning to Slide 13. COVID-nineteen also precipitated the widening of credit spreads. The combination of COVID-nineteen credit issues and wider spreads together caused unrealized losses of 2.06 per share on GBDC's NAV.

Speaker 2

One way to look at

Speaker 1

drivers of that unrealized loss would be based on the internal performance ratings. So for investments in categories four and five, we view spread widening as the primary driver of the unrealized losses as we think these borrowers are performing at or better than original expectations.

Speaker 3

So on average, if you look

Speaker 1

at loans in categories four and five, they were marked down from 99.9% of at twelve thirty one to 96.2% of par as of March 31. That markdown accounted for a dollar and 2¢ of GBDC's adjusted unrealized net depreciation per share for the quarter or about half of the total. For investments in category three, our view is that the unrealized losses reflect a combination of both spread widening and credit stress. As we said earlier, the majority of the increase in category three came from GBDC's investments in subsectors that we believe are exposed in a material way to COVID nineteen. On average, loans in category three were marked down from 96% of par at twelvethirty one to 90% of par at threethirty one, a larger average markdown compared to categories 4.5.

Markdowns in category three accounted for $0.86 of GBDC's adjusted unrealized net depreciation per share for the quarter were 42% of the quarter I'm sorry, 42% of the total. In categories one and two, the average markdown was several points greater than the average markdown in category three, again, surprising. We believe the markdowns in this category reflect the stress of COVID-nineteen on top of preexisting credit challenges. Categories one and two were a relatively small portion of GBDC's portfolio, about 2% of total investments at fair value. And markdowns in categories one and two contributed $0.18 of GBDC's adjusted unrealized net depreciation per share for the quarter or 9% of the total.

Slide 14 provides a bridge from twelvethirty onenineteen NAV per share of $16.66 to threethirty onetwenty NAV per share of $14.62 From an adjusted NII perspective, GBDC generated $0.33 per share, not surprising given our 8% annualized income incentive fee hurdle rate. In the next column, you can see realized credit losses. Net realized losses amounted to $03 per share, very small amount. The clear driver of the NAV per share decline in the quarter was the unrealized depreciation of $2.06 per share that we just reviewed in detail. So how do we think about these unrealized losses?

Well, at one level, as long as our underlying borrowers continue to pay their principal and interest, unrealized losses in the portfolio will reverse over the remaining life of the loans. That's just loan math. We're hopeful that a large portion of the unrealized losses will reverse much sooner than that as credit spreads start to normalize over the coming months. This is what happened in Golub Capital's loan portfolios following the two thousand and eight financial crisis. Put differently, unrealized losses offer a snapshot picture every quarter, but at the end of the day, only one thing matters for lenders who who hold their loans to maturity.

A loan either pays off or it doesn't. Accordingly, as we think about what job one is for Golub Capital, job one's really clear. It's to minimize GBDC's permanent or realized credit losses. With that, let me turn it over to Gregory Robbins, who's going to provide some specifics on how we're approaching that task. Gregory?

Speaker 3

Thank you, David. Turning to Slide 16. We've been focusing on two key strategies. First, proactively managing our portfolio and second, fortifying GBDC's balance sheet. Let's discuss each in turn.

The first focus area on Slide 17 has been proactive portfolio management. There have been three phases to this. In the first phase, which began earlier this year, we opened up lines of communication with our portfolio companies, private equity sponsors, and industry consultants to gather data and assess COVID nineteen risk by borrower. In support of these efforts, the Golub Capital direct lending team, consisting of more than a 130 professionals, pivoted from loan origination to portfolio management. We undertook detailed analyses using thirteen week cash flow forecasts, real time sales figures and other proprietary data to segment the portfolio and identify the most affected borrowers.

In the second phase, we developed and executed on short term game plans for the borrowers most affected by COVID nineteen. We also helped many of our borrowers apply for loans under government programs where this was appropriate. In the third phase, which is where we are now, we're designing and executing on longer term game plans for all of our borrowers. We're doing this collaboratively with the management teams and sponsors of each company. And in many cases where the borrower is doing fine despite COVID nineteen, the game plan is business as usual.

In more challenging cases, we are focused on credit enhancing amendments or on incremental investments where we, as first lien lenders, may contribute to a solution alongside capital support from the private equity sponsors. Every deal is different, but we think our deep partnerships with sponsors and our lead position on the preponderance of our loans has given us the power and the nimbleness to structure win win solutions. If sponsors are unable or unwilling to support a company, we're also prepared to take the keys. And in the small number of cases, we expect we will do so. We have deliberately built out our workouts team over the last twelve months to prepare for an economic downturn.

The second focus area, as outlined on slide 18, has been fortifying GBDC's balance sheet to support existing investments and create future opportunities. We've spoken about this in the context of GBDC's rights offering, with subscription period concluded on May 6 and is expected to raise approximately $300,000,000 of new equity for the company. GBDC intends to use the rights offering proceeds for three key purposes. First, to repay outstanding outstanding indebtedness. Second, to make credit enhancing incremental investments to support existing portfolio companies.

And third, to make selective new investments. Pro form a for the rights offering, GBDC's GAAP leverage will decrease from 1.22 times to 0.92 times as of March 31, which is at the low end of our targeted range and well within our 150% asset coverage test. We have developed a use of proceeds plan, which we anticipate will give GBDC a significant amount of additional flexibility, liquidity, and borrowing capacity. We expect to be able to provide you with more detail on that game plan shortly. We also believe that the rights offering have bolstered GBDC's flexibility to play offense on new transactions in the future.

Right now, new deal m and a is on hold with buyers and sellers unable to agree on the day of the week. That's okay because for now, we wanna stay focused on credit enhancing incremental investments in our portfolio. But if we go out three to six months, this will change. History has shown that some of the most attractive opportunities exist during and after significant market dislocations. As illustrated on slide 19, leverage levels decreased dramatically after the global financial crisis, and Golub Capital was able to capitalize significantly on those opportunities.

We believe recent market events will likely lead to a sustained lender friendly environment, much like we saw after the last recession. Lower leverage, higher spreads, improved covenants and enhanced downside protection are components of what we expect to see come out of the current market environment. So to summarize this portion of the presentation, while we recognize that uncertainty is high and likely to persist, we believe GBDC is well positioned to navigate COVID nineteen. As shown on slide 20, we believe GBDC has developed a number of powerful competitive advantages. In our experience, sustainable competitive advantages are the key to consistent, replicable premium shareholder returns.

With that, let me hand it over to John to go through our results for the March in order to help. John?

Speaker 1

Thanks, Gregory. I'm on Slide 22. First, just as a reminder, in addition to the GAAP financial measures in our investor presentation, we've also provided certain non GAAP measures to make GBDC's financial results easier to compare to our results prior to our merger with GCIC. These non GAAP or adjusted measures seek to strip out the impact of the merger related purchase premium write off and amortization and are further described in the appendix of our earnings presentation. We'll refer to these adjusted measures where appropriate as we think they are a better indicator of GBDC's financial performance.

With that context, let's look at the results for the quarter in the column on the far right of the page. Adjusted net investment income per share, or as we call it, income before credit losses for the March was $0.33 unchanged from the previous quarter. Adjusted net realized and unrealized loss per share was $2.04 This compares to adjusted net realized and unrealized gain per share of $02 for the quarter ended December 3139. As David discussed in his remarks, the adjusted net realized and unrealized loss for this quarter was primarily driven by unrealized losses from the impact of COVID-nineteen. Loss per share and adjusted loss per share for the March was 1.71 This compares to earnings per share and adjusted earnings per share for the December of $0.35 As a result of a loss per share, our NAV per share declined approximately 12.2% to $14.62 as of March 31 from $16.66 at December 31.

On 03/30/2020, we paid a quarterly distribution of $0.33 per share. And then finally, on 04/09/2020, our board declared a quarterly distribution of 29¢ per share payable on 06/29/2020 to stockholders of record as of 06/09/2020. This distribution is consistent with historical quarterly cash distributions at an annualized rate of approximately 8% of net asset value. I'll now hand the call over to Ross to go through the results in more detail. Ross?

Great. Thanks, John. I'll start on Slide 23. This slide highlights our total originations of $167,000,000 and total exits and sales of investments of $291,000,000 for the quarter ended March 31. Factoring in unrealized depreciation and other portfolio activity, including a record level of revolver fundings, total investments at fair value decreased by 5.4% or approximately $238,100,000 One point I want to highlight, as of March 31, we had just $17,500,000 of remaining undrawn commitments on revolvers and 134,100,000 of remaining undrawn commitments on delayed draw term loans.

These are small numbers in the context of GBDC's balance sheet and liquidity position. As shown on the bottom table, the weighted average rate of 7.1% on new investments, the weighted average spread over LIBOR on new floating rate investments of 5.2% and the weighted average fee on new investments all declined from the prior quarter, primarily due to a higher percentage of traditional senior secured originations this quarter. The weighted average rate on investments that paid off of 7.7% was relatively consistent with the prior quarter. As a reminder, the weighted average interest rate on new investments is based on the contractual interest rate at the time of funding. For variable rate loans, the contractual rate would be calculated using current LIBOR, the spread over LIBOR and the impact of any LIBOR floor.

The top of Slide 24 shows that GBDC's portfolio remained highly diversified by obligor with an average investment size of less than 40 basis points. Bottom of the slide shows that our overall portfolio mix by investment type has remained consistent quarter over quarter with one stop loans continuing to represent our largest category at 82%. Turning to Slide 25, 97% of our investment portfolio remains in first lien senior secured floating rate loans and defensively positioned in what we believe are to be resilient industries. Turning to Slide 26. This graph summarizes portfolio yields and net investment income spreads for the quarter.

Focusing first on the light blue line, this line summarizes or represents the income yield or the actual amount earned on the investments, including interest and fee income. But excluding the amortization of upfront origination fees and purchase price premium, The income yield decreased by 20 basis points to 7.8% for the quarter ended March 31, primarily due to the continued decline in LIBOR. The investment income yield, the dark blue line, which includes amortization of fees and discounts, also decreased by 20 basis points, 8.2% during the quarter ended March 31. The weighted average cost of debt for the aqua blue line also decreased by 20 basis points to 3.7%. As a result, our net investment spread or the green line, which is the difference between the investment income yield and the weighted average cost of debt remained stable at 4.5%.

Tipping to the next two slides, non accrual investments as a percentage of total debt investments at cost and fair value increased modestly to two point three percent and one point six percent respectively as of March 31. During the quarter, the number of nonaccrual investments increased to a total of 10. As David discussed in his opening commentary, primarily due to the COVID-nineteen outbreak, the percentage of investments rated three on our internal performance ratings increased to 26.5% of the portfolio at fair value as of March 31. As a reminder, independent valuation firms value at least 25% of our investments each quarter. For the quarter ended March 31, the total percentage of portfolio company investments valued by the independent valuation firms was over 40%.

Slides twenty nine and thirty provide further details on our balance sheet and income statement as of and for the three months ended March 31. Turn to Slide 31. This graph illustrates our long history of steady growth in NAV per share since our IPO prior to the impact of COVID-nineteen in the quarter ended March 31. Turning to Slide 32. The graph on the top summarizes our quarterly returns on equity over the past five years, and the graph on the bottom summarizes our quarterly regular distributions as well as our special distributions over the past five years.

The next slide summarizes our liquidity and investment capacity as of March 31 in the form of restricted and unrestricted cash, availability on our revolving credit facilities and debentures available through our SBIC subsidiaries. As previously highlighted, the rights offering we announced on April 1 expired on May 6. The offering was meaningfully oversubscribed and will raise approximately $300,000,000 in net proceeds. Slide 34 summarizes the terms of our debt facilities as of March 31 prior to the application of any proceeds from the rights offering as well as our focus on diversified long term and stable sources of debt capital. And with that, I'll turn it over to David for some closing remarks.

David? Thanks, Ross. So to summarize today's discussion, the COVID-nineteen outbreak led to stress and wider spreads in calendar Q1 twenty twenty. This, in turn, caused large unrealized losses in GBDC's portfolio. Our key priority now is to proactively manage the portfolio to minimize realized credit losses.

If we're successful, the rest will take care of itself. At GBDC, we have a long and industry leading track record of keeping credit losses low, including through many prior periods of market uncertainty and volatility. We believe we enter this period with a series of compelling competitive advantages that are stronger than ever, including our experienced team, scale, sponsor relationships, and industry expertise. Our track record, our competitive advantages and a deep sense of humility should position us well to manage GBDC through these challenging times. With that, let me thank you for your time today and for your partnership.

Operator, please open the line for questions.

Speaker 0

Thank you. If you would like to register a question, please press the one followed by the 4 on your telephone. You will hear a three tone prompt to acknowledge your request. Our first question comes from the line of Simeon O'Shea of Wells Fargo.

Speaker 2

David, first question on the rights offering proceeds. I think Greg actually gave a bit of a breakdown there. Are you able to provide any more color on the split between debt pay down and new commitments? And, you know, on new credit enhancing commitments, what kind of pipeline do you have now for those portfolio opportunities?

Speaker 1

Great. So let me let me address each of those two questions. So let's talk first about rights offering proceeds. I don't have an exact answer for you right now, but I I can give you a directional answer. Let's start with the the the goals that we're we're undertaking to to apply the the rights offering proceeds to to pursue.

We want to use the proceeds to fortify liquidity and to create more flexibility. So that combination will equip us to play both offense and defense within the portfolio and capitalize on what Gregory was talking about, the attractive lending environment that we're anticipating is going to develop once the M and A market regains its footing. So what we're currently thinking is that we'll use about $140,000,000 of the proceeds to retire several older debt facilities that are no longer in their reinvestment periods. There's the twenty fourteen CLO that's been winding down, and there's the two SLF facilities. By paying off those facilities, we create a large amount of unencumbered assets to add to what is already a large amount of unencumbered assets on QVC's balance sheet.

We're also in discussions to expand one or or more of our long term bank facilities. In combination, the the increase in unencumbered assets and the increase in size of one or more of our long term bank facilities should put us in a position where we have ample liquidity, we have significant availability under our debt facilities, and we have hundreds of millions in unencumbered assets. So I'm pleased with how that's developing. We also plan to continue to explore other debt alternatives, including unsecured notes when the market becomes more attractive for this. Second question you asked, Finn, if I understood it right, was what's the pipeline look like for these credit enhancing incremental investments that you've heard me talk about?

And and the answer is is is good. We're in a lot of discussions right now with sponsors, as you would imagine, to address longer term amendments. And in many cases, those amendments will include some combination of new investment by sponsors, deferral of interest, by junior debt providers, some improvement in our credit position, in some cases, a repricing of of of of our loans, in some cases, a new investment by us on attractive terms. So so we've got we've got a a large number of those that we're working on right now, and I I think that's that sort of transaction, is going to be the the focus of what we're working on over the course of the next three or four months. And, you know, we're gonna continue to look at the potential to do new deals.

But the truth is there's not much new going on right now. As Gregory put it, the M and A market's dead because buyers and sellers can't agree on the day of the week. So it's it's both timely for us to be focused on these credit enhancing incrementals in our own portfolio, and there's also not much competition for time in respect of that.

Speaker 2

Thank you. That was a lot of good color. Was like, you more or less answered or sort of my next question on the Morgan Stanley credit facility amendment. You know, that was the the the relapse or or collapsing commitment was pushed out just one quarter. Presumably, there would, you know, you there would need to be cash proceeds to pay that down.

You know, you just kinda touched on that you're looking at other forms of of unsecured and other debt there, but anything we should look at given the the sort of near term from here reduction in that credit capacity?

Speaker 1

So I think what you're alluding to is that in in our in in our filings last quarter, we indicated that we extended, but not permanently, a portion of the Morgan Stanley bank facility. And we are in discussions with Morgan Stanley and with our other bank providers about the right mix of of commitments under our long term bank facilities. The truth is we don't need all of that mortgage family facility, so maintaining it in its current form is not something that that we would like to pursue. But we've got we've got a number of different options that are attractive. We're gonna make a final decision on that in the coming weeks.

Speaker 2

Okay. Thank you. And just one final for me. I'll hop back in. On the dividend, you know, recently reduced to 29¢ as part of the portfolio update.

Is the BDC able to earn that payout through the rights offering transaction?

Speaker 1

You know, I I think there are a lot of factors right now that are going to impact NAV per share. We we just went through a quarter where we had a very significant unrealized loss that reduced NAV per share. When I think about dividends for GBDC, what I would like to see us, have is a is a a steady dividend that slowly increases over time. And that's what we did for, about ten years prior to prior to the COVID nineteen quarter. So what we've gotta assess, prospectively, is where where is NAPA per share going to settle post the uncertainties associated with with with with COVID nineteen.

I think once we have more clarity about that, we will be able to have a a firmer answer on on your question. I think right now, the the the answer to your question is we're we're just gonna, along with everybody else, have to muddle through with the uncertainties created by this COVID nineteen environment.

Speaker 2

That's all for me. Thanks so much.

Speaker 0

Thank you. Our next question comes from the line of Ryan Lynch of KBW. Please go ahead with your question.

Speaker 3

Hey. Good afternoon. First, wanted to just touch again on the on on the rights offering. I know you guys gave some some general commentary on on kind of the the thoughts behind why that was done. But was one of the primary reasons behind the rights offering, did it have to do with any concerns, of potential covenant breaches surrounding any of your securitizations and the potential impacts of diverting cash flows to pay down those securitizations versus cash flows that were required to be paid out of the dividend regarding rig status?

Speaker 1

No. I I I I I don't think it was quite as you described it. I I would describe it somewhat differently. I would say that COVID nineteen created an environment in which we saw a much wider range of potential future scenarios than we typically do. So if you typically think about the future in terms of a bell curve and you shape your your base case assumptions around the middle of the bell curve, you can create a an upside case and a downside case that are a little off of that that base case, and cover the vast preponderance of potential scenarios.

In a COVID nineteen world, you can't do that. The the curve is a very different shape. It's much flatter with much fatter tails. So as an asset manager in a COVID nineteen world, we came to the conclusion that it made sense to have more flexibility in our capital structure to be able to manage effectively through a much wider array of different scenarios. Now in some of those scenarios, we were concerned that we wouldn't have sufficient capital to be able to do these credit enhancing, credit enhancing incremental investments and simultaneously to be able to make best use of the low cost liabilities that that GBDC contractually has.

So I'm not I'm not I'm not saying, Ryan, that that your your question isn't the right question. I think I think that those concerns are among a whole slew of concerns that drove us to conclude that the rights offering was the was the right thing to do. I I put that larger group of concerns under the rubric of of of of of an an increased level of uncertainty in the environment and a desire to have a a balance sheet that would work well in the context of a wider array of different forward scenarios. I feel very good about where we are now.

Speaker 3

Okay. Did you think that longer term, this will have you reevaluate how you compose the right side of your balance sheet given that you guys ran with zero, you know, unsecured notes or unsecured debt, which, you know, a lot of other BDCs have chosen to make that part of their liability structure, which is obviously a higher cost debt, which is bad during the uptimes. But in downtimes like this, it creates a significant amount of unencumbered assets that become very important in a downturn like this. And I don't know if we're going to see PDCs do So we do have rights offerings like this, especially the ones with significant amounts of of unsecured debt. So do you think that you will rethink your liability structure going forward as far as the composition of it goes?

Speaker 1

We had already rebought our our our liability structure. And and as I commented on in the September discussion and the December discussion, we we had begun a serious evaluation of getting an investment grade rating and and of issuing unsecured notes. So I I'm I'm a believer in unsecured notes. I I think that we have a place in the liability structure of of a scaled BDC, and I'm sure it's something we're gonna be seeking to to explore, subject to that market normalizing in terms of cost.

Speaker 3

Okay. And then just kind of a technical one. With the unfunded commitments, I think you guys had $152,000,000 at the end of the quarter. What was the level of unfunded commitments that were revolvers or or or commitments that were kind of at the full discretion of the borrower to draw down versus commitments that that had some sort of, like, delayed draw term loan or or or were not at the full discretion of the borrower to draw down?

Speaker 1

The the vast preponderance of our undrawn commitments at quarter end were in the form of of of acquisition focused DDTLs. I think we were down to 16,000,000, one six million of of revolvers that were undrawn. Most most obligors drew their revolvers in March.

Speaker 3

Okay. And then And we did we did

Speaker 1

break that down in our queue this quarter, Ryan. So it's, yes, dollars 17,500,000.0 was the exact number of unfunded revolvers.

Speaker 3

Thank you. Didn't see that. Okay. And then one other one. As far as calendar second quarter, so the June ended, assuming that there's no change in fair value for your portfolio, it's just held constant, Do you anticipate the the total return, look back feature of your incentive fee structure kicking in, holding everything else equal?

I'm just trying to get a get a feel for for what you guys are looking at versus my model.

Speaker 1

Let let us review that with you offline. I think we still have I think we still have some cushion before the NII incentive fee look back would would restrict NII incentive fees, but I'll also tell you that we don't anticipate that NII incentive fees are gonna be terribly high in the near term.

Speaker 3

Okay. Yes. It would be great if you could Because of the hurdle. Yes. Thanks for taking my questions.

I appreciate the time. I'll hop back in the queue. Thank

Speaker 0

you. Our next question comes from the line of Matt Fajadin of Raymond James.

Speaker 1

So just two quick ones. The first one, revolving around sponsor attitude and willingness to put in more capital. So just any any general commentary you can give there. And, specifically, I guess, what we would be interested in is whether or not there's any difference in willingness to put in more capital by industry. So for example, for a retail portfolio company versus more of a staple, say, health care, is there any difference in willingness to put in more capital?

Thank you. I I would say there's not a difference based on industry. What matters most in discussions with sponsors about level of sponsor support are two two factors. The first factor is to what degree they they like the company, see the capacity for for its performance to rebound, and for it to to to be a successful investment for them. Sponsors, for obvious reasons, the economic animals, they they they want to focus their resources on on those companies that are going to do well for them.

The second issue, which comes up sometimes, infrequently, but sometimes, is that a particular investment comes from an older fund, and the sponsor has limited resources remaining that are available to it in that older fund. And it may have some competing needs in the context of COVID nineteen. So so what where where we where we anticipate some of the most challenging conversations with sponsors are are those that are in the second category where the sponsor would like to provide support but doesn't have the the the capacity to do so to the degree it would like to. I would say on on balance look. It's still early days.

But on balance, we've been very gratified by the way in which sponsors have engaged with us in a very solutions oriented, collaborative fashion. Great. That's helpful. And then last one, just any color you can provide on the scale of amendment reliefs within the quarter, and then through April, whether or not that has that has sped up would be very helpful. Thank you.

We had relatively little in terms of amendment activity in calendar Q1. There were roughly a dozen companies that were heavily impacted by COVID nineteen where we agreed to reduce the cash pay spread of our loans and to have a portion of the the spread be payable in PIC. Virtually all, I think, all but one of our borrowers fully paid their their principal and interest in the quarter. I anticipate there will be a need for a lot of amendments going forward. I think most of those amendments are going to be in calendar q three, actually, as opposed to calendar q two.

Just bear in mind that for most companies, they had two good months and one bad month in q one. So q one financial results will, in in the preponderance of cases, not trip covenants. Q two financial performance, however, is gonna be harder for many companies not to trip covenants. So those those financial statements would be due over the summer, and and that would be when I would anticipate the biggest crunch of amendments would be needed. That's all for me.

Thanks, guys. Appreciate it.

Speaker 0

Thank you. As a reminder, if you'd like to register for a question, please press the 1 four.

Speaker 3

And, Selena, let's do one more.

Speaker 0

And at this present time, no one has registered for any questions. Please continue with your presentation or closing remarks.

Speaker 1

Excellent. I just wanna thank everyone. This was a a long call. I know we wanted to provide a lot of data to help everyone understand the COVID-nineteen consequences and challenges prospectively. Hope this was helpful.

Thank you for listening. Thank you for your partnership. And as always, please feel free to reach out to us if you have further questions. Look forward to chatting next quarter.

Speaker 0

Thank you. That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.