Golub Capital BDC - Earnings Call - Q2 2025

Executive Summary

• Q2 FY25 was resilient operationally but a headline miss: GAAP EPS $0.30 vs S&P Global consensus $0.41, and total investment income $213.9M vs $223.8M consensus; Adjusted NII/share held at $0.39, covering the $0.39 dividend (100% coverage)*.
• NAV per share slipped to $15.04 (–$0.09 q/q) on realized/unrealized losses tied to a small tail of underperformers and two restructurings; non‑accruals remained low at 0.70% of FV.
• Funding costs improved: weighted average cost of debt fell to 5.9% (–30 bps q/q), with further benefit expected next quarter from the April 4 corporate revolver repricing (lower spread and unused fee).
• Management struck a cautious tone amid macro/tariff uncertainty, stayed highly selective (2.3% close rate), and emphasized core middle‑market incumbency advantages as a defensive source of spread and control.

What Went Well and What Went Wrong

• What Went Well
  • Stable core earnings power: Adjusted NII/share remained $0.39 despite base‑rate and spread compression; dividend coverage at 100%. Quote: “Adjusted NII per share was $0.39... Adjusted net income per share was $0.30.” — CEO.
  • Funding tailwinds: Cost of debt decreased to 5.9% and should benefit further from the April 4 JPMorgan revolver amendment (spread and unused fee cut, maturity extended to 2030).
  • Asset quality resilient: Non‑accruals only 0.70% of FV; ~90% of FV in top two internal rating categories (4/5), with 1/2 rated loans at just 1.4%.
• What Went Wrong
  • Headline miss vs Street: GAAP EPS ($0.30) and total investment income ($213.9M) fell short of S&P consensus ($0.41 EPS; $223.8M revenue)*.
  • Fair‑value and realized losses: Adjusted net realized/unrealized loss per share was ($0.09) due to underperformance in a small tail and two restructurings; NAV/share fell $0.09 q/q to $15.04.
  • Yield pressure: Investment income yield fell ~40 bps q/q to 10.8% as floating loans reset to lower SOFR and some spread tightening earlier in the quarter; net investment spread declined ~10 bps to 4.9%.

Transcript

Speaker 4

Hello everyone, and welcome to GBDC's earnings call for the fiscal quarter ended March 31, 2025. Before we begin, I'd 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 of 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 GBDC's SEC filings. For materials we intend to refer to on today's earnings call, please visit the Investor Resources tab on the homepage of our website, which is www.golubcapitalbdc.com, and click the Events Presentations link.

Our earnings release is also available on our website in the Investor Resources section. As a reminder, this call is being recorded. With that, I'm pleased to turn the call over to David Golub, Chief Executive Officer of GBDC.

Speaker 0

Hello everybody, thanks for joining us today. I'm joined by Matt Benton, our Chief Operating Officer, and Chris Ericson, our Chief Financial Officer. For those of you who are new to GBDC, our investment strategy is the same as it's been since our IPO 15 years ago. It's to focus on providing first-lien senior secured loans to healthy, resilient middle-market companies that are backed by strong, partnership-oriented private equity sponsors. Yesterday, we issued our earnings press release for the quarter, and we posted an earnings presentation on our website. We'll be referring to that presentation during the course of today's call. Before I begin with quarterly headlines, I want to take a moment to celebrate our 15th anniversary as a listed BDC. GBDC is one of only a few BDCs to have successfully navigated multiple credit cycles over a long period of time.

Since our IPO 15 years ago, GBDC has delivered a 9.6% annualized total return, outperforming peer BDCs, leveraged loan indices, and even the Russell 2000, which returned 8.5% annually over the same period. I want to take this opportunity to thank all of our shareholders for their partnership over the course of the last 15 years. With that, let me start with the usual headlines, and then Matt and Chris are going to go through operating results and financial performance for the quarter in more detail. Finally, I'll come back with our outlook for the coming period and take some questions. The headline is that GBDC had a solid quarter despite a challenging macro environment. It was a macro environment marked by shifting sentiment and an unusual level of policy uncertainty. Here are the highlights. Adjusted NII per share was $0.39.

That corresponds to an adjusted NII return on equity of 10.4%. Adjusted net income per share was $0.30. That corresponds to an adjusted return on equity of 8%. Adjusted net income per share included $0.09 per share of adjusted net realized to unrealized losses. While the vast majority of GBDC's portfolio continued to perform well in the quarter, we did see some weakness in the small tail of underperforming borrowers we've spoken about previously. Finally, our new investment activity for the quarter was very selective. We closed on just 2.3% of reviewed deals. Now, at the risk of stating the obvious, this quarter was not the one market participants were expecting. At the beginning of the year, there was broad optimism about continuing strong economic growth and about the potential for increased deal activity. That is not what played out.

We ended the quarter, and we've begun calendar Q2 with an uncomfortable level of uncertainty around tariff policy, an unusual degree of market volatility, decreased consumer confidence, and broad reports of slowing growth. One of our goals today is to give you an assessment of how we're seeing these forces play out for GBDC and to explain both what we've done and what we're going to do to prepare further. If you're a longtime shareholder of GBDC, a lot of this is going to sound familiar. Our playbook for navigating uncertainty has been the same for decades. It's to play offense by collectively looking for new loans, and it's to focus on early detection and early intervention. Early detection means looking for borrower underperformance early, and early intervention is about working with sponsors and borrowers to address future potential problems proactively.

Now, I'll pass the call over to Matt Benton to discuss the quarter in more detail, and I'll come back at the end with some closing thoughts.

Speaker 7

Thanks, David. I'm going to start on slide four. GBDC's $0.39 per share of adjusted NII and $0.30 per share of adjusted earnings were driven by four key factors. First, overall credit performance remained solid. Nearly 90% of GBDC's investment portfolio at fair value remains in our highest performing internal rating categories. That said, credit was not perfect. We had unrealized losses from fair value markdowns on a small number of underperforming investments, and we recognized realized losses on two restructurings of investments that had been on non-accrual status as of December 31, 2024. Second, earnings continue to be supported by high base rates and attractive spreads, consistent with recent quarters. GBDC's investment income yield remained robust at 10.8% despite a sequential decline of about 40 basis points, primarily driven by certain loans resetting to lower base rates during the quarter.

Third, a decline in GBDC's borrowing costs largely offsets a sequential decline in investment income yield. Lower base rates reduced the interest expense on the 80% of our borrowings that are floating rate. On top of that, the debt stack initiatives we closed at the end of 2024, and which we've spoken about before, further reduced borrowing costs during the March 31st quarter. Fourth, earnings continue to structurally benefit from lower expenses due to GBDC's leading fee structure. I'm going to turn to portfolio activity and credit quality in the quarter now. One of the ways we responded to the high uncertainty that David mentioned earlier was by dialing up our conservatism about adding to GBDC's portfolio. We prioritized quality over quantity in new investment activity, which actually led to a small decrease in the size of the portfolio as exits outpaced new investment commitments.

Gross originations were $298.9 million during the quarter, with $159.5 million funded at close. This focus on quality over quantity showed up in several ways. We were highly selective, closing just 2.3% of deals reviewed. We leaned on relationships and incumbencies, with over 50% of our origination coming from repeat borrowers. We leveraged our scale to lead deals, acting as the lead or sole lender in 93% of our transactions. We focused on conservative LTVs at the time of origination, generally in the mid-30-40% range. We focused on the core middle market, which we believe continues to offer better risk-adjusted return potential than the large borrower market. The median EBITDA for our calendar Q1 2025 originations was $54 million, and our weighted average spread on new originations increased 30 basis points this quarter versus the last couple of quarters.

We really believe our ability to play across the size spectrum is a valuable differentiator versus many of our peers that are limited to the large borrower market. Credit statistics remained strong quarter over quarter, and we continue to believe that we have a highly defensive portfolio that is well-positioned for the emerging economic uncertainty. Investments in rating categories four and five remained at nearly 90% of the portfolio at fair value as of March 31, 2025. Investments in rating category three remained just under 9% at 8.9% of fair value. Investments in rating categories one and two remained very low, representing just 1.4% of the total portfolio at fair value. As a percentage of total investments at fair value, non-accrual investments increased modestly to just 70 basis points as of 3/31/2025.

In the quarter, the number of non-accrual investments remained at just nine, following the restructuring of two former non-accrual investments and the return of one former non-accrual investment to accrual status on improved operating performance. These dynamics were offset by the placing of three loan investments on non-accrual status. Let me take a minute to discuss the portfolio management processes we've undertaken in response to tariff uncertainty. As we've said repeatedly, early detection of potential vulnerabilities in our portfolio is a key focus. Our underwriting teams have reviewed GBDC's portfolio on a sectoral basis and on a name-by-name basis to identify potentially impacted borrowers. Our initial analysis suggests that the vast majority of our portfolio companies are relatively insulated from the direct impact of tariffs.

Our risk analytic framework includes A, analyzing credits by sector with a focus on sectors that we believe may be more vulnerable, and B, assessing borrowers on a name-by-name basis, evaluating potential exposure in areas such as revenue, supply chains, and liquidity. Based on the work to date, we have identified a short list of portfolio companies in a higher potential tariff risk bucket. We're prioritizing this subset of the portfolio for further discussions with sponsors and management teams to assess their mitigation plans and to help them take steps to shore up potential vulnerabilities. We intend to remain in close contact with our sponsors and portfolio companies as they continue to monitor and assess the impact of tariffs and tariff-related risks. Being a sole or lead lender in approximately 90% of our deals gives us a greater degree of access and influence than some of our direct lending peers.

Continuing on slide four, let me briefly summarize distributions paid and certain balance sheet changes in the quarter. Total distributions paid in the quarter were $0.39 per share. NAV per share decreased by $0.09 on a sequential basis to $15.04, primarily because of net unrealized and realized losses. Debt to equity remained stable quarter over quarter, ending at 1.16 turns, with debt reduced by available cash and cash retained as debt securitizations for the purpose of paying down principal on standing notes. GBDC's average net leverage during the quarter was 1.17 turns, well within our targeted range of 0.585-1.25 turns. In the quarter, we took advantage of attractive trading levels in the stock price to selectively issue equity on an accretive basis through our at-the-market offering program.

Given the unprecedented levels of market volatility experienced at the end of the calendar quarter and following quarter end, we purchased shares on an accretive basis. The board declared a regular quarterly distribution of $0.39 per share, representing an annualized dividend yield of 10.3% based on GBDC's NAV per share as of March 31, 2025. Dividend coverage remains strong at 100% today. Let's shift gears in terms of slide five. Quarter over quarter, there was no change in the level of adjusted net investment income. GBDC generated $0.39 per share. We see further opportunity to optimize GBDC's balance sheet to drive higher earnings, including further borrowing cost optimization. For example, subsequent quarter end, we extended duration on and repriced our syndicated corporate revolver to the tightest level among our traded BDC peers.

This highly attractive lower-cost debt should begin to be reflected in our results for the quarter end of June 30, 2025. In addition, our well-laddered unsecured debt stack and best-in-class ratings profile provides us with the flexibility to be an opportunistic issuer when credit spreads are attractive and to not have to issue when credit spreads have widened, as was the case at the end of the quarter. Finally, investment portfolio rotation. We believe the successful monetization of certain non-earning equity investments and low-yielding loans associated with prior restructured names with subsequent redeployment into new core middle market originations can potentially generate incremental NII. I'll include the obvious caveat that we have work to do to successfully resolve these gains, and it's not going to happen all overnight, but we have the skills and resources to do this.

I'm going to turn it over to Chris now to take us through our financial results in more detail. Chris?

Speaker 3

Thanks, Matt. Turning to slide seven, you can see how the earnings drivers Matt just described and distributions paid in the quarter translated into GBDC's March 31, 2025, NAV per share of $15.04. Adjusted NII of $0.39 per share was in line with the $0.39 per share base distribution paid out during the quarter. Net realized and unrealized losses were $0.07 per share and $0.09 per share after reversing the $0.02 per share in unrealized appreciation on investments resulting from the purchase premium paid in the GCIC and GBDC3 acquisitions. Together, these results drove a net asset value per share decrease to $15.04. Turning to slide 10, which details our origination activity for the quarter. Net funds quarter over quarter decreased modestly by $64 million as exits and payoffs outpaced funded investments during the quarter.

Looking at the bottom of the slide, the weighted average rate on new investments was 9.7%. Investments that repaid during the quarter were at a weighted average rate of 10.4%. As David and Matt described at the outset, these contributed to a lower investment yield on the portfolio compared to prior quarters. I'll reiterate that we did see a 30 basis point increase in the weighted average spread on new originations versus the 12/31/2024 quarter. It reflects our continued focus on the core middle market and our deal selectivity. Slide 11 shows GBDC's overall portfolio mix. As you can see, the portfolio breakdown by investment type remained consistent quarter over quarter, with one-stop loans continuing to represent around 87% of the portfolio at fair value.

Slide 12 shows that GBDC's portfolio remains highly diversified by portfolio company with an average investment size of approximately 30 basis points, consistent with prior quarters. Additionally, our largest borrower represents just 1.5% of the debt investment portfolio, and our top 10 largest borrowers represent below 12% of the portfolio. We are big believers in modulating credit risk through position size, which we believe has served GBDC well in previous credit cycles. As of March 31, 2025, 92% of our investment portfolio consisted of first lien senior secured floating-rate loans to borrowers across a diversified range of what we believe to be resilient industries. The economic analysis on slide 13 highlights the drivers of the change in GBDC's net investment spread to 4.9%. Let's walk through this slide in detail. We'll start with the dark blue line, which is our investment income yield.

As a reminder, the investment income yield includes the amortization of fees and discounts. GBDC's investment income yield fell 40 basis points sequentially to 10.8%. As highlighted earlier, this was predominantly the result of a portion of GBDC's 99% floating-rate investment portfolio reindexing throughout the quarter to lower three-month and one-month SOFR reference rates, and to a much lesser extent, lower weighted average spread on debt investments in the portfolio, which was driven via net originations at lower spreads and some repricing activity in the existing portfolio. Our cost of debt, the TO line, decreased 30 basis points to 5.9%, reflecting our approximately 80% floating-rate debt funding structure. As Matt described earlier, we expect further improvement in GBDC's weighted average cost of debt next quarter as we see the impact from the amendment of our syndicated corporate revolver.

Net net, our weighted average net investment spreads, the gold line, decreased by a modest 10 basis points sequentially to 4.9%. I'll now turn it back over to Matt.

Speaker 0

Thanks, Chris. Let's move on to slides 14 and 15 and take a closer look at our credit quality metrics. On slide 14, you can see the non-accruals increased slightly to 70 basis points of total investments at fair value. We completed restructuring to VRC Topco and Reaction Biology and returned JHC investment to accrual status in the quarter. In addition, we placed three companies on non-accrual status, resulting in no change in the number of total portfolio companies on non-accrual status from the prior quarter. Slide 15 shows the trend in internal performance ratings I highlighted earlier. Of note, investments rated three, signaling a borrower could be out of compliance with debt covenants, remained low at just 8.9% of the total investment portfolio.

The proportion of loans rated one and two, which are loans we believe are most likely to see significant credit impairment, remained very low at just 1.4% of the portfolio at fair value. As we usually do, we're going to skip past slides 16 through 19. These slides have more detail on GBDC's financial statements, dividend history, and other key metrics. I'll wrap up this section by reviewing GBDC's liquidity and investment capacity on slides 20 and 21. First, let's focus on the key takeaways on slide 21. Our weighted average cost of debt this quarter was 5.9%, down from the prior quarter, reflecting the debt funding structure's transactions we executed in the fourth calendar quarter of 2024 and before the impact of repricing our corporate revolver, which I discussed earlier.

Our debt maturity profile remains well-positioned with 44% of our debt funding in the form of unsecured notes, with maturities ranging from 2026-2029. The April 2025 corporate revolver amendment further enhanced our debt maturity profile, extending final maturity on the nearly $2 billion of total commitments under the facility through 2030. Consistent with our asset liability matching principle, 80% of GBDC's total debt funding is floating rate or swapped to a floating rate. The portion of the debt funding that remains fixed rate are the 2026 and 2027 notes that were issued with a weighted average coupon of 2.3%. As you've heard us say on prior occasions, we did not swap them out for floating rate exposure.

Overall, our liquidity position remains strong, and we ended the quarter with approximately $1.2 billion of liquidity from unrestricted cash, undrawn commitments on our meaningfully over-collateralized corporate revolver, and the unused, unsecured revolver provided by our advisor. We're well-positioned with the level of capital and significant amount of liquidity for the period ahead. Now I'll hand it back over to David for closing remarks. Thanks, Matt. To sum up, GBDC had a solid second quarter against a challenging backdrop of weakening market fundamentals and high policy uncertainty. Let me touch briefly on our outlook before we open the line for questions. We've talked for a number of quarters now about how consensus expectations have proven consistently wrong about big macro themes in the years since COVID. In 2020, we were told to expect a recession. In 2021, it was transitory inflation. In 2022, it was stubborn inflation.

In 2023, it was recession again. In 2024, we were told to expect dramatic reductions in interest rates. All of these predictions proved wrong, often very wrong. After only a quarter, the big consensus prediction for 2025 that we were going to see a big pickup in M&A, that's also proved wrong. What's the lesson here? I think there are three lessons. Choose resilient strategies, stay humble, and prepare for multiple scenarios. Let me recap what we've done and what we're doing in keeping with these lessons. Let's start with choosing resilient strategies. As you know, our investment strategy is designed to be resilient. We focus on lending at the top of the capital structure to healthy businesses in recession-resistant industries that are backed by relationship-oriented, very talented private equity firms.

This strategy has been tested through multiple periods of dislocation, and it's come out each time proving to be strong. We believe our long-standing focus on the resiliency of our investment strategy means our portfolios are relatively insulated from the direct impact of tariffs and other trade-related issues like FX exposure. Now, I'm not saying there isn't still uncertainty, but our borrowers are primarily U.S. businesses with U.S.-centric supply chains that are selling to U.S. customers. Most of our borrowers are in service industries. Few of them have meaningful exposure to imported raw materials or to export markets. We believe sponsors and management teams have, since the election, been anticipating potential tariffs and developing mitigation strategies. We think this puts us in a relatively strong position. Now, there's still all the unknowns we talked about over the course of this call, and there's still the possibility of second-order unknowns.

We think it's important to stay humble about what we don't know. It's also important not to be paralyzed by uncertainty. What we're doing, and consistent with my three lessons, is preparing for multiple scenarios. What that means, first off, is carefully reviewing and monitoring our portfolio for tariff-related risks. You heard Matt describe how we're doing that, how we're following a rigorous sector-by-sector and name-by-name review process. The approach we're taking is similar to how we leveraged the scale and expertise of our investment team during COVID and during the turbulent market conditions of 2022. We pivot resources, we seek to identify vulnerabilities early, we seek to engage with private equity sponsors and borrowers to take action early. What this reflects, I think more than anything, is that this isn't our first rodeo. We've been through a number of unprecedented times over the last 30 years.

In each case, we were charged to deliver for shareholders by using the same proven playbook. We have come out stronger on the other side. I'm confident that our playbook is once again going to serve us well in this instance as we manage through this set of issues. There is a silver lining to this challenging, uncertain environment. We think this is the type of environment that historically has separated lenders with strong businesses and real competitive advantages from those that do not have those characteristics. We have already seen increased dispersion in performance among BDC managers over the course of the last few quarters, and we expect to see more of this in the coming period. We believe Golub Capital and GBDC will once again be on the good side of the performance dispersion spectrum. With that, Operator, could you please open the line for questions?

Speaker 5

We will now begin the question and answer session. If you would like to ask a question, please press star, followed by the number one on your telephone keypad. If there's a question, it comes from the line of Finian O'Shea with Wells Fargo. Please go ahead.

Speaker 2

Hi, everyone. Good afternoon. David, picking up at the end there, it's certainly been a fool's errand to predict the macro, but the rate curve is pointed down at least somewhat, and OI is basically right at the dividend right now. How should we think about the base payout going forward?

Speaker 0

Great question. Matt, do you want to take that up?

Speaker 7

Yeah, happy to. Thanks. Good to speak. Yeah, acknowledge that we're sitting at 100% today, Tim. Really, just like everybody, we're battling spread and base rate compression. The short answer is that we feel about as good as we can given where we sit today, despite what we're seeing from a forward curve compression perspective, because we do have some potential near-term levers that we can pull. The first, what I would characterize as in-place lever, is the pricing reduction on our J.P. Morgan credit facility that we executed on April 4. We'll get the full benefit of that in the 6/30 quarter. I think if you think about your model, the benefit is pretty easy to calculate.

If you want to think about it from a backward-looking view, it's a $1 billion wanted drawn balance at 3/31 and assume a spread of 165 basis points versus a 175 where we were at today. Also, don't forget the unused fee dropped by five basis points on the undrawn amount of almost $900 million. So there'll be some pickup there. That'll be nicely accretive. The second, what I would call in-place lever today, is that 80% of the liability stack is variable rate. This largely mitigates base rate reductions, not entirely. You saw the benefit of that this quarter. I would say the third lever that we have to pull would be modestly considering increasing financial leverage to the extent that we see attractive opportunities. If you noted during the comments, our spread this quarter increased on new originations, just given where we're focusing.

The end of the quarter at leverage of 1.16 turns. So we have room to run there to the extent that we want to do that. It's pretty easy to calculate the accretive impact of moving higher within our target leverage range. And then finally, our day count next quarter is going to be higher, which is worth surprisingly a decent amount of incremental adjusted NII, i.e., there'll be more earning days for GBDC next quarter. So, I mean, listen, management and the board were always evaluating dividend levels versus our expected steady-state profitability. These are big scenario planners over here. If there is a scenario that we see where the combo of base rate and/or spread compression is substantial enough to warrant revisiting the quarterly dividend levels, we'll certainly do it. But for now, we feel okay where we're sitting.

Speaker 2

Fair enough. Appreciate that. I do want one more. Appreciating that you all held back on deployment this quarter feels like a good move. Pretty frothy quarter in hindsight. The repayments have also trended low. Those have picked up for a lot of peers as a percent of the portfolio. Just sort of question, are we seeing anything there? Is that also part of the formula? Are you focused on defending the names, doing the repricings, which would hopefully be abating by now? Yeah, anything there on the just low overall activity?

Speaker 0

Sure. I'll take that. We went into the quarter, and I think everybody, including us, expected a pickup in activity. I was not a believer in this M&A supercycle talk, but I anticipated that we would see a continuation of trend from the last two quarters of 2024. It did not happen. Instead, we have seen a significant deceleration of deal activity. Even before the tariff discussions, it has decelerated even more as we look into Q2. In that environment, we saw decreased deal activity and still very significant competition for the deals that were happening. We saw, in the first two months, actually continued compression of spreads. That is what led us to be very cautious because we thought that the new activity was not as attractive as we would like for it to have been. We wanted to hustle and powder for better times.

To your point, I'm glad we did. We do consistently follow the same playbook. If we write a credit and it's an existing borrower and it's looking to do something new, we consistently, very aggressively defend incumbencies where we write the credit. That's just a standard Golub Capital policy. We think it's served us well over a very long period of time. I think looking at one quarter and trying to draw inferences about overall repayment trends, I'd caution against that. I think that's hard to do because one quarter's worth of repayments can be very heavily influenced by a small number of transactions. I would tell you, as a generalization, we're seeing private equity hold longer in hopes that we're going to see a better environment for selling companies. That's the dominant trend of the first four months of this calendar year.

Speaker 2

Very helpful. If I could sneak one more in. You guys did mention on the portfolio tariff review, there were some names identified. You did not name those, so I will not ask you to. How bad is it? Should we expect a bit of a hit next quarter, or is this still early stages, hopefully manageable? Thank you.

Speaker 0

I think it's going to prove manageable. There are a lot of unknowns. Right now, we're in this period of pause, and the administration is talking about hopeful signs of reaching a lot of trade deals. I'm hopeful that that comes to fruition. Right now, we identified sub-10% of the portfolio that has some degree of exposure to imports and exports that warranted further study. That doesn't mean they're going to be impacted. That means they're warranting the further study. We've been working with borrowers and sponsors to do the further study and to identify the much smaller proportion of the portfolio that I anticipate will be meaningfully impacted. I think we're in good shape. A first-order basis, Tim. The thing I worry about more is second-order impacts.

I think we may be headed toward a downturn if the pause isn't a well-utilized pause to establish more trade deals. Thanks so much, everybody.

Speaker 5

Your next question comes from the line of Robert Dodd with Raymond James. Please go ahead.

Speaker 6

Hi. Hopefully, you can hear me okay. On one of the issues you brought up, David, is you moved a little bit that market during the quarter, like maybe an even top $50 million. Pure Tech. I mean, $50 million is not a small company, but it is smaller. I mean, is that kind of what you expect to do as things continue as they are kind of for the rest of the year, maybe, in terms of doing those smaller companies? Spreads tend to be a little higher. The M&A cycle for those core market companies is not quite as boom and bust as the large market M&A businesses, but they are a little bit smaller and maybe not as resilient if there is a downturn. Can you give us thoughts on how that plays out?

Speaker 0

Sure. We have long prided ourselves on being able to be a lender and being able to be a partner to private equity firms across a broad range of different EBITDA levels, from approximately $20 million to approximately $100 million, which constitutes most of what we do. The average is, Robert, if you can mute, there is a lot of background noise. Thank you. We pride ourselves on being in this broad range, playing in the larger market, but playing in the larger market more opportunistically when market conditions are attractive. We found in the early part of this quarter, particularly, that the larger market was not terribly attractive. The broadly syndicated market at the time was quite robust, and we were seeing relatively low spreads on new transactions in the broadly syndicated market.

In that kind of set of market conditions, we're going to be even more inclined to focus on our core. I wouldn't characterize the 54 as being unusual. If you look at our median EBITDA by quarter over time, it's frequently in that range. Most of the portfolio, approximately two-thirds of the portfolio, is typically in the range of $30 million-$70 million in EBITDA. That's really our core specialty. I do like the—and this is, I think, your point—I do like the risk-reward dynamic and the competitive dynamic in that core middle market better than I like the lower middle market, where companies are less resilient, or in the upper middle market or larger market, where market conditions can cause spreads to compress to the point where they're pretty tight. That's why we focus on the core middle market.

We think it's where our competitive advantages are strongest.

Speaker 6

Got it. Thank you for that. I'm sorry about the background noise. Just one more. On the three you noted for this quarter, any themes there? I mean, was any of that a proactive step with a view to tariffs, or was it just the normal idiosyncratic things, or was there any kind of thematic underpinning there? I mean, it's only three, but still.

Speaker 0

No, I would say there's no thematic underpinning, and it was not influenced by tariffs. What we've said before is—and I think this is true of credit markets generally, not just for Golub Capital—most borrowers have been performing well and have adapted well to the higher interest rates and changing market conditions, but there is a tail. If you look at the broadly syndicated market, we've been operating now for some time with a default rate about 4.5%, about double the historical average. We have not seen that in our portfolio, but we have seen a little bit of an uptick in credit stress, and the situation with our non-accruals this quarter reflects that.

Speaker 6

Thank you.

Speaker 5

Your next question comes from the line of Paul Johnson with KBW. Please go ahead.

Speaker 1

Thanks. Good afternoon. Thanks for taking my questions. Just on the small subset of companies sort of at risk for tariffs, how is that, or how is that reflected, I guess, or captured in your internal watchlist? Were there any, I guess, names that were demoted in terms of risk ranking this quarter, or would we expect that to be more factored into next quarter's watchlist?

Speaker 0

I think it's going to take more time for that to play out. Bear in mind Liberation Day announcement for April 2nd. It was after the quarter ended. There certainly wasn't an economic impact of tariff issues in the March 31 quarter that we could see in financial results. This is all right now analytic and anecdotal, and we're going to need to see how results play out over the course of the coming quarters.

Speaker 1

Got it. Thanks for that. Then just on the refinancing activity, as Tim said, repayments have been on the lower end the last few quarters here. Can you give us an idea of just how much, I guess, of the portfolio you might think is roughly just, I guess, exposed to potential continued refinancing activity and getting repriced lower this year?

Speaker 0

I'll give you a different answer than I would have given you in February. I think we were still seeing a significant amount of refinancing activity in January and February, and we're seeing scarcely any now. I think the main reason for the change is that we've seen the pendulum shift directions. We've gone from a market that was becoming more and more borrower-friendly to one that's now becoming more lender-friendly. It's visible in the broadly syndicated market through lower prices and higher spreads on new issue. We've seen some degree of a shift in spreads in new issue in our market. Unless we see another fairly significant shift, a wind direction shift, I'm not concerned about a lot of spread-tightening refinancing activity in our portfolio in the coming period.

Speaker 1

Thanks for that. That's good to hear. Just on this sort of very brief April period of volatility, I realize we're talking about a very short window of time here, but I'm just curious to hear if you at all noticed any sort of dispersion in terms of the scale of lenders in the market, in terms of any sort of smaller-scale players that were constrained in any way, or even from the borrower side, an affinity to work with more larger-scale type of lenders, if there was any sort of noticeable trend there as the market became volatile?

Speaker 0

It's early days, but I think this kind of market plays to our strengths and relationship strengths in particular. We've been involved this month in a number of different situations where sponsors had reasons to choose either one or a small group of lenders that they wanted to work with. I feel like this has been a good period for us from a share standpoint in attractive transactions. I do not want to draw too many conclusions from it because it's only a month. I think we've got to give this more time.

Speaker 1

Thank you. That's all for me.

Speaker 5

I'll now turn the call over to David Golub for closing remarks. Please go ahead.

Speaker 0

Great. I just want to thank everyone for listening today and appreciate all of your time and your questions. As always, if there's something that we didn't cover today that you're interested in, please feel free to reach out, and I look forward to engaging with you next quarter. Thank you.

Speaker 5

Ladies and gentlemen, that concludes today's call. Thank you all for joining, and you may now disconnect.

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