Update on Golub Capital's Earnings Outlook

 |  About: Golub Capital BDC (GBDC)
by: Nicholas Marshi

Many Business Development Companies make periodic announcements between reporting periods on business activity underway. We often report those press releases because the information is somewhat useful in updating the picture on any given company while waiting for the formal SEC filing. Here is what mid-sized BDC Golub Capital (ticker: GBDC) reported, and we are quoting from PR Newswire:

Golub Capital BDC, Inc. (NASDAQ:GBDCNews), a business development company, today announced that it originated $54.6 million in new investment commitments during the three months ended March 31, 2011. Of these new investment commitments, $52.4 million funded at close. During this same period, Golub Capital BDC sold $22.9 million of primarily lower-yielding broadly syndicated loans and received $24.1 million in debt repayments on existing portfolio company investments. Overall, total investments, at fair value, increased by $6.7 million during the three months ended March 31, 2011. Excluding loan sales, total investments, at fair value, would have increased by approximately $29.6 million.

As expected, our origination activity slowed during the quarter ended March 31, 2011,” commented David B. Golub, Chief Executive Officer of Golub Capital BDC. ”We anticipate growth in total investments will increase in the quarter ending June 30, 2011, and with the proceeds of our recent follow-on offering, we are well positioned to take advantage of them.”

The BDC Reporter’s Two Cents: The bottom line is that Golub Capital is preparing investors for a flat balance sheet. A net increase of $6.7mn in loan assets on a 2010 year-end of $382mn is just a 1.8% increase. The Analyst Consensus (admittedly only 2 analysts) for the quarter just ended (March 2011) is $0.30, which is flat compared to the IVQ 2010, suggesting expectations were already modest before the announcement.

We Question the June 2011 Analyst Consensus

Peering a little further forward, though, the Consensus for $0.31 of Net Investment Income for the quarter ending June 2011 is sounding a little optimistic. It’s in this quarter that the 4mn new shares issued as part of Golub’s recent equity offering that we commented on in an earlier post will come into play. By our count, Net Investment Income will have to increase by 29% from the earnings level achieved in the last quarter of 2010 to reach that estimate. Given that the first quarter of this year was essentially flat, any new deals booked in the second calendar quarter will only be partial contributors, depending on when they’re booked. We wouldn’t be surprised to see Net Investment Income increase modestly in absolute terms, but drop on a per share basis to $0.25-$0.27. That will create a situation that’s not unusual with BDCs where earnings per share lag behind the dividend, which is currently pegged at $0.32. We should stress, though, that we don’t expect a dividend cut, as GBDC has plenty of cash to fund the gap until earnings play catch up.

Year-End Estimate

It’s too early to quibble with the fiscal year end Consensus of $1.25. Golub is in the process of swapping out lower yielding assets for higher ones. Even if asset growth is only modest, earnings could reach the projected number thanks to higher loan yields. We wrote in our earlier post that the key challenge for Golub will be booking the higher yielding mezzanine loans which will lift its aggregate yield. Last quarter, the reported all-in average yield (which includes interest income and amortization of fees and discounts, according to the IVQ 2010 press release) was 10.6%. Despite GBDC’s lower management fees, the average yield will have to increase at least 2 points to over 12.6% to be in line with its peers.

What's happening to Loan Yields?

Unfortunately, today’s press release gave no suggestion as to the type of loans being booked or repaid recently, and what is happening to yield levels. Sometimes BDCs report this data in these press releases and sometimes not. Perhaps the industry should get together on a uniform format for reporting intra-quarter data. Still, kudos to Golub for reporting both new loans committed to as well as actually funded, and delineating loans repaid in the period. Sometimes BDCs just report new loan investment activity but are mute on what assets are being repaid, which is a frequent bugaboo of ours, because there is no way to ascertain where that leaves a balance sheet.


Looking even further down the road, there’s no reason to believe the Company won’t be back booking substantial net new assets as most of the industry indicators are pointing to a revival of buy-out and recapitalization activity in the middle market. There may be a “miss” on estimates for a quarter or two, but there is little doubt that the Company will be able to deploy its capital over time.

Market Reaction

The market,though, does seem to be taking a wait-and-see attitude as the stock price is virtually unchanged in the two weeks since the equity offering at $15.75. Today Golub is trading at $15.82. Still, that’s a healthy premium over NAV.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GBDC over the next 72 hours.