After the Thursday close, one of the newer Business Development Companies, Golub Capital (GBDC) announced an equity offering for 3,500,000 shares at a price of $15.75. In addition, the underwriters were allocated an additional 525,000 shares. Gross proceeds are $55 million, without counting the underwiters' option. Funds will be used for additional investments.
RUNNING THE NUMBERS
At close of business, GBDC was trading at $15.78, the lowest level in weeks, which suggests word had leaked out of the offering. That’s down from a high of $17.99 (says Yahoo Finance), and well above the initial IPO price of $14.5 of a year ago. The new equity is priced at an 8% premium over the 2010 IPO. The Company’s latest reported Net Asset Value Per Share or NAV was $14.74, which means this offering was made at a respectable 7% premium. As a multiple of the 2012 projected earnings of $1.21, the stock went at a multiple of 12.1x. Not bad for one of the new boys on the block.
GBDC pays a quarterly dividend of $0.32, or $1.28 a year. As a result, the implied yield on the closing price is 8.1%. Earnings in the last quarter were a little lower at $0.30, but we’d guess Taxable Income was higher due to the relatively high number of new deals being booked recently, which would have earned fee income, usually booked in the year the loan is closed for tax purposes but spread over the life of the loan for GAAP purposes.
Total shares will increase from 17,738,197 to 21,238,197 (leaving out the underwriters) and total equity will increase from $261mn at 12/31/2010, to around $310mn when the shares are delivered April 6th. Net debt to equity (which is calculated by deducting the $41mn in cash on the balance sheet from the $194mn in debt and dividing that number by equity at year end ) will drop from an already moderate 0.6:1.0 to under 0.50: 1.0.
We don’t have much doubt that Golub will be able to find an investment home for its new capital. The Company added $113mn in new COMMITMENTS (which is not the same as outstandings) in the last quarter of 2010. We should see total investment assets grow from just under $400mn toward the half billion mark over the next few quarters. What will happen to Net Investment Income Per Share, though, is the $64,000 question. By our rough calculation, Net Investment Income will have to increase by 30% just to keep the earnings per share at the same level as the current dividend. The key challenge for the Company will be achieving its avowed intention of increasing its portfolio yield by adding a greater number of mezzanine and Unitranche loans. We quote from the latest Earnings report: “The Company expects to continue to invest in a mix of mezzanine and senior secured loans to obtain a high level of current income and to preserve capital." The gross yield, when factoring in amortization of fees and discount accruals, is running at 10.6%. Just increasing the portfolio yield by 1.0% could add 15 cents a year per share.
BIGGER PICTURE VIEW
For the BDC industry, this successful equity offering is the fifth one in 2011 so far [not including the multiple Convertible debt offerings by Ares Capital (ARCC), Apollo Investment (AINV), Kohlberg Capital (KCAP) etc.], and demonstrates that the industry continues to be attractive to investors, and that net loan demand continues to grow, albeit modestly. Our unofficial running tally shows $302mn in new equity raised in the first 3 months of the year, which should equate to nearly $500mn in new investment assets once deployed. That’s adding only about 2% or so to the BDC industry’s total assets, but it’s something. Interestingly most of the capital is being raised by BDCs, which lend principally to the lower middle market segment. The upper middle market BDCs such as Ares Capital, Apollo Investment, BlackRock Kelso (BKCC), American Capital (ACAS) etc. are either focused on raising debt or not feeling the pressure to add equity given the difficulty of growing their balance sheets due to the hearty refinancing market under way with the loosening of the debt markets.
We wouldn’t be surprised to see Golub Capital back in the equity market within the next year, and at least a third of the industry players as well. When you can raise equity at a cost of capital (as measured by the dividend yield of 8.0%) while being able to invest proceeds in loans and investments yielding aggregate returns in the mid teens, it’s hard to resist.