Goldman Sachs BDC - Q2 2024

Transcript

Austin Neary (Head of Investor Relations)

Good morning. This is Austin Neary, a member of the investor relations team for Goldman Sachs BDC Inc., and I would like to welcome everyone to the Goldman Sachs BDC Inc. second quarter 2024 earnings conference call. Please note that all participants will be in listen-only mode until the end of the call, when we will open up the line for questions. Before we begin today's call, I would like to remind our listeners that today's remarks may include forward-looking statements. These statements represent the company's belief regarding future events that, by their nature, are uncertain and outside of the company's control. The company's actual results and financial condition may differ, possibly materially, from what is indicated in those forward-looking statements as a result of a number of factors, including those described from time to time in the company's SEC filings. This audiocast is copyrighted material of Goldman Sachs BDC, Inc. and may not be duplicated, reproduced, or rebroadcast without our consent. Yesterday, after the market closed, the company issued an earnings press release and posted a supplemental earnings presentation, both of which can be found on the homepage of our website at www.goldmansachsbdc.com under the Investor Resources section, and which include reconciliations of non-GAAP measures to the most directly comparable GAAP measures. These documents should be reviewed in conjunction with the company's quarterly report on Form 10-Q, filed yesterday with the SEC. This conference call is being recorded today, Friday, August 9, 2024, for replay purposes. I'll now turn the call over to Alex Chi, Co-Chief Executive Officer of Goldman Sachs BDC, Inc.

Alex Chi (Co-CEO)

Thank you, Austin. Good morning, everyone, and thank you for joining us for our second quarter 2024 earnings conference call. I'm here today with David Miller, our Co-Chief Executive Officer, Tucker Greene, our Chief Operating Officer, and Stan Matuszewski, our Chief Financial Officer. I'll begin the call by providing an overview of our second quarter results and then discuss the current market environment. I'll then turn the call over to Tucker to describe our portfolio activity and performance before handing it off to Stan to take us through our financial results. And then finally, we'll open the line for Q&A. With that, let's get to our second quarter results. Our net investment income per share for the quarter was $0.59, up 7.3% from the previous quarter. Net asset value per share was $13.67, a decrease of approximately 6%. Our net investment income again exceeded our quarterly dividend, but the excess was offset by net realized and unrealized losses during the quarter, which led to the decrease in NAV. More than 70% of the unrealized losses in the quarter were related to markdowns in three investments within the portfolio: Lithium Technologies, Pluralsight, and Zipari. Both Lithium and Pluralsight were placed on non-accrual status in the quarter. As it relates to Pluralsight, we're currently working with the other lenders towards an orderly restructuring, which we believe will contribute towards maximizing recovery for our investors. We recognize that Lithium, Pluralsight, and Zipari are recurring revenue software loans. As it relates to how we invest in recurring revenue loans, following the integration of GSBD into the broader Goldman Sachs private credit platform, we remain very selective, focusing on borrowers who we believe are highly profitable, scaled, and display strong growth, with best-in-class technology and software products that are mission critical for their customers, regardless of the economic environment. When evaluating new software investments on the current platform, we leverage both our investment team's experience, where we have professionals dedicated to the software sector, as well as the broader engineering expertise of Goldman Sachs, where we have thousands of software engineers who evaluate and implement best-in-class technology every day. Finally, it is worth noting again that we have seasoned professionals dedicated towards restructurings, with the resources and expertise required to work with our investment teams to handle underperforming names. We believe this assists with maximizing recoveries and contributes to our low annualized loss ratios across the Goldman Sachs private credit platform that's been investing for nearly 3 decades. Moving forward, we aim to continue to recycle capital as we receive repayments and bolster the portfolio with compelling new originations. On that front, we're very pleased with our new originations this quarter, as GSBD originated more investments in the second quarter than in all of 2023. In fact, this quarter marks the highest level of origination activity since the integration of the Goldman Sachs private credit business just over 2 years ago, when GSBD was able to take advantage of being part of the broader Goldman Sachs private credit platform. On a fair value basis, first lien loans ticked higher to 97% of our assets as of June thirtieth, which reflects our bias to maintaining exposure primarily to investments that are higher up in the capital structure. Consistent with prior quarters, substantially all new loan commitments this quarter were to first lien credits. As we announced after market close yesterday, our board declared a third quarter dividend of $0.45 per share, payable to shareholders of record as of September thirtieth, 2024. This marks the company's 38th consecutive quarter of a $0.45 per share dividend, totaling $17.10 per share since our IPO, excluding the special dividends we paid in 2021 following the merger with MMLC. Now, with respect to broader market conditions, the significant growth in our originations in the second quarter reflects both the improving M&A environment and the expansive platform capabilities that we've been discussing for a number of quarters. GSBD also continues to benefit from potential origination opportunities through the broader Goldman Sachs franchise, including the investment bank. As another example of this, within the quarter, our direct lending platform, including GSBD, led and acted as administrative agent on a loan that helped TPG acquire Classic Collision, which is the fourth largest multi-site operator of collision repair centers in the United States. Our investment banking division was engaged by Classic Collision as sell-side advisor, which helped us move quickly to evaluate the opportunity, provide a financing proposal, and ultimately be selected by TPG for the acquisition financing in a highly competitive environment. During the quarter, we leaned into the firm's long-standing expertise in the data center sector to lead the financing of US Signal, a hybrid colocation and cloud services provider operating nine data centers in the upper Midwest. Given our ability to move with speed through diligence and execution, we were able to take lead agent position and were awarded a larger hold size in the transaction. With that, let me turn it over to our Chief Operating Officer, Tucker Greene, to discuss new investments this quarter and our overall credit quality.

Tucker Greene (COO)

Thanks, Alex. During the quarter, we originated $440 million in new investment commitments to 10 new and 15 existing portfolio companies. As Alex mentioned, this is indeed the highest level of originations for GSPD during a fiscal quarter since the integration of our platform in early 2022. To the first half of 2024, investment activity across Goldman Sachs Direct Lending Americas platform is up nearly 4 times on a dollar basis and 2 times on a deal basis versus the first half of 2023, despite relatively flat M&A activity. Sales and repayment activity totaled $226.5 million, primarily driven by the full repayment and restructuring of our investments in 6 portfolio companies. Turning to portfolio composition, as of June 30, 2024, total investments in our portfolio were $3.52 billion at fair value, comprised of 98% in senior secured loans, including 92.3% in first lien, 4.6% in first lien last out unitranche, and 1.1% in second lien debt, as well as a negligible amount in unsecured debt, and 1.8% in a combination of preferred and common stock. As of June 30, 2024, the company held investments in 155 portfolio companies operating across 38 different industries. The weighted average yield of our investment portfolio to amortized cost at the end of the second quarter was 11%, as compared to 11.9% from the prior quarter. The weighted average yield of our total debt and income-producing investments at amortized cost at the end of the second quarter was 12.3%, as compared to 12.7% at the end of Q1. The weighted average net debt to EBITDA of the companies in our investment portfolio remained flat at 6.1x during the second quarter as compared to the first quarter. Importantly, our portfolio companies had both top-line growth and EBITDA growth quarter-over-quarter and year-over-year on a weighted average basis. The current weighted average interest coverage of the companies in our investment portfolio at quarter end remained flat at 1.5x in the second quarter as compared to the first quarter. Finally, turning to asset quality. During the quarter, and as Alex mentioned earlier, Lithium and Pluralsight were both placed on non-accrual status. In addition, the Thrasio first lien debt position, which was on non-accrual, was restructured into a first lien, second-out term loan and a common equity position. The restructured second-out term loan remained on non-accrual. As of June 30, 2024, investments on non-accrual status increased to 3.4% of the total investment portfolio at fair value from 1.6% as of March 31, 2024, and 7.6% of the total investment portfolio at amortized cost from 3.3% as of March 31, 2024. I'll now turn the call over to Stan Matuszewski to walk through our financial results.

Stan Matuszewski (CFO)

Thank you, Tucker. We ended the second quarter of 2024 with total portfolio investments at fair value of $3.5 billion, outstanding debt of $2 billion, and net assets of $1.6 billion. Our ending net debt-to-equity ratio as of the end of the second quarter was 1.19 times, which continues to be below our target leverage of 1.25 times. At quarter end, approximately 64.4% of the company's total principal amount of debt outstanding was in unsecured debt, and we had $1 billion of capacity available under our secured revolving credit facility. Before continuing to the income statement, as a reminder, in addition to GAAP financial measures, we will also reference certain non-GAAP or adjusted measures. This is intended to make the company's financial results easier to compare to the results prior to our October 2020 merger with Goldman Sachs Middle Market Lending Corp, or MMLC. These non-GAAP measures remove the purchase discount amortization impact from our financial results. For the second quarter, GAAP and adjusted after-tax net investment income were $67 million and $65.2 million, respectively, as compared to $60.8 million and $59.5 million, respectively, in the prior quarter. On a per share basis, GAAP net investment income was $0.59. Excluding the impact of asset acquisition accounting in connection with the merger with MMLC, adjusted net investment income for the quarter was $0.57 per share, equating to an annualized net investment income yield on book value of 16.7%. Total investment income for the three months ended June 30, 2024, and March 31, 2024, was $108.6 million and $111.5 million, respectively. The decrease in total investment income was primarily due to investments being placed on non-accrual status as a result of underperformance during the quarter. We would also note that we saw a slight decrease in PIK income as a percentage of total investment income quarter-over-quarter. Distributions during the quarter remained consistent at $0.45 per share. Our spillover taxable income is approximately $143.3 million, or $1.23 on a per share basis, which we believe provides continued stability on our consistent dividend since inception. With that, I'll turn it back to Alex for closing remarks.

Alex Chi (Co-CEO)

Thanks, Stan, and thanks everyone for joining our earnings call. While we're disappointed by this quarter's markdowns, we remain determined and optimistic about maximizing shareholder value in the quarters ahead, all while continuing to recycle capital to bolster the quality of the portfolio by deploying capital into the most attractive opportunities, using the full breadth of the Goldman Sachs platform. With that, let's open the line for Q&A.

Operator (participant)

Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one to signal for a question, and we'll pause just briefly to assemble our queue. We'll take our first question from Finian O'Shea with Wells Fargo Securities. Please go ahead.

Finian O'Shea (Director and Senior Equity Research Analyst)

Hey, everyone. Good morning. Appreciate your commentary on the non-accruals in the beginning. I wanted to ask on ARR loans, on a high level, would you say that the EBITDA flip in those structures is what sort of catalyzes the reckoning or the credit event for an underperforming name? And if so or otherwise, but like, what does the EBITDA flip wall look like? Were they generally four years or five years? Thank you.

Alex Chi (Co-CEO)

Hey, Fin, thanks for the question and thanks for joining. It's Alex. So with respect to the ARR loans, EBITDA flips or approaching EBITDA flips could be a factor. And we've seen that in some of these names, where, as the company was approaching an EBITDA flip, the company started to potentially cut back on R&D spend, for example, on investing in new technology, potentially cutting back on sales and marketing spend in order to generate EBITDA, all while their competitors might be investing in new technology, which then leads to some churn and some underperformance. And so that could be a factor, but it's only one factor. Other factors could also just be the fact that companies may have just taken on a bit much, too much leverage when base rates were low. Or also, you really have to look at the underlying products and the technology that these companies have. Under our current platform, we're very selective, and we choose ARR loans and companies where the products are mission-critical, best-in-class technology, and the customers look at this as critical for their operations, regardless of the economic environment. With some of these other problems that we've seen, that was not the case.

Finian O'Shea (Director and Senior Equity Research Analyst)

Okay, thanks. That's helpful. Sorry, I had myself on mute. Can you remind us, you know, origination was strong. I think that credit impacted this a little bit. What's the target leverage profile? Are you sort of where you want to be now or prefer to let it run down a little bit?

Alex Chi (Co-CEO)

So our target leverage has been around 1.25 times. We are still below that. We finished the quarter at 1.19, so we still have some additional capacity to make new loans, as well as potentially provide some cushion to the extent we need it. So our target is still at 1.25.

Finian O'Shea (Director and Senior Equity Research Analyst)

Very good. Thank you so much.

Alex Chi (Co-CEO)

Thanks, Finn.

Operator (participant)

We'll take our next question from Mark Hughes with Truist. Please go ahead.

Mark Hughes (Senior Research Analyst)

Yeah, thank you. Good morning. Maybe another-

Alex Chi (Co-CEO)

Hi.

Mark Hughes (Senior Research Analyst)

A high-level question on the recurring, recurring revenue loans. Is there a... Are, are you perhaps looking at those differently on a go-forward basis? And, you know, anything in the Pluralsight, their business model that you might incorporate into future underwriting as kind of the something to be cautious about? Or do you think this is just unique to that company?

Alex Chi (Co-CEO)

Yeah, thanks for the question. So in terms of how we approach recurring revenue loans, that has not changed since we started managing the platform, more than a couple of years ago. So we continue to look at, as I mentioned, companies that have best-in-class technology, mission-critical to their customers, but we, we also look at margins. We want to make sure that these companies are highly profitable and also have sustainable growth. So if you look at the loans that we've made, more recently in the recurring revenue space, and again, we are very selective about where we choose to do it. It fits all those different profiles. If you looked at Pluralsight at the time of investment, the company had negative margins, and also, the product is a good product, but at the same time, what we've seen is that as their customers have pulled back on spending, this company has seen some underperformance as a result.

Mark Hughes (Senior Research Analyst)

Understood. You had mentioned the deal flow. I think the deal flow up four times, even as M&A was relatively steady. Could you expand on that, or to clarify what that, what the four times was? And then maybe comment on the context of that on selectivity this quarter, was your success more a function of the deal flow, or do you just see more that you liked in this case?

Alex Chi (Co-CEO)

So we certainly saw a healthy amount of flow. The number of originations that we've seen this year to date has been up significantly versus the same period last year. But also the quality of the businesses that we've seen has also increased. We've talked about how in the last couple of quarters, we've seen EBITDA growth tick higher than top-line growth, and we saw that again this past quarter. So there's been more flow. So as Tucker mentioned, the number of deals in terms of deal count that we've had is up double, but also just as a function of the capital that we have, it's been up four times, and so we're clearly taking share.But if you look at it as a percentage in terms of the deals that we've done versus the number of originations, it's still a mid-single-digit %, which again, just shows how selective we are and how broad our funnel is with respect to the originations that we see.

Mark Hughes (Senior Research Analyst)

Understood. And then, you mentioned the overall interest coverage steady 1.5 times. Any sense of the, you know, the, proportion that are at one or below? Has there been any change in that, ratio out on the tail?

Alex Chi (Co-CEO)

No, there's been no change to that, and it still remains in the mid-single-digit %.

Mark Hughes (Senior Research Analyst)

Okay. Thank you very much.

Alex Chi (Co-CEO)

Thank you.

Operator (participant)

We'll move next to Derek. Derek Hewett with Bank of America, your line is open.

Derek Hewett (Senior Research Analyst)

Good morning. So you had mentioned that PIC was slightly lower, on a quarter-over-quarter basis, but it's still roughly 11% of revenue, which is moderately above the, the BDC period average. So could you talk about your comfort level with, with PIK at, at current levels, and could we see it, potentially drift higher, over the next 12-18 months?

Stan Matuszewski (CFO)

Yeah, certainly. This is, Stan speaking. So we've been monitoring the, you know, we always monitor the PIC as a percentage of the total investment income in the portfolio. Certainly, I think, you know, we saw about a 50 basis points decline, period-over-period. We had some one-time PIC items in the Q1 period, some due to, you know, restructures or other, one-time items. And again, this quarter, we did see a one-time item. So I'd say, normalized for that, you know, PIC would have been sub 10%. And we think that, you know, that we're comfortable with that, and we continue to monitor it.

Derek Hewett (Senior Research Analyst)

Okay. And then, in terms of the portfolio yield on a cost basis, it looked like it went down 30-40 basis points. Was there anything in particular that caused that decline on a quarter-over-quarter basis?

Stan Matuszewski (CFO)

No, I'd say for the most part, it's due to the yield on for our non-accruals coming out of the portfolio, the reduction in income. So that's the primary driver.

Derek Hewett (Senior Research Analyst)

Okay. Thank you.

Stan Matuszewski (CFO)

Thank you.

Operator (participant)

At this time, we have no further questions. I'd like to turn it back to Alex Chi for any additional or closing remarks.

Alex Chi (Co-CEO)

Great. Well, thank you everyone for joining our call. Please enjoy the rest of your summers, and we look forward to speaking with you again after our next quarter.

Operator (participant)

Thank you.

Mark Hughes (Senior Research Analyst)

Goodbye.

Operator (participant)

This concludes today's conference. We thank you for your participation. You may disconnect your lines at this time.