The following information is from the GSBD Projections Update that was previously provided to subscribers of Premium BDC Reports along with target prices, dividend coverage and risk profile rankings, earnings/dividend projections, quality of management, fee agreements, and my personal positions for all Business Development Companies (“BDCs”).
As mentioned in “8% To 10% Balanced Portfolio Yield Investing In America: Part 2” on Seeking Alpha, I will be using this blog for additional public updates on individual BDCs.
GSBD Merger With MMLC Update
On June 11, 2020, GSBD and MMLC announced that they had amended and restated the Original Merger Agreement (the “Amended Merger Agreement”). The Amended Merger Agreement has been unanimously approved by the Boards of Directors of both companies. GSBD and MMLC previously announced that they had entered into an Agreement and Plan of Merger dated as of December 9, 2019 (the “Original Merger Agreement”).
Why are the terms of the Merger being amended?
In order to comply with provisions of the Investment Company Act of 1940 which require that a merger of affiliated business development companies not result in dilution to either party, the Original Merger Agreement contained a closing condition whose satisfaction was dependent on the trading price of GSBD’s common stock. Heightened volatility in the current market precipitated by the COVID-19 pandemic has created uncertainty as to whether this condition can be met. The Amended Merger Agreement eliminates this closing condition while still ensuring that the transaction would not result in dilution to either party.
What are the key changes from the original merger terms?
The consideration has been changed from a fixed exchange ratio to a “net asset value for net asset value” exchange. Based on this change, the exchange ratio will be determined at closing such that shares issued by GSBD to MMLC shareholders will result in an ownership split of the combined company based on each of GSBD’s and MMLC’s respective net asset values. Based on March 31, 2020 net asset values and pro forma for the MMLC distributions, transaction costs and the repayment of MMLC’s revolving credit facility described below, GSBD would issue approximately 1.0656 shares for each MMLC share outstanding. The total share consideration to MMLC shareholders would represent a 17% premium to the pro forma MMLC net asset value, based on the closing market price of GSBD as of June 10, 2020.
The variable cap on GSAM’s incentive fees has been extended for an additional year, through the end of 2021. The Variable Incentive Fee Cap provides that incentive fees payable to GSAM will be reduced if net investment income (”NII”) would be less than $0.48 per share without implementation of the incentive fee cap.
Upon closing the transaction, GSAM has agreed to reimburse GSBD and MMLC for all fees and expenses incurred and payable by GSBD or MMLC or on their behalf in connection with the transaction, subject to a cap of $4 million with respect to each of GSBD and MMLC.
Prior to closing the Merger, MMLC’s board of directors will declare a $75 million distribution to MMLC shareholders relating to the pre-closing period. This distribution is an amount equal to approximately 8.1% of MMLC’s March 31, 2020 net asset value.
What impact will a change in the market price of GSBD stock price have on the Merger Consideration to be received by MMLC stockholders?
Under the “NAV for NAV” exchange mechanism, the shares issued by GSBD to MMLC shareholders will result in an ownership split of the combined company based on each of GSBD’s and MMLC’s respective net asset values. Changes in the market price of the GSBD stock price will therefore have no impact on the exchange ratio. However, the total value of the consideration received by MMLC stockholders will be the product of the shares received in the exchange, and the price of GSBD stock.
What are the benefits of the Merger to GSBD stockholders?
The GSBD Board and the GSBD Special Committee weighed various benefits and risks, both with respect to the immediate effects of the Merger on GSBD and its stockholders and with respect to the potential benefits that could be experienced by the combined company after the Merger. These potential benefits include, among others:
Expected to be Accretive to Short and Long-Term NII: GSAM expects the merger to be accretive to GSBD’s net investment income per share both in the short and long-term, reflecting a variable incentive fee cap through 2021, as well as anticipated optimization of the combined company’s capitalization following the close of the transaction. On June 11, 2020, GSAM announced that it will waive a portion of its incentive fee for the four quarters of 2021 (Q1 2021 through and including Q4 2021) payable pursuant to the Investment Advisory Agreement for each such quarter in an amount sufficient to ensure that GSBD’s net investment income per weighted average share outstanding for such quarter is at least $0.48 per share. This waiver helps to ensure that the distributions paid to GSBD’s stockholders are not a return of capital for tax purposes. This waiver is an addition to the existing waiver with the same terms that applies through the end of 2020.
Benefits of Scale: The combination more than doubles the size of GSBD, and is expected to result in benefits of scale, including improved access to diversified funding sources, cost synergies and greater trading liquidity.
Improved Balance Sheet: GSBD’s debt to equity ratio is expected to decline, creating more capacity to deploy capital into today’s attractive investment environment while adding a greater margin of safety to maintain investment grade (“IG”) credit rating and comply with regulatory and contractual leverage ratios.
What approvals are required for the Merger to be completed, and what is the expected timing of such approvals?
Consummation of the Merger is subject to certain closing conditions, including receipt of approval from each of the MMLC and GSBD stockholders, regulatory approval and other closing conditions. The Merger is currently anticipated to close during Q4 2020, subject to the satisfaction of certain closing conditions.
GSBD Dividend Update
The Board has approved special distributions of $0.15 per share, and “payable post-closing in three $0.05 per share quarterly installments currently expected to begin Q1 2021”:
GSBD has covered its dividend by an average of 112% over the last 8 quarters growing spillover/undistributed income to $46.6 million or around $1.15 per share. GSBD’s dividend coverage is not reliant on fee and dividend income, some of which is amortized over the life of the investment, reducing the potential for “lumpy” earnings results.
“Loan origination fees, original issue discount and market discount or premiums are capitalized, and the Company then amortizes such amounts using the effective interest method as interest income over the life of the investment. Consistent with prior years, we spilled over all of the undistributed NII into 2020 as we believe the cost of the spillover in the form of the excise tax is a small price to pay relative to the much higher cost of issuing new equity if we had to replace that amount.”
As a part of the merger agreement, Goldman Sachs Asset Management (“GSAM”) has agreed to waive a portion of its incentive fees and was discussed on the recent call:
Q, “And just a reminder on the fee waivers that you proposed for GSBD related to this transaction, are those still independent on schedule? Or is there any time…”
A, “Yes, all of those are — all of those kind of are part of the merger agreement, and there’s been — yes, there’s been no change to that merger agreement. So all those fee waivers would continue to apply through the course of 2020.”
Q. “But if the merger doesn’t happen, do they reverse?”
A. “Well, so again, we’re looking at the way the merger document is structured today. There’s basically a concept called the outside date by which something has to happen or termination provisions start to kick in. That’s really not until December of 2020. And so we have no expectation or no reason to think that in the short term, anything would change to that dynamic, which would cause us to change the fee waivers.”
On June 11, 2020, GSAM announced that it will waive a portion of its incentive fee for the four quarters of 2021 (Q1 2021 through and including Q4 2021) payable pursuant to the Investment Advisory Agreement for each such quarter in an amount sufficient to ensure that GSBD’s net investment income per weighted average share outstanding for such quarter is at least $0.48 per share. This waiver helps to ensure that the distributions paid to GSBD’s stockholders are not a return of capital for tax purposes.
For Q1 2020, there were no incentive fees paid and the portfolio yield continues to decline due to lower LIBOR and investments at lower yields.
On February 6, 2020, GSBD issued $360 million of unsecured notes due 2025 at a very low rate of 3.750% trading under CUSIP: 38147UAC1. Also, on February 27, 2020, the company reduced the borrowing rate on its credit facility to LIBOR +1.875% from LIBOR + 2.00% and extended to February 25, 2025 which is taken into account with updated projections.
“We favorably amended our senior secured revolving credit facility agreement to reduce the stated interest rate from LIBOR plus 2% to LIBOR plus 1.875% and to extend the final maturity date from February 2023 to February 2025. On February 10, 2020, we closed a public offering of $360 million aggregate principal amount of unsecured notes due 2025 and bearing interest at a fixed rate of 3.75%. We used the proceeds from the sale of notes to partially repay our senior secured revolving credit facility. This action left us with no near-term maturities until our convert comes due in 2022, while preserving almost $400 million in availability under our revolving credit facility.”
Previously, 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 following table. However, the merger with MMLC will result in lower leverage and is taken into account with the updated projections. Also, management is acutely aware of needing lower leverage to retain its investment-grade rating and will likely be using repayments to deleverage as well prudently making new investments:
“When we endeavor to get a rating and issue the bonds, we articulated a leverage strategy where we’re now operating at the high end of what we articulated by virtue of adding a couple of assets in the quarter and, of course, marking down the NAV. And so we do think it’s smart to be thoughtful and prudent. The bar is certainly high for any new investments. And of course, we want to make sure that there’s capital available, if necessary, to support some of our portfolio companies. And so in that context, we think we’re overall in a very good position with the agencies, with our capitalization overall, and we wouldn’t expect just to take up leverage, to take on new opportunistic, higher-yielding opportunities because they’re available. Our hope is that they’ll be more organic deleveraging. That would give us that opportunity here.”
Updated Slides Related to the Merger With MMLC:
Previous GSBD Insider Purchases:
Full BDC Reports:
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:
- Identify BDCs that fit your risk profile.
- Establish appropriate price targets based on relative risk and returns (mostly from regular and potential special dividends).
- As companies report results, closely monitor dividend coverage potential and portfolio credit quality.
- Diversify your BDC portfolio with at least five companies. There are around 50 publicly traded BDCs; please be selective.