GBDC Q1 2019 Update

The following is a quick GBDC Update that was previously provided to subscribers of Premium Reports along with revised target prices, dividend coverage and risk profile rankings, credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions on all business development companies (“BDCs”) please see Deep Dive Reports

Summary

  • GBDC hit its base case projections covering its dividend by 100%, leverage continues to increase as shareholders recently approved the reduced asset coverage requirements.
  • The annualized quarterly return from its SLF improved from the previous quarter “but continues to be impacted by a few underperforming investments” as well as under its target leverage.
  • There was a rebound in its overall portfolio yield from 8.6% to 8.8% due to new investments at higher yields that were 90% One Stop loans.
  • NAV declined by $0.02 or 0.8% (from $15.97 to $15.95) partially due to the restructuring of its non-accrual investment in Uinta Brewing Company and markdown in its non-accrual investment in Aris Teleradiology.
  • Portfolio credit quality improved slightly due to the restructuring of its non-accrual investment in Uinta Brewing Company reducing non-accrual investments as a percentage of total investments at fair value and cost of 0.2% and 0.5%, respectively.
  • On February 1, 2019, GBDC closed on a $200 million credit facility with Morgan Stanley priced at LIBOR +2.05% and was used to repay its higher cost credit facility with Wells Fargo.

 

For the quarter ended March 31, 2019, Golub Capital BDC (GBDC) hit its base case projections covering its dividend by 100% after excluding $0.7 million reverse accrual for the capital gain incentive fee. Its portfolio yield and income from the Senior Loan Fund LLC (“SLF”) rebounded from the previous quarter. Leverage continues to increase as shareholders recently approved the reduced asset coverage requirements allowing higher leverage.

 

 

GBDC usually has predictably boring NII of $0.32 each quarter (see table below) that is mostly due to its fee structure combined with strong portfolio credit quality.

 

 

The annualized quarterly return from its Senior Loan Fund LLC (“SLF”) improved from the previous quarter “but continues to be impacted by a few underperforming investments” as well as under its target leverage due to continued declines in total investments.

 

 

On August 31, 2018, the reinvestment period on SLF’s credit facility expired. Due to a “paucity of attractive traditional senior secured opportunities”, the SLF determined not to extend the reinvestment period but instead amended the facility to reduce the interest rate on the facility from LIBOR + 2.15% to LIBOR + 2.05% and to reduce the commitment to advances outstanding. On previous calls, management has mentioned that it is currently in “shrink mode” due to having difficulties finding attractive investments for the SLF:

From previous call: “This was a decrease of $1 million from the prior quarter, primarily due to a decline in dividend income from SLF, which was partially offset by higher interest income from a growing portfolio. The Senior Loan Fund had a weak quarter as a result of unrealized losses, below target leverage and a shortage of attractive new investment opportunities appropriate for this fund. SLF investments at fair value at December 31 declined by 2.6% to $174.4 million. Guidance remains the same, as I have said in prior quarters, which is we are not actively looking to grow SLF right now, but we think it is a smart tool to keep in our arsenal if and when market conditions change and we find traditional middle market senior loans more attractive.”

There was a rebound in its overall portfolio yield from 8.6% to 8.8% due to new investments at higher yields that were 90% One Stop loans:

 

 

New investment commitments totaled $116 million with approximately 8% were senior secured loans, 90% were one stop loans, and 2% were in the SLF.

 

 

Net asset value (“NAV”) per share declined slightly by $0.02 or 0.8% (from $15.97 to $15.95) partially due to the restructuring of its non-accrual investment in Uinta Brewing Company and markdown in its non-accrual investment in Aris Teleradiology. However, NAV has increased 23 out of the last 27 quarters, after excluding the impact from previous special dividends:

 

 

Portfolio credit quality remains strong with low non-accrual investments as a percentage of total investments that declined slightly to 0.2% and 0.5% of fair value and cost, respectively. The three investments currently on non-accrual include Aris Teleradiology ($0.8 million FV, $3.1 million cost) was added to non-accrual status during the previous quarter, Uinta Brewing Company ($0.8 million FV, $0.9 million cost) and Tresys Technology Holdings ($1.8 million FV, $4.5 million cost). It is important to remember that GBDC has 211 portfolio companies, so three on non-accrual is to be expected.

 

GBDC’s liquidity and capital resources are primarily from its debt securitizations (also known as collateralized loan obligations, or CLOs), SBA debentures, and revolving credit facilities. On February 1, 2019, GBDC closed on a new $200 million credit facility with Morgan Stanley priced at LIBOR +2.05% and was used to repay its revolving credit facility with Wells Fargo. As of March 31, 2019, the company had $53 million of available SBA debenture commitments, of which $12.5 million was available to be drawn.

 

 

On September 7, 2018, GBDC received a ‘no-action letter’ from the SEC allowing the company to issue new securitizations for a lower cost alternative to its Morgan Stanley credit facility as well as longer term and more flexible. On November 16, 2018, the Company issued $408.2 million in notes through a debt securitization structured as follows:

 

 

On November 27, 2018, GBDC entered into a definitive agreement to merge with Golub Capital Investment Corporation (“GCIC”) and is expected to close “during the first half of the calendar year 2019”. Following the merger, GBDC is expected to be the fourth-largest externally managed, publicly traded BDC with $3.5 billion of assets. The combined company will remain externally managed by GC Advisors and continue to trade under the ticker GBDC. Please see the previous linked Deep Dive report for more information.

  • The transaction would be accretive to GBDC’s NAV per share by 4.5%(previously 3.6%).
  • Based on the pro forma earnings power of the combined company, GBDC’s Board intends to increase GBDC’s quarterly dividend to $0.33 per share after
  • The increased market cap of GBDC is anticipated to provide greater trading liquidity, broader research coverage and the potential for greater institutional
  • The combined portfolio is expected to be substantially similar to GBDC’s current portfolio, as over 96% of GBDC’s investments overlap with those of GCIC;
  • The transaction is expected to deliver operational synergies via the elimination of redundant expenses

 

 

To be a successful BDC investor:

  • As companies report results, closely monitor dividend coverage potential and portfolio credit quality.
  • Identify BDCs that fit your risk profile.
  • Establish appropriate price targets based on relative risk and returns (mostly from regular and potential special dividends).
  • Diversify your BDC portfolio with at least five companies. There are around 50 publicly traded BDCs; please be selective.

For updated GBDC target prices, dividend coverage and risk profile rankings, credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions on all BDCs please see Premium Reports.

 

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