Golub Capital BDC - Earnings Call - Q4 2025

Executive Summary

• Solid quarter with adjusted NII per share of $0.39 and GAAP EPS of $0.36; total investment income was $217.8M. Credit quality remained strong with non-accruals at 0.3% of fair value and net investment spread of 4.8%.
• Versus estimates: slight revenue miss ($217.8M vs $220.5M*) and slight NII/EPS miss ($0.38 vs $0.384*), reflecting spread compression and lower base rates partially offset by lower borrowing costs and higher fee/dividend income.
• Dividend maintained at $0.39 per share; board will revisit dividend policy early next year given the outlook for rates/spreads/financing costs, a potential stock reaction catalyst.
• Active capital allocation: $5.2M buybacks in quarter; $34.8M repurchased post-quarter through Nov 18 at $13.69 average, alongside $8.1M Trust purchases for employee program.
• Liquidity robust: ~$899M JPM revolver availability and $260.8M unsecured adviser line; $250M of 2028 notes issued and swapped to floating, keeping ~81% of funding floating to mitigate rate changes.

What Went Well and What Went Wrong

What Went Well

• Credit quality: Non-accruals declined to 0.3% of fair value; ~90% of investments rated 4–5. “Investments on non-accrual status decreased to a very low level, 0.3% ... well below the BDC peer industry average.”
• Funding cost management: Effective borrowing costs fell to 5.6% driven by revolver repricing and calling legacy securitization; asset-liability matched with ~81% floating-rate debt funding.
• Portfolio diversification/granularity: 417 portfolio companies; largest borrower is 1.5% of debt portfolio; top-10 are 12%.
• Quote: “GBDC had a solid quarter ... bolstered by solid credit results across our portfolio.” – CEO David Golub.

What Went Wrong

• Spread compression/base-rate decline: Investment income yield fell ~20 bps to 10.4% due to modest declines in base rates and spreads, pressuring revenue relative to consensus.
• Realized/unrealized losses: Adjusted net realized/unrealized loss per share was ($0.03) driven by restructurings and write-downs on underperformers (partly offset by FX gains).
• NAV drift: NAV/share ticked down to $14.97 from $15.00, reflecting distributions and modest net losses.
• Analyst concern: Headline credit cycle persists with elevated defaults across markets; management expects dispersion to continue and stresses caution.

Transcript

Speaker 2

Hello everyone, and welcome to GBDC's earnings call for the fiscal quarter and fiscal year, and it's September 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 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 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 GBDC.

Hello everybody, and thanks for joining us today. I'm joined by my colleagues, Tim Toppix and Chris Ericson. 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 sponsors. Yesterday, we issued our earnings press release for the fiscal quarter and year-end at September 30, 2025, and we posted an earnings presentation to our website. We'll be referring to that presentation during the call today. I'm going to start with headlines and a summary of performance for both the quarter and the fiscal year. Tim and Chris are going to go through our operating and financial performance for the quarter in more detail. Finally, I'll come back and wrap up with some observations on current market conditions and our outlook for the coming period.

With that, let's jump in. I see two primary headlines to today's news. The first, GBDC had a solid quarter and a strong end to fiscal year 2025. It was bolstered by solid credit results across our portfolio. Second, at the same time, the private credit direct lending market faces some headwinds, and GBDC is not immune from those headwinds. Let me expand and unpack each of these headlines. First, let's talk about performance. For the quarter, adjusted NII per share was $0.39, and that translates to an adjusted NII ROE of 10.4%. Adjusted net income per share was $0.36 for an adjusted ROE of 9.6%. For fiscal year 2025, GBDC paid $1.65 per share of cumulative distributions, representing 10.9% of end-of-year net asset value per share. Further, GBDC ended fiscal year 2025 with a net asset value per share of $14.97.

That's 34 cents above GBDC's net asset value per share at its IPO in 2010. GBDC is one of only a very small number of BDCs that have delivered NAV per share growth since IPO. GBDC's performance reflected a continuation of trends that you've heard me talk about over the last several quarters. Overall credit performance remained solid, and earnings were supported by decreasing but still attractive portfolio spreads and attractive borrowing costs. At the same time, this is the second key headline, the direct lending market is facing some headwinds, headwinds that GBDC isn't immune to. What are those headwinds? First, spreads have narrowed. Now, this isn't just true of middle market direct lending. We've seen tighter spreads across traditional fixed income, asset-based finance, high yield, the broadly syndicated loan market. Spreads are tighter just about everywhere other than subprime.

Second headwind, base rates have started to come down, and the market expects them to come down further. Third headwind, and this is the most important, we're in a credit cycle. There's an unusual level of defaults and credit stress in the leveraged loan market today. That's both the liquid leveraged loan market, including the broadly syndicated market, as well as the private credit market. This has been the case for over a year, and I anticipate it's going to continue for some time. We'll talk more about these headwinds over the course of today's call, but I want to highlight two ramifications of these headwinds. First, they're causing a spate of colorful news articles about the sector. Some of these articles are quite insightful, some less so. I'm going to talk in my closing remarks about some of the insightful ones.

They are causing very significant dispersion in performance among direct lending managers. Some managers are continuing to produce solid returns, mostly down a bit from last year, but still solid. Some other managers are producing poor results. I described this last quarter as being a story about winners and whiners, and I said this pattern would continue, and it is continuing. Before I pass the mic to Tim and Chris to go over operating results in more detail, I want to comment on the decision by our board to declare a $0.39 per share distribution for the first fiscal quarter of 2026. In connection with this decision, the board also determined that it would be prudent to revisit GBDC's dividend policy early next year when we hope to have more information on the forward outlook for rates and asset spreads and financing costs.

GBDC plans to approach the dividend question with the same underlying strategy we've had since our IPO. To remind those of you who haven't heard me talk about dividend strategy before, we're guided by four goals. First, we seek to maintain a stable net asset value per share over time. Second, we seek to minimize excise taxes over time. Third, we seek to adjust our base distribution level infrequently. Finally, we seek to pay as high a dividend yield on NAV as sustainable, consistent with the above goals, the three prior goals. Now, we can't always achieve all four of these goals at the same time, and at such times, we need to find the right balance. I'll have more to say in my closing remarks, but to sum up my intro, GBDC demonstrated strong and resilient earnings in fiscal 2025, despite macro surprises and despite market volatility.

The market today is challenging, but based on our experience through multiple cycles over multiple decades, we believe this is the kind of environment where we and other private credit specialists outperform. Now, I'll pass the call over to Tim Toppix to discuss the quarter in more detail.

Speaker 0

Thanks, David. Let's begin on slide four. GBDC's $0.39 per share of adjusted net investment income and $0.36 per share of adjusted earnings were driven by four key factors. First, overall credit performance remained solid. Approximately 90% of GBDC's investment portfolio at fair value remains in our highest-performing internal rating categories. The $0.03 per share of adjusted net unrealized and realized losses were primarily related to the successful restructurings of certain loan investments in the quarter that were on non-accrual status and select write-downs on a certain portion of GBDC's tail of underperforming borrowers. Investments on non-accrual status decreased to a very low level, 0.3% or 30 basis points of the total investment portfolio at fair value. This level remains well below the BDC peer industry average. Second, earnings were supported by declining but still attractive spreads consistent with recent quarters.

GBDC's investment income yield was 10.4%, a sequential decline of 20 basis points, primarily driven by, one, a modest decline in weighted average base rates, and two, modest compression of weighted average portfolio spread during the quarter. The headwinds were somewhat offset by a sequential increase in fee and dividend income related to certain early loan repayments and a dividend associated with the recapitalization of one portfolio company. Third, a decline in GBDC's borrowing costs partially offsets the sequential decline in investment income yield. There were two main drivers here. First, the full quarter impact of repricing GBDC's syndicated corporate revolver to a drawn spread of one-month SOFR plus 1.525% with a 32.5 basis point unused fee. Second, we elected to call the final legacy GBDC-3 debt securitization in advance of its 2030 stated maturity.

The combined impact was a reduction in effective borrowing costs during the quarter to 5.6% annualized, which we believe is an industry-leading level. Fourth, earnings benefited from lower operating expenses due to GBDC's market-leading fee structure of a 1% base management fee, a 15% incentive fee, and an 8% income incentive fee hurdle, which will become increasingly relevant in a market environment characterized by lower reference interest rates and historically tight investment spreads. GBDC's investment portfolio decreased modestly quarter over quarter to just under $8.8 billion at fair value. The decrease was the result of $371 million in repayments and exits, net of $60 million in new investment commitments that funded in the quarter. We remain highly selective and conservative in our underwriting, closing on just 3.8% of deals reviewed in the quarter and a weighted average LTV of approximately 42%.

We leaned on our existing sponsor relationships and portfolio company incumbencies for approximately half of our origination volume and delivered an uptick in deal activity with new borrowers. We continued to leverage our scale to lead deals, acting as sole or lead lender in 90% of our transactions in the quarter. 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 originations in the quarter was $61 million. While larger cap opportunities are experiencing greater pressure on spreads and terms given robust conditions in the public credit market and increased competition, the breadth of our origination capabilities allows us to flexibly seek attractive risk-adjusted returns for GBDC.

For instance, in respect to the larger borrower market, in the quarter, Golub Capital acted as joint lead arranger on a $4.5 billion unitranche facility in support of Clearlake Capital's acquisition of Dun & Bradstreet, the largest private credit LBO recorded to date. While in the core middle market, we acted as lead lender and administrative agent on a new unitranche facility to Ollo Inc. to support Thoma Bravo's Tate Private, a leading provider of mission-critical technology infrastructure to U.S. restaurant chains. 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. Net debt to equity decreased modestly quarter over quarter, ending at 1.23 times, within our targeted range of 0.85-1.25 times.

During the quarter, we opportunistically repurchased 368,000 shares, and this brought total repurchases to 2.9 million shares or $40.6 million in aggregate value for the fiscal year. Since quarter end, GBDC repurchased an additional 2.5 million shares at an average price of $13.69 per share. Unlike many other BDC managers who prioritize AUM goals, we approach repurchase opportunities with the goal of maximizing investor returns. I'm going to turn it over to Chris now to take us through our financial results in more detail.

Speaker 3

Thanks, Tim. Turning to slide seven, you can see how the earnings drivers Tim just described and distributions paid in the quarter translated into GBDC September 30, 2025, NAV per share of $14.97. Adjusted NII per share of $0.39 was in line with $0.39 per share base distribution paid out during the quarter, and adjusted net realized and unrealized losses were $0.03 per share. Together, these results drove a net asset value per share decrease to $14.97. Turning to slide 10, which details our origination activity for the quarter. Net funds growth, defined as new funded commitments, less exits and sales, and net of market value changes in portfolio fair value, decreased by $192 million for the quarter as repayments and exits outpaced funded new originations and delayed draw term loan and revolver draws.

Looking at the bottom of the slide, the weighted average rate on new investments was 8.9%, a decline of 30 basis points from the prior quarter, the result of tighter new origination spreads and lower SOFR reference rates. Investments that repaid in the quarter were at a weighted average rate of 9.8%. 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 20 basis points across 417 distinct portfolio companies. Additionally, our largest borrower represents just 1.5% of the debt investment portfolio, and our top 10 largest borrowers represent just 12% of the portfolio.

We believe GBDC is one of the most diversified and granular portfolios in the public BDC sector, modulating credit risk through position size. As of September 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 4.8%. Let's walk through this slide in detail. I'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 approximately 20 basis points sequentially to 10.4%. Our cost of debt, the teal line, decreased approximately 10 basis points to 5.6%.

It's reflecting our approximately 80% floating-rate debt funding structure while benefiting from a full quarter contribution of the amendment to our syndicated corporate revolver and the decision to early repay the final outstanding legacy GBDC-3 debt securitization during the quarter. Net net, GBDC's weighted average net investment spread, the gold line, declined modestly quarter over quarter to 4.8%. Moving on to slides 14 and 15, let's take a closer look at our credit quality metrics. On slide 14, you can see that non-accruals decreased to 30 basis points as a percentage of total investments at fair value and 60 basis points of total investments at amortized cost.

The number of non-accrual investments remained at nine investments as the disposition of one portfolio company investment, and the return to accrual status of one portfolio company investment following the restructuring was offset by the addition of two portfolio company investments during the quarter. Slide 15 shows the trend in internal performance ratings. As Tim noted earlier, nearly 90% of the total investment portfolio remained in our top two internal performance rating categories. Investments rated three, signaling a borrower may have the potential to or is performing below expectations as compared to at underwriting, remained low at just 9.6% of the total investment portfolio. The proportion of loans rated one and two, which are the loans we believe are most likely to see significant credit impairment, remained very low at just 1% 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 49% of our debt funding in the form of unsecured notes across a well-laddered maturity profile. In September, we capitalized on favorable market conditions to issue an additional $250 million of our 2028 notes at a yield to maturity of 5.05%, which we swapped to a floating rate of SOFR plus 172 basis points.

Consistent with our asset liability matching principle, 81% of GBDC's total debt funding is floating rate or swapped to a floating rate, levels that we believe are amongst the highest in the sector, positioning GBDC well to modulate the impacts of lower interest rates on investment income through offsetting lower interest expense on its borrowings. Overall, our liquidity position remains strong, and we ended the quarter with approximately $1.2 billion of liquidity from unrestricted cash on drawn commitments on our corporate revolver and the unsecured revolver provided by our advisor. Now, I'll hand it back over to David for closing remarks.

Speaker 2

Thanks, Chris. As I said at the outset, GBDC posted another quarter of solid results, rounding out a strong fiscal year 2025. Let's shift and first talk about our outlook for the economy and the BDC sector, and then I want to address the recent spate of colorful press articles about the private credit space. In terms of the overall U.S. economy, the picture right now is confusing. On the one hand, the U.S. economy continues to show surprising resilience. We see this in the Golub Capital Middle Market report for Q3, which showed continuing solid year-over-year growth in revenues and EBITDA across our portfolio, albeit at a bit slower pace than we saw in 2024. Yes, there are signs of weakness, especially the lower-end consumer, but overall, the economy is doing quite well.

On the other hand, there continues to be a tale of companies that are not adjusting well to the current environment. We see this in the default rate in the broadly syndicated market, which is currently running at about two and a half times historical average levels, and in the growth of realized and unrealized losses in the BDC space generally. As I've said for several quarters, we're in a protracted credit cycle. One way to interpret the weakness in certain BDC stock prices over recent weeks is that the market is paying closer attention to credit issues, and especially to the increase in realized and unrealized losses at some BDCs. We expect elevated credit stress to persist, and we expect this to continue to impact different BDCs in different ways. This is consistent with what I said last quarter.

We expect the gap between winners and minors to widen, and the winners will be those with proven competitive advantages and a long track record of low credit losses across cycles. Finally, I'd like to wrap up by addressing some of the recent press about private credit. We've seen an unusual number of colorful and dramatic press pieces about private credit, and some made good points while others have been, in my opinion, less well-informed. Jamie Dimon created some ruckus with his comments about when you see a cockroach, but we think he was making an important point. He wasn't, in fact, picking on private credit. If you look at the transcript, what he was saying correctly is that we're in a period of elevated credit stress.

This means it's an appropriate time to be cautious, to be careful, to examine your portfolio carefully, to look for problems, and to try to find ways through early intervention to mitigate the potential for credit losses. If that sounds familiar, it should. This is standard operating procedure at Golub Capital and GBDC. A second spate of articles covered First Brands and Tricolor, two high-profile bankruptcies that Golub Capital and GBDC had absolutely no exposure to. Some commentators have said that these are cases of private credit gone awry. We disagree. First Brands' debt was in the broadly syndicated loan market, and Tricolor's was in the securitization market. Neither company had Golub Capital-style private credit, and neither had a private equity sponsor. In our view, it's odd to blame private credit for either of these. More generally, we believe that private credit, when done right, is boring, intentionally so.

Golub Capital makes first-lien senior-secured loans to resilient companies in resilient industries backed by top-quality private equity firms. We've been doing it for more than 20 years. We've been building a set of competitive advantages that have enabled us to produce consistently low credit losses and strong returns for our investors. This playbook has guided us well for decades, and we think it will continue to do so going forward. With that, operator, could you please open the line for questions?

Speaker 4

Thank you. We will now begin the question-and-answer session. If you'd like to ask a question, please press star then the number one on your telephone keypad to raise your hand and enter the queue. If you'd like to withdraw your question at any time, you can press star one again. We'll pause just for a moment to compile the Q&A roster. Your first question comes from the line of Jordan Wesson with Wells Fargo. Your line is open.

Speaker 1

Hi, good morning. Just a question on the availability of co-invest, and not specifically to this vehicle, but just in the market generally. Have there been any changes in the availability or quality of those companies that you can get equity co-invest in, say, over the past one, three, five years?

Speaker 2

By way of context and background, Golub Capital has often done equity co-invest alongside debt investments that we make. Sometimes we also do stand-alone equity investments. We've done about 400 equity co-investments over the last 20 years. We look at the track record that we have on those equity co-investments, and it's very strong. It's the equivalent from an IRR standpoint of a top-tier private equity firm. We have not seen any meaningful change in either our approach or the availability of equity co-invest as we've historically done them. I'm not sure whether that's consistent or inconsistent with other firms. I'm not sure there are other firms that are as disclosive as we are about the strategy or the number or the track record of their equity co-invest.

I don't want to speak to the industry, but I would feel comfortable saying that we're not really seeing a change in our approach or in the availability of the equity co-invest that we make.

Speaker 1

Okay. I was just curious. There is a lot out there about continuation funds, and it seems like deals are happening that way. Obviously, private credit is supplying leverage to those. I do not know if just because of the greater amount of deal flow with continuation vehicles and the like, you have more opportunities to invest today than in the past. Thank you for your answer. Appreciate it.

Speaker 4

Again, if you'd like to ask a question, please press star then the number one on your telephone keypad. Your next question comes from the line of Robert Dodd with Raymond James. Your line is open.

Speaker 2

Hello, Robert. If you're talking, we can hear you.

Speaker 5

I apologize. I was muting myself. Sorry about that. Thank you. I wanted to go back to the comments on your closing comments on kind of the state of the economy, the confusing picture. Some areas doing well, some less well. I mean, are there any themes that you can point to? I mean, obviously, wage inflation is still out there, but broad inflation is still out there as well. I mean, are there particular areas? If we go back a few years, there were some issues in healthcare where wage inflation and healthcare did not have the pricing power to cope with that to a degree, right? Are there any areas developing now where we are still seeing kind of cost inflation starting to outstrip the ability for pricing to be passed on?

Speaker 2

Yeah, it's a good question, Robert. I tell you, an area where I have some optimism and an area in which I have some concerns. The area where I have some optimism is I think we are beginning to see and we're going to see more impact from the provisions in the big, beautiful bill that made capital spending more attractive for companies by enabling companies, in many cases, to get an immediate deduction for that capital spending. I think we're already seeing some unlocking of capital spending, and I'm not just talking about the AI boom. I think that's going to be very good for the economy generally. The area in which I have concerns is the subprime consumer. There are a number of different data points that all indicate that the subprime consumer is under stress.

If you look at the credit card data, you see not only increased delinquencies, but you see reduced spending. You see increased delinquencies in subprime mortgage. We've seen significant increased delinquencies in subprime auto. I think what that reflects is a low-end consumer who's stretched. We're not seeing wage increases in that area as we were in the earlier post-COVID period. To your point, we are seeing food cost inflation and housing, particularly rent increases that I think are problematic. It's a mixed picture. It is, as I said, confusing, and I caution everybody against being too confident in predictions because the accuracy of predictions in this post-COVID period about the macroeconomy, the pattern's been poor.

Speaker 5

I appreciate that, Colin. Thank you, David. On kind of the other point, on spreads, right? I mean, they have compressed. They've compressed everywhere, right? To your point, I mean, private credit spreads have kind of maintained their premium. On that, I mean, what's the risk in your view that that premium doesn't get maintained? On the complete flip side to that, what do you think would be necessary for broad spreads to move higher without it being triggered by some credit catastrophe?

Speaker 2

Again, it's a great question, Robert. I think there's a bit of a mythology that your question bursts. The mythology is that private credit spreads have compressed because of an imbalance between supply of capital and demand for capital. It's a nice theory, but that theory does not explain the compression of spreads across a whole variety of debt categories, including investment grade, including high yield, including the broadly syndicated sector, including securitization. I mean, it's everywhere other than subprime. Spreads are an indicator of confidence. Right now, investors are talking with their feet that they would rather be invested in debt investments of various sorts than in other investments. In order for the spread situation to change, I think there needs to be a change in perspective, a change in sentiment that's pretty broad. Right now, there is a lot of investor optimism.

I think we would need to see new facts come out that would cause investors generally to reset. I think that reset would probably affect not just private credit, but a lot of investment categories, including equities.

Speaker 5

Got it. Thank you.

Speaker 4

With no further questions in queue, I'd like to turn the conference back over to David Golub for any closing remarks.

Speaker 2

Sure. I want to thank everyone for their time this morning. As always, please feel free to reach out if there's a subject or issue that we didn't cover adequately today. Thanks for coming. We look forward to talking to you next quarter.

Speaker 4

This concludes today's conference call. You may now disconnect.