Golub Capital BDC - Earnings Call - Q3 2025

Executive Summary

• Solid “good boring” quarter: Adjusted NII per share was $0.39 and GAAP EPS was $0.34; NAV per share dipped 4¢ to $15.00 as unrealized losses on a small tail of underperformers offset equity gains and FX gains.
• Versus estimates: EPS (primary/NII) was essentially in line (0.38 actual vs 0.382 consensus*), while revenue (total investment income) beat ($218.34M actual vs $215.47M consensus*).
• Credit quality remained strong: nonaccruals were ~0.60% of fair value, with ~90% of the book in the top two internal ratings; net investment spread held at 4.9% as lower cost of debt offset modest yield compression.
• Capital actions and liquidity: $34.3M of accretive buybacks in Q3, $950M liquidity post-quarter-end actions (cash + revolvers), revolver repriced lower and GBDC 3 2022 securitization redeemed to further reduce borrowing costs.
• Near-term catalysts: stable dividend coverage at $0.39, spread stabilization, selective origination uptick, and liability-side optimization; watch leverage (1.26x net at Q3) within the 0.85–1.25x target range and unrealized depreciation on underperformers.

What Went Well and What Went Wrong

What Went Well

• “Good boring” quarter with resilient fundamentals: “Adjusted NII per share was $0.39… Adjusted net income per share was 34¢” (CEO).
• Spread stability despite compression: Investment income yield declined ~20 bps to 10.6%, but cost of debt fell ~20 bps to 5.7%, keeping net investment spread stable at 4.9% (CFO).
• Credit quality: Nonaccruals ~0.60% of fair value, “well below the BDC peer industry average,” and nearly 90% of portfolio in top two ratings (COO).

What Went Wrong

• Valuation headwinds: Adjusted net realized and unrealized loss of ($0.05) per share driven by underperformance in certain portfolio companies (primarily equity marks), partly offset by FX gains.
• NAV down sequentially: NAV per share decreased to $15.00 from $15.04 due to unrealized depreciation.
• Higher leverage within range: GAAP debt-to-equity, net rose to 1.26x at Q3 (avg 1.21x) amid muted repayments; investor questions focused on deleveraging prospects.

Transcript

Speaker 0

Hello everyone, and welcome to Golub Capital BDC's earnings call for the fiscal quarter ended June 30, 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 Golub Capital BDC'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 on the Events and 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 Golub Capital BDC.

Speaker 2

Hello everybody, and 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 focused on providing first lien senior secured loans to healthy, resilient middle market companies that are backed by strong partnership-oriented private equity funds. Yesterday, we issued our earnings press release for the quarter ended June 30, and we posted an earnings presentation on our website. We're going to be referring to this presentation over the course of today's call. I'm going to start with headlines, then Matt and Chris are going to go through our operating and financial performance for the quarter in more detail. Finally, I'll wrap up with our outlook for the coming period, and we'll take some questions. The headline is that GBDC had another good boring quarter.

Here are the highlights. Adjusted NII per share was $0.39. This corresponds to an adjusted NII return on equity of 10.4%. Adjusted net income per share was $0.34, and that's an adjusted return on equity of 9.1%. This brings the SLEEP IPO internal rate of return for GBDC shareholders to 9.6% over 15 years. Adjusted net income per share included $0.05 per share of adjusted net realized and unrealized losses, primarily unrealized losses in the small tail of underperforming borrowers that you've heard us speak about previously. Our new investment activity increased from prior quarters, but the overall M&A environment remained muted. We continue to see an encouraging level of resilience across our borrowers, with internal performance ratings remaining strong and generally consistent quarter over quarter. With that, I'll pass the call over to Matt Benton to discuss the quarter in more detail.

Speaker 0

Thanks, David. I'm going to start on slide 4. GBDC's $0.39 per share of adjusted NII and $0.34 per share of adjusted earnings were driven by four key factors. First, overall credit performance remains solid. Nearly 90% of GBDC's investment portfolio at fair value remains in our highest performing internal rating categories. The $0.05 of adjusted net unrealized and realized losses were primarily related to fair value markdowns on a small number of underperforming investments, the majority of which were in equity investments in these portfolio companies. Investments on non-accrual status remained very low at 60 basis points of the total investment portfolio at fair value. This level is well below the BDC peer average. Second, earnings were supported by historically high base rates and attractive spreads consistent with recent quarters.

GBDC's investment income yield was 10.6%, a sequential decline of about 20 basis points, primarily driven by, one, modestly lower base rates, mostly related to a greater mix of loans tied to lower non-self-referenced rates, and, two, modest spread compression during the quarter. Third, a decline in GBDC's borrowing costs largely offset the sequential decline in investment income yield. The repricing of GBDC's syndicated corporate revolver, which took effect in mid-May, reduced effective borrowing costs during the quarter. Fourth, earnings benefited from lower operating expenses due to GBDC's market-leading fee structure. GBDC's investment portfolio grew modestly quarter over quarter, an increase of 4% to just under $9 million at fair value. The increase was the result of $557 million of new investment commitments in the quarter, $411 million of which funded in the quarter, and net of $306 million in repayments.

We continue to remain highly selective and conservative in our underwriting, closing on just 3.1% of deals reviewed in the quarter at a weighted average LTV of approximately 34%. We continue to lean in on existing sponsor relationships and portfolio company incumbencies for approximately half of our origination volume and delivered an uptick in dealer activity with new borrowers. We continue to leverage scale to lead deals, acting as the sole or lead lender in 88% of our transactions. We focus 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 Q2 2025 originations is $79 million. We believe our ability to play across the size spectrum is a particularly valuable differentiator today versus many of our peers that are limited to the large borrower market.

Continuing on slide 4, 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 $0.04 on a sequential basis to $15, primarily because of net unrealized loss. Net debt to equity increased modestly quarter over quarter, ending at 1.26 turns. On average throughout the quarter, GBDC's net leverage was 1.21 turns, well within our targeted range of 0.85 to 1.25 turns. During the quarter, we opportunistically repurchased common stock on an accretive basis. GBDC's board declared a regular quarterly distribution of $0.39 per share, representing an annualized dividend yield of 10.4% based on GBDC's NAV per share as of June 30, 2025. I'm going to turn it over to Chris now to take us through our financial results in more detail. Chris?

Speaker 2

Thanks, Matt. Turning to slide 7, you can see how the earnings drivers Matt just described and distributions paid in the quarter translated into GBDC's June 30, 2025 NAV per share of $15. Adjusted NII per share of $0.39 was in line with the $0.39 per share base distribution paid out during the quarter. Adjusted net realized and unrealized losses were $0.05 per share, and repurchases of common stock during the quarter resulted in $0.01 per share of NAV accretion. Together, these results drove a net asset value per share decrease to $15. We will turn to slide 10, which details our origination activity for the quarter. Net funds quarter over quarter increased modestly by $340 million as a combination of funded new originations and DVTL and revolver draws outpaid repayments in the quarter. Looking at the bottom of the slide, the weighted average rate on new investments was 9.2%.

Investments that repaid in the quarter were at a weighted average rate of 9.8%. We did see some spread widening immediately after liberation days. That was followed by some spread tightening over the remainder of the quarter. Slide 11 shows GBDC's overall portfolio mix, and 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 20 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 June 30, 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 GBDC's net investment spread of 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 20 basis points sequentially to 10.6%. The decline was primarily the result of a lower weighted average spread on debt investments in the portfolio and the result of a portion of GBDC's 99% floating rate investment portfolio re-indexing in the quarters to lower reference rates.

Our cost of debt, the teal line, decreased 20 basis points to 5.7%, reflecting our approximately 80% floating rate debt funding structure and the partial quarter contribution of the amendment of our syndicated corporate revolver. Net net, GBDC's weighted average net investment spread, the gold line, remained stable quarter over quarter at 4.9%. Moving on to slides 14 and 15, as we take a closer look at our credit quality metrics. On slide 14, you can see that non-accruals decreased slightly to 60 basis points of total investments at fair value. The number of investments on non-accrual status remained at 9. Slide 15 shows the trend in internal performance ratings. As Matt noted earlier, nearly 90% of the total investment portfolio remained in our top two internal performance rating categories.

Investments rated 3, signaling a borrower is or has the potential to be performing below expectations at underwriting, remained low at just 9% of the total investment portfolio. A proportion of loans rated 1 and 2, which are the loans we believe are most likely to see significant credit impairment, remained very low at just 1.3% 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 to 21. First, let's focus on the key takeaways on slide 21. Our debt funding structure remains highly diversified and flexible. Our debt maturity profile remains well positioned, with 42% of our debt funding in the form of unsecured notes with no near-term maturities.

The April 2025 corporate revolver amendment further enhances our debt maturity profile, extending final maturity on the nearly $2 billion of total commitments under the facility through 2030. We expect to operate at the lowest pricing tier of 1.525% over one month's SOFR, given the level of overcollateralization in the facility. The following quarter ended, we elected to repay and hold the outstanding notes under the GBDC III 2022 debt securitization with available borrowing capacity under GBDC's corporate revolver. This action represented the final step in transitioning the post-GBDC III merger debt funding structure, and we expect it to result in a modest borrowing cost reduction beginning in the quarter ended 9/30/2025. Consistent with our asset liability matching principle, 82% 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 rates at closure. Overall, our liquidity position remains strong, and we ended the quarter with approximately $950 million of liquidity from unrestricted cash, undrawn commitments on our corporate revolver, and the unused unsecured revolver provided by our advisors. 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, Chris. For the sum up, GBDC posted another quarter of good boring results. These results happened in a quarter that, from a macro perspective, wasn't boring at all.

It saw big market swings, and it saw another example of a bad consensus forecast. You'll recall in prior quarters I talked about how many bad consensus forecasts we've seen since the beginning of COVID. At the beginning of calendar Q2, the strong consensus view was that tariff-related uncertainty would be a big drag on the U.S. economy and that it would probably result in slowing growth. That's not what happened. Instead, the U.S. economy is, at least so far, demonstrating considerable resilience. I'm now going to offer up some observations and some predictions about the future. I want to acknowledge in doing so that we're in a period that's proved very difficult for forecasters. I advised last quarter, given this, that we should all stay humble, we should all choose resilient strategies, and we could prepare for multiple scenarios.

I think that was good advice then, and it's good advice now. With that context, let me touch briefly on two topics: on our outlook for credit performance and our outlook for the deal environment. First, credit performance. I expect what is already a protracted credit cycle to become even more protracted. Traditionally, credit cycles are typically spikes. Something bad happens, there's a collapse in confidence, or there's too much inventory, or there's a geopolitical shock, and you get a spike in credit default where defaults rise to an unusual height and then quickly fall. That's not what we've seen this credit cycle. In 2022, when we saw the dramatic increase in interest rates, a lot of smart people, including us, expected that we'd see a sudden significant increase in defaults in response to that increase in rates. That didn't happen.

Instead, almost two years later, we started to see a slow increase in defaults. We saw it across the broadly syndicated loan market, the high yield market, and private credit markets. We continue to see that slow increase, sustained increase, today. Defaults in the broadly syndicated loan market, a place where the data is reasonably clean once you factor in liability management exercises, have been running at about 4.5% for about 18 months. That's about 2x historical average levels. We think this elevated level of credit stress across public and private credit markets is likely to continue for a considerable period. With apologies to Tolstoy who famously wrote that every unhappy family is unhappy in its own way, every unhappy credit is unhappy in its own way. There are a few common themes that cover a large number of the stressed companies that we see today. Three examples.

Some haven't grown into aggressive capital structures that were put in place in 2021. Some have come around the wrong side of some changing post-COVID consumer tastes. For some, the adjustments in their original business plans haven't played out the way that they were expected to play out. Our observation is that many of these companies have not yet gone through restructurings and fixed their balance sheets. Some have done liability management exercises, but those LMEs haven't solved their issues, they've just kicked the can. We expect high yield default and private credit default rates to stay elevated for some time from here. We also anticipate that there will continue to be very substantial dispersion in credit manager performance. We call these winners and whiners. Some firms are going to continue to produce really solid ROEs, and some won't.

We think this will be directly related to whether the firms have solid competitive advantages. Accordingly, we expect the same winners to keep winning and the same whiners to keep, well, you get the idea. That's topic one. We expect a protracted credit cycle to become even more protracted. Second topic, let me give you my view on when the muted M&A environment is going to get less muted. There are some reasons for optimism. The recent enactment of the Big Beautiful Bill provides a significant degree of clarity on tax and spending changes. The regulatory environment is also becoming clearer. There remains, as we've talked about in prior quarters, very significant pressure on private equity firms to be sellers in order to make distributions to LPs and to be buyers to deploy the very significant amounts of dry powder that they're behind schedule in deploying. All that's positive.

On the other hand, there's still a lot of tariff uncertainty, and there's still a lot of global macro issues. On balance, I expect the M&A environment to improve. I think it's going to improve slowly in the rest of this year and then more quickly next year. I also want to go back to my theme of humility. I'm humble about this prediction. We've all been pretty consistently wrong on this. No matter whether the deal markets heat up or not, our playbook at Golub Capital BDC is going to remain the same as it's been for decades. We're going to continue to be very selective when we make new loans. We're going to continue to focus on early detection of a borrower underperformance. We're going to continue to work with our sponsor friends to address problems proactively.

Our approach is all about minimizing realized credit losses and being ready to play offense when opportunities arise. With that, operator, please open the line for questions.

Speaker 0

Ladies and gentlemen, 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. Your first question comes from the line of Kelly Seth with Graham and James. Please go ahead.

Hi, good morning. Thanks for the question. A quick one on leverage. This quarter, you guys ended with net leverage of 1.26, which is quite high by historical standards. Is it fair to say that you're expecting a significant wave of repayments to eventually lever down?

Speaker 2

Yes and no. You're correct that we have some repayments in the pipeline and that we think the quarter-end leverage was a little bit higher than we're looking at it over time. Matt alluded to this in his comments. He alluded to the fact that average leverage over the quarter was about 1.2. We've always thought about leverage as being appropriate in the context of a target range rather than being too religious on one specific point within the range. 1.25 is the high end of our range. You indicated in your question, are we anticipating a deleveraging? No, but likewise, we're not anticipating further leveraging either.

Got it. Thanks. A quick follow-up, maybe a more philosophical question, but spreads across the floating rate markets are quite tight right now, not just with BDCs, but with syndicated loan spreads as well, which tend to widen when rates go down. With BDCs spreads having lagged these movements by upwards of six months, do you think this lag time between liquid loan markets and BDCs is going to remain the same, or is it more likely to respond more quickly?

I'm not sure I understand your question. When you say BDCs have lagged, can you elaborate on what you mean by that?

Yeah, lagging like loan spread movements with the broadly syndicated loan market.

You're saying that the broadly syndicated loan markets have seen more spread compression than we've seen in our reported spreads on our new loans?

Yeah.

That was, yeah, you're right. I think that is an appropriate description of the pattern that we've seen. We've seen quite significant spread compression in the broadly syndicated loan markets. It's been a pattern for some time. If you think back to the summer of 2022 when rates went up and the broadly syndicated loan markets dislocated and we saw very significant spread widening, since 2023, we've been on a trend toward a more borrower-friendly, tighter spread environment in both private credit and the broadly syndicated loan markets. I do think you're right that private credit spreads are a little stickier, especially middle market private spreads. We've seen a significant degree of spread compression in our markets as well. I don't think we're immune to those trends.

I think the right way to look at it is, especially in the core middle market as opposed to the larger market, the core middle market's insulated but not immune from spread trends that are happening in the broadly syndicated loan markets. The larger end of the private credit market is less insulated because DFL is a replacement. We've seen a number of transactions, FINASTRA is a good example recently, where credits that were in the private credit market are being refinanced at lower spreads in the broadly syndicated loan markets. Because of that phenomenon, the larger end of the market tends to respond more quickly to changes in spreads than the core middle market.

Got it. Thanks for the call. I appreciate it.

Speaker 0

Ladies and gentlemen, as a reminder, if you would like to ask a question, please press star, followed by the number one on your telephone keypad. I will now turn the call back over to David Golub for closing remarks. Please go ahead.

Speaker 2

It seems that today the report's so good, boring we don't have the usual number of questions, which is fine. Thank you all for listening. As always, if you have questions after today, please feel free to get in touch, and we look forward to being back in front of you next quarter. Thank you.

Speaker 0

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