The following is from the GSBD Update that was previously provided to subscribers of Premium BDC Reports along with revised target prices, dividend coverage and risk profile rankings, potential credit issues, earnings/dividend projections, quality of management, fee agreements, and my personal positions for all business development companies (“BDCs”).
GSBD Update Summary:
- GSBD beat its base-case projections covering its dividend by 107%even after taking into account lower-than-expected portfolio yield and a decline in the size of the portfolio.
- On September 3, 2019, Vast Broadband announced that it had completed its acquisition of NTS Communication, Inc. and repaid its loan in Q3 2019 resulting in a realized loss of $7.2 million. However, this a positive development as the company will be reinvesting proceeds into performing assets.
- NAV declined by $0.23 per share or 1.3% mostly due to markdowns of ‘watch list’ investments (discussed next) slightly offset by overearning the dividend.
- One of its ‘watch list’ investments (MPI Products LLC) was added to non-accrual status “due to its capital condition” and marked down another $3.7 million resulting in NAV decline of $0.09 per share.
- Also, the largest ‘watch list’ investment Zep Inc. was marked down another $2.4 million “due to financial underperformance” impacting NAV by $0.06 per share.
- These investments will be discussed along with a revised ‘watch list’ in the updated GSBD Deep Dive report.
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Goldman Sachs BDC (GSBD) beat its base-case projections covering its dividend by 107% even after taking into account lower-than-expected portfolio yield as well as a decline in the size of the overall portfolio. As discussed in the previous report, on September 3, 2019, Vast Broadband announced that it had completed its acquisition of NTS Communication, Inc. and repaid its loan in Q3 2019 resulting in a realized loss of $7.2 million. However, this a positive development as the company will be reinvesting proceeds into performing assets.
Net asset value (“NAV”) declined by $0.23 per share or 1.3% (from $17.21 to $16.98) mostly due to markdowns of ‘watch list’ investments (discussed next) slightly offset by overearning the dividend by $0.02 per share:
During Q3 2019, one of its ‘watch list’ investments (MPI Products LLC) was added to non-accrual status “due to its capital condition” and marked down another $3.7 million resulting in NAV decline of $0.09 per share. Also, the largest ‘watch list’ investment Zep Inc. was marked down another $2.4 million “due to financial underperformance” impacting NAV by $0.06 per share. These investments will be discussed along with a revised ‘watch list’ in the updated GSBD Deep Dive report.
“Net change in unrealized appreciation (depreciation) in our investments for the three and nine months ended September 30, 2019 was primarily driven by the reversal of unrealized depreciation in connection with the aforementioned exchange with ASC Acquisition Holdings, LLC., and the full exit from our investments in NTS Communications, Inc. The net change was offset by the unrealized depreciation in Zep, Inc., which was due to financial underperformance, and the placement of MPI Products LLC on non-accrual status due to its capital condition.”
Total non-accruals declined from 3.5% to 1.0% of the portfolio fair value due to the previously discussed repayment of NTS Communication and one of the investments assumed from the SCF portfolio Professional Physical Therapy added back to accrual status in Q3 2019. However, as MPI Products LLC was added to non-accrual as discussed earlier and other recently marked down investments need to be ‘watched’.
New investments during Q3 2019 were 99% first-lien and the portfolio remains heavily invested in first-lien debt as shown below. Over the past five quarters, GSBD’s proportion of its first-lien debt investments within its portfolio has increased from 53% to 75% and second-lien debt investments decreased from 36% to 18%:
As discussed previously, the company dissolved its Senior Credit Fund (“SCF”) during Q2 2019 and received $215 million of assets financed directly on its balance sheet. This improved the credit quality of the overall portfolio including diversification and increased first-lien. In June 2018, shareholders approved the reduced asset coverage ratio of at least 150% (potentially allowing a debt-to-equity of 2.00) and management reduced the base management fee from 1.50% to 1.00%, lowering expenses and improving dividend coverage as shown in the previous table. Management does not have a target for leverage (debt-to-equity) but has mentioned that leverage will increase gradually along with the amount of first-lien (as a %):
“We have not set forth a specific target leverage range for the company as the reduced asset coverage requirement provides the company with overall greater balance sheet flexibility. However, we will seek to maintain a meaningful cushion relative to the regulatory asset coverage requirements, as we have done historically. We would expect our leverage ratio to continue to gradually increase if we continue to find attractive first lien senior loans.”
This information was previously made available to subscribers of Premium BDC Reports, along with:
- GSBD target prices and buying points
- GSBD risk profile, potential credit issues, and overall rankings
- GSBD dividend coverage projections and worst-case scenarios
- Real-time changes to my personal portfolio
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.