Golub Capital BDC's CEO Discusses F1Q 2012 Results - Earnings Call Transcript

| About: Golub Capital (GBDC)

Golub Capital BDC, Inc. (NASDAQ:GBDC)

F1Q 2012 Earnings Conference Call

December 9, 2011 1:00 pm ET

Executives

David B. Golub – Chief Executive Officer and Director

Ross A. Teune – Chief Financial Officer and Treasurer

Analysts

Greg Mason – Stifel Nicolaus & Company

Joel Houck – Wells Fargo Securities, LLC

Heath Ritchie – Delphi Management

David Miyazaki – Confluence Investment Management

John Rogers – Janney Montgomery Scott

Ross Haberman – Haberman Management

Operator

Good afternoon, welcome to the Golub BDC Inc. September 30, 2011 quarterly and Fiscal Year and Earnings Conference Call.

Before we begin, I would like to take a moment to remind our listeners that remarks made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than the statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time-to-time in the Golub Capital BDC, Inc.’s filings with the Securities and Exchange Commission.

For a slide presentation that we intend to refer to on the earnings conference call, please visit the Events and Presentations link on the homepage of our website, www.golubcapitalbdc.com and click on the Investor Presentation’s link to find the September 30, 2011 investor presentation. Golub Capital BDC’s earnings release is also available on the company’s website in the Investor Relations section. As a reminder, this conference is being recorded Friday, December 09, 2011.

I will now turn the call over to David Golub, Chief Executive Officer of Golub Capital BDC. Please proceed.

David B. Golub

Thank you, Suzy. Good afternoon, everybody and thanks for joining us today. I am joined today by Ross Teune, our Chief Financial Officer. I hope you’ve been able to review our earnings release in the investor presentation we posted on the website. Ross and I will be referring to this presentation throughout the call today.

I‘d like to start today by providing an overview of the September 30 financial results. Ross is then going to take you through the results in more detail. I’ll then come back and give you an update on new origination activity for the first two months of our first fiscal quarter for 2012, as well as to provide you with some information on that hedge that we put in place that affectively fixes the interest rate on our SBIC debentures that we’ve drawn, but where the ultimate rate on those debentures won't be determined until the March 2012 of SBA pooling date.

With that, let me get started. As highlighted on page one of the investor presentation, net investment income for the quarter ended September 30 with $6.5 million or $0.30 a share, as compared to $6 million or $0.28 a share for the quarter ended June 30.

The increase in net investment income was driven by both an increase in our weighted average earning investments of $15.1 million and an increase in our weighted average net investment spread of 20 basis points.

If we look at net increase and net assets or what I think of as net income for the quarter ended September 30, it was $3 million or $0.14 a share as compared to $6.5 million or $0.31 a share for the quarter ended June 30.

The decrease for the quarter ended September 30 was primarily a result of two factors. First was unrealized losses on investments of $1.8 million or $0.08 per share, which were caused by a combination of market yield adjustments and write-downs on two non-earning investments.

And the second factor was an unrealized loss of $1.7 million or $0.08 a share on the mark-to-market adjustments on the broadly syndicated bonds that are referenced in our total return swap. And I just want to highlight that the unrealized loss on the total returns swap has already partially reversed as of November 30. The appreciation on the total return swap is been roughly $1.4 million. So, $1.4 million of this $1.7 million loss in the September 30 quarter is already reversed.

Turning to page three of the investor presentation; new originations for the quarter totaled $60 million, that's down from $136 million in the June 30 quarter. We expected the decline, in fact, we talked about the expectation of a decline here in our last – in our call – earnings call. Originations were unusually high in the June 30 quarter. Prepayments also slowed during the quarter, and overall net fund's growth was $21 million for the quarter, about 5%.

As I've said in previous calls, one of our goals is to increase the percentage of investments in unitranche and junior debt in the portfolio and I’m pleased to report that we continue to make progress for that goal in the quarter ended September 30. Of our originations, 68% were in the unitranche product category and that allowed us to increase the overall percentage of unitranche investments in the portfolio from 35% of total investments at June 30 to 39% as of September 30. As I mentioned, our weighted average investments spread increased by 20 basis points this quarter in large part due to the shifting asset mix.

Given current market conditions, and I'm going to talk about this later, we continue to focus on unitranche investments. Having said that we have recently seen some compelling risk reward opportunities in subordinated debt and we closed several attractive sub-debt opportunities in the December 31 quarter. After Ross discusses the financial results in more detail, I'm going to come back and provide some additional color on new investment activity since the September 30 quarter-end.

With that Ross, I'm going to hand it to you.

Ross A. Teune

Thanks, David. I'm going to start on page four of the investor presentation providing some portfolio of highlights. As David previously mentioned, we closed our new investment commitment totaling $59.8 million for the quarter. Exits from repayments and sales totaled $28.69 million for the quarter, which resulted in overall net funds growth of about $21 million.

As shown in the asset mix table, we continue to make progress in shifting the asset mix from senior secured investments to a more unitranche and the junior debt investments.

During the quarter, the percentage of senior secured assets declined by 3% and the percentage of unitranche investments increased by 4% and just looking on a year-to-date basis, the percentage of senior secured assets declined by 22%, declining from 66% of portfolio at September 30, 2010 down to 44% at the end of this quarter. We still have some more work to do in this area, but we have made considerable progress over the last 12 months.

Flipping to the next page, just looking at the balance sheet as of September 30, total assets were $559.6 million, which includes total investments of $459.8 million at fair value and total restricted cash of $69.8 million.

Total liabilities were total liabilities were $243.1 million, which primarily consists of debt of $237.7 million. The debt consists of $174 million in floating rate debt issued through our securitization vehicle; $61.3 million of fixed rate SBA debentures and $2.4 million on our revolving credit facility. As of September 30, net assets were $316.5 million and our net asset value per share was $14.56.

Turning to page 6, looking at the statement of operations. Total investment income for the quarter was $10.8 million, an increase of 7.5% quarter-over-quarter. This increase was primarily attributable to an increase in average investments outstanding, as well as an increase in the average yield on investments, which I will provide some more color on the following slide.

One the expense side, total expenses were $4.4 million, which increased 6.4% during the quarter. This was primarily due to an increase in interest expense due to higher average debt outstanding and an increase in management fees due to higher average investments outstanding.

Net losses on investments and derivatives for the quarter were $3.5 million, which was comprised primarily of net unrealized losses. Due to the net loss on investments, we reversed previously accrued incentive fees resulting in a negative incentive fee for the quarter of $176,000 as kind of shown on the expense categories.

Turning to slide 7 or page 7, the chart on the left provides a breakdown of our new originations by product category. For the quarter ended September 30, 68 of our new originations were unitranche investments, 30% in senior secured investments with the remaining 2% in equity investments. The chart on the right provides a breakdown based on total investments.

Turning to slide 8, I’ll walk you through the changes in our yields and investment spreads for the quarter. I’d like to focus your attention first on the red line, which represents the interest income yield. The interest income yield represents all income earned on the investments, excluding the amortization of discounts and origination fee.

Our interest income yield continues to increase reflecting our progress in shifting the asset mix. For the quarter ended September 30, the interest income yield increased 50 basis points from the prior quarter to 9.1%. And looking on a year-to-date basis, we have increased the interest income yield by 100 basis points from 8.1% to 9.1%.

Including amortization in fees and discounts, the total yield on investments, the dark blue line for the quarter ended September 30 was 9.9%.

As we have previously noted, our total yield on investments will fluctuate on a quarterly basis depending on the level of runoff in the portfolio, because on prepayments we take into income any remaining unamortized fees.

The cost of our borrowings, the green line, increased slightly from 3.2% from the previous quarter to 3.3% for the quarter ended September 30.

Turning to page 9, for new investments, the weighted average rate on new investments was 8%. The weighted average rate on new investments is based on the contractual interest rate at the time of funding. For variable rate loans, the contractual rate would be calculated using the current LIBOR, the spread of our LIBOR and also taking into account, the impact of any LIBOR floor. For fixed rates loans, it’s the stated fixed rate.

The 8% this quarter compares favorably to the weighted average rate of 7.2% for investments that were sold or paid off. So, in a sense, we picked up 80 basis points on the new assets compared to the old assets that ran off. As shown on the middle of the page, the investment portfolio remains predominantly invested in floating rate loans.

In regards to credit quality and non-earning loans, I refer your attention to pages 10 and 11. Overall, fundamental credit quality remains strong with nearly 90% of the investments in our portfolio rated a four or five and non-earning loans representing 0.6% of our loan portfolio at fair value.

However, as David mentioned earlier, continued weakness in two non-earning investment negatively impacted our quarterly financial results. In addition, unrealized losses primarily caused by mark-to-market adjustments on the broadly syndicated loans referenced in our total return swap also negatively impacted our quarterly financial results.

As David indicated, we view these mark-to-market adjustment on the broadly syndicated loans is temporary, as the markets were driven by market yield adjustments, and were not due to any credit related issues.

During the post-September 30 market value in the broadly syndicated loan market, as well as an increase in the net interest accrued on the loaned in the TRS. The fair value of the TRS was negative $0.5 million, as of the end of November, which is a $1.4 million increase from the fair value at the end of the quarter.

Just as a reminder, our independent valuation firms valued approximately 25% of our investments as of September 30. Turning to page 12, the Board declared a distribution of $0.32 a share payable on December 29 to shareholders of record as of December 19.

Turning to page 13, overall liquidity remains strong as of September 30, with $69.8 million of unrestricted and restricted cash. In addition, we had $38.7 million of available SBIC debenture commitments and availability of $72.6 million on our revolving credit facility.

In regards to our SBIC debentures on September 30 of 2011, we see the exempt of relief from the SEC allowing us to modify the asset coverage requirement to exclude our SBIC debentures from this calculation.

I’ll now turn it back to David who will provide some commentary on new investment activity since the end of September, as well as provide some details on the hedging contract that we entered into this quarter, and he will close with some closing remarks.

David B. Golub

Thanks Ross. So we are on a late schedule this quarter, because of the fiscal year-end and given that I thought that it would be useful as we approach the end of our first fiscal quarter of 2012 to provide you with some information on the current market environment and our activities since the quarter-end.

We think the environment for middle market lending right now is very favorable post the August credit dislocation, credit spreads have widened, transaction structures remain conservative, and as a consequence, we’ve been quite active, and new originations have been very strong. For the first two months of the quarter, we’ve already closed on over $100 million of new investment commitments. Of these new commitments, 46% were in second lien and subordinative debt investments. As I mentioned earlier, we’ve seen more attractive sub-debt opportunities recently; 18% were in unitranche investments, 33% in senior secured, and 3% in equity.

The weighted average rate on the new investment commitments was 10.7%, which compares favorable to the interest income yield, Ross alluded to 9.1% that we reported on the investment portfolio for the quarter ended September 30.

Also before I wrap up, I want to give you some details on the hedging transaction that I referenced. In September, we entered into a 10-year U.S. Treasury futures contract, reflecting a yield of 2.08% and an amount of $25 million with the intention of fixing the rate on $25 million of SBIC debentures we've already drawn.

For those of you who don't remember how the SBIC program works; we draw debentures under this program, but their interest rate gets fixed twice a year. The next time when they get fixed will be in March, so we thought rates were at a very attractive level at 2.08% and decided to look to lock in that rate. So, this transaction insulates us against adverse changes in the ten-year U.S. Treasury rate between September, 2011 and SBICs pooling date in March.

The only downside to this hedge is that we will have to reflect changes in the value of the hedge through our P&L whether they be good news or bad news, we will have to reflect changes in the value through our P&L until we unwind the hedge at the time of the pooling date in March.

So, to sum up the market environment, we think right now is very favorable. I’m not saying we are not concerned about all these sources of uncertainty in the world. We are, whether we are talking about the European financial crisis or the stubbornly high level of unemployment in the U.S. or the new normal in U.S. government circles of political dysfunction.

Despite all of that, we think Golub Capital BDC is well positioned to deliver solid results in fiscal 2012. I said this before, but I will say it again, we don’t need robust economic growth to have a good year, flat is good enough.

The portfolio is in solid shape for a credit perspective. I’m not saying it’s perfect, we have a couple of problem children and that’s the nature of our business, but overall it is very solid and I feel very good about the Golub Capital platform.

We are pleased that Golub Capital is ranked the number one traditional middle market book runner for the third quarter by Thomson Reuters for traditional middle market bonds under $100 million. We were also ranked number one for the year through September 30.

We’ve completed transactions now as a platform with over a 160 different private equity sponsors and multiple transactions with over 80 of them. So we feel we’ve got a lot of momentum going into next year.

As always, I want to thank everyone for their time and support. And with that, operator I’d like to open up the line for questions.

Question-and-Answer-Session

Operator

Certainly. (Operator Instructions) Our first question comes from the line of Greg Mason from Stifel Nicolaus. Please proceed with your question.

Greg Mason – Stifel Nicolaus & Company

Great. Good afternoon, gentlemen. David, could we dive into the TRS a little bit reading through your Q; the earnings from that the TRS come through the realized and unrealized gains bucket. Could you breakout what the earnings from that versus the mark-to-market was in the third quarter?

David B. Golub

Yeah. The net interest income fees doesn’t get earned until the interest income is actually paid, and so most of what occurred in the quarter was the unrealized mark-to-market adjustments on the broadly syndicated loans. I think we had $40,000 in realized gains, which represents interest income that was kind of received on those loans.

Greg Mason – Stifel Nicolaus & Company

Can you talk about how that the payment comes to you, is it a once a quarter payment, when will we see that income come through the realized gains line?

David B. Golub

That income does come on a quarterly basis. So you will see some of that income come through for the quarter ended December 31.

Greg Mason – Stifel Nicolaus & Company

Okay, great. And then, just overall, what is your expectations of your ROE on your committed capital to the TRS, now that you’ve kind of fully invested that $100 million facility?

David B. Golub

That's a good question, Greg. I mean, I think that, I can tell you that on a steady state basis, we anticipate a low to mid-teens return on that. But when I say steady-state, what I mean is that, as we saw this quarter, there will be some period-to-period volatility in that because of the mark-to-market on the individual loans. I think in general, we won't see volatility of the order that we’ve seen in the last quarter. We had an unusual degree of volatility in credit markets generally, so I anticipate that that will modulate. But what we’re looking at here is a return in, our expectation is a return in the mid teens.

Greg Mason – Stifel Nicolaus & Company

Okay, great. And then, this was a $100 million TRS, is there are any idea of, can you upsize that, do you want to upsize that, do you want to do more of this?

David B. Golub

We do not have the intention or plan of upsizing it at this time.

Greg Mason – Stifel Nicolaus & Company

Okay, great. And then, one more question, I can hop back in the queue. What changed in the fourth quarter where you wanted to take on more second lien and sub-debt. What were you seeing there that made you want to really go after that market in the fourth quarter?

David B. Golub

I wouldn't suggest you that that something change where we really wanted to go after. I think what I would tell you is that, this is always a very granular micro set of factors. I mean, we simply saw a number of transactions post September 30 where we found attractive risk awards in sub debt, and we didn't go into the quarter saying, hey let’s make a whole bunch of commitments to sub-debt. But what we have seen is that in the recent period, we’ve have identified a number of subordinated debt investments that we thought were quite attractive.

You can see this if you look at the charts from this investor presentation and prior investor presentations from quarter-to-quarter. There are significant variations in the mix of the new assets that we put on, and that's a reflection of a lot of different factors.

I think that it would be a mistake for you to conclude that some things changed and how we are looking at the world or in our assessment of the goals of our portfolio. We quite simply just saw couple of opportunities and took advantage of the opportunities we saw.

Greg Mason - Stifel Nicolaus & Company

Great. Thank you, David.

Operator

Our next question comes from the line of Joel Houck from Wells Fargo. Please proceed with your question.

Joel Houck – Wells Fargo Securities, LLC

Good afternoon. Maybe you could comment, if we see the pipeline, over 100 million into December, can you give us a sense for what you kind of looking as we head to the calendar year-end. Are you seeing sponsors still looking to close before year-end or do you see some of those deals spilling over into 2012?

David B. Golub

It’s a mix Joel, I think what we have seen as a pattern going back to the fourth quarter of 2010 is at the risk of sounding a little nerdy is a bit of a sign wave. So, in the fourth quarter of 2010 we had a very big origination quarter.

We told you at the time that that was in part a function of deals being pushed into that quarter by sellers who were concerned about the possibility of tax law changes. The degree of activity in the fourth quarter of 2010 actually caused the first quarter of 2011.

I'm talking calendar quarters now just to avoid confusion, because of the first calendar quarter of 2011 to be slow. And then, the second calendar quarter to once again be robust and the third quarter to be a little slow and now we’re seeing the fourth quarter again robust. So, there is a kind of on/off pattern that I think goes back to Q4 of last year.

If I had to guess, my prediction is that we're going to see a continuation of that into next year. And if as I expect there is discussion next year in Washington about tax law changes and the possibility of capital gains, taxes going up, then I think we are likely to see another surge of activity in the fourth quarter of 2012, the fourth calendar quarter of 2012.

Joel Houck – Wells Fargo Securities, LLC

Yeah, that makes sense and I guess the capital gains tax rate would go up automatically if nothing is done through congressional acts, so that's interesting. Now, I guess switching gears, if you look at – you guys have plenty of capacity for near-term growth in terms of cash and is available in the line, which you’re also in the enviable position of having your stock traded a nice premium to book value. Can you give us a sense for how you balance raising more equity capital versus the increasing leverage and perhaps getting few tie to the BDC constrain?

David B. Golub

Sure. This is obviously a subject that we spend a lot of time thinking about we want to – as we discussed in the past. We want to continue to grow Golub Capital BDC in a very shareholder friendly and methodical way. We think it would be good for shareholders, if we are able over time to increase the float and increase the market cap of the company. But we're not interested in growing for the sake of growth and we're not interested in issuing shares at values that we think don't reflect the value of the company.

As you put it Joel, enviable position of having a stock that trades at a premium, we're also in the enviable position of having our platform where if we can grow through the BDC, it’s really not a big problem. So, what I tell you is we're going to look at this, the way we looked at it historically, which is, if there is an opportunity to grow the capitalization of the BDC that we think we’ll be good for existing shareholders then we will pursue it, and if it’s not good for existing shareholders then we will not.

Joel Houck – Wells Fargo Securities, LLC

All right, thanks for the answer.

David B. Golub

I’d also just make one other comment on this and Joel you heard me say this before, but for the benefit of others on the call. We are in a small category of BDCs that has not sought approval for issuance of new shares that’s below book value and as a philosophical matter, it’s really not something we believe in.

Joel Houck – Wells Fargo Securities, LLC

No, that’s a good point. Thank you.

Operator

Our next question is from the line of Heath Ritchie from Delphi Management. Please proceed with your question.

Heath Ritchie – Delphi Management

Thanks. I was wondering if you could discuss dividend coverage and sort of you’re your outlook is for the stability of the dividend? Thank you.

Ross A. Teune

Thanks Heath. Our dividend right now is $0.32 a quarter. If you look at our performance since IPO, we’ve – that’s a good approximation of our average level of earnings. This quarter a bit lower because of our unrealized losses, some of which we think will reverse.

Our dividend policy is to change our dividend rarely and to have our dividend be at a level that we feel confident. We can cover with earnings over time with obviously some degree of volatility, but we want it to be at a level that we believe we can cover over time, so that we’re looking at a steady-to-increasing NAV over time. That’s a restatement of our dividend philosophy.

At a practical level, we’ve said on prior calls and I feel comfortable repeating here that one of our goals over the coming quarters is to increase our return on equity and as we increase our return on equity, we would anticipate revisiting our current dividend with our board and looking at the possibility of increasing it.

Heath Ritchie – Delphi Management

Thanks.

Operator

Our final question comes from the line of Roth Haberman from Haberman Management. Please proceed with your question. Mr. Haberman, your line is open; please proceed with your question. Mr. Haberman, your line is open; please check your mute button and proceed with your question.

David B. Golub

I think we lost Mr. Haberman. Suzy maybe we can go to the next question.

Operator

Certainly. We have a follow-up question from Greg Mason with Stifel Nicolaus. Please proceed.

Greg Mason – Stifel Nicolaus & Company

Great, thank you. The reversal incentive fees this quarter David. Was that a reversal of some realized gain incentive fees or past kind of NOI incentive fees this quarter? Can you talk about that a little bit?

David B. Golub

Yeah, it was a reversal of kind of the capital gains component. A reversal of the previously accrued incentive fees related to capital gain component, not related to net investment income.

Greg Mason - Stifel Nicolaus & Company

And then, David you have one of the favorable management fees calculations that includes unrealized depreciation in your NOI incentive fee, kind of, given the fact that probably some of that has reversed here in the fourth quarter, but if we didn’t have that, is there a way that capital gains, the depreciation of portfolio ever works its way off of the NOI incentive fee, or is it kind of, if we look at your balance sheet today where you’ve got cumulative unrealized gains today of negative $1.5 million. If those weren’t to reverse for theory sake, do you kind of always sit there as a negative $1.5 million on your NOI for each quarter?

David B. Golub

If you recall the way that the incentive fee works, there is a cap structured into it, so you would look at that loss that we've had below the net investment income line and that would impact the calculation of whether we’re hitting our cap. And our cap just to refresh your recollection is 20% of cumulative net income from the IPO date.

I think the point you're making is quite correct, which is, if you were to look at this quarter and compare our fee structure to others in the industry and just run the numbers on what our fee structure is producing versus others, you would see there is quite a considerable difference both on the management fee line where it would increase by roughly 50%. If we were like other BDCs who charge 2% on assets and it would also increase at the incentive fee line, if we calculate our incentive fees differently.

Greg Mason - Stifel Nicolaus & Company

Okay, great. Thank you, David.

Operator

(Operator Instructions) Our next question comes from the line of Casey Alexander from Gilford Securities. Please proceed with your question.

Casey Alexander – Gilford Securities

Hi, good afternoon. Looking at your presentation, it shows that you’ve had the heights yield on your payoffs of any time in the recent history; is that kind of due to the seasoning of the portfolio or is that more a one-off of a pay-off that happened this quarter?

David B. Golub

I think I’d very careful. I think more of the ladder. It's not off a big end, right. You’ve roughly $40 million of payoffs, so in any one quarter that number can be highly impacted on by what happens to that paid off.

Casey Alexander – Gilford Securities

Okay. I think my other questions were answered. Yeah, that was it. Thank you.

Operator

Our next question comes from the line of David Miyazaki from Confluence Investment Management. Please proceed with your question.

David Miyazaki – Confluence Investment Management

Well, thank you for taking my question, David. Just a quick comment; we are obviously big fans of your fee structure, so we would like to see that in that spreads throughout the industry and of course, we are also fans of your philosophical apposition to issuing equity below NAV. So, I just wanted to make that comment.

A couple other things; with regard to, there’s a lot of work that's been done with regard to vintages, and how they perform, we’ve seen a lot of problems come out with ’06 or ’07 vintages, and then the ’08, ’09 vintages for underwriting has been very good. How do you think that the ‘11 vintage is going to play out in the next few years for the industry, not necessarily for you guys?

David B. Golub

I think the 11 vintage will be unusually strong in terms of credit results. I think that there is a longstanding pattern in this industry, which is the first couple of years after a downturn, credit results are particularly strong for those vintages. It’s largely a function of a combination of conservative capital structures and businesses that are being underwritten off of trough EBITDA, cyclically, trough EBITDA. So, the easiest time in our business to underwrite credit is shortly after a downturn has ended. So, my expectation would be ‘11 would look pretty good.

David Miyazaki – Confluence Investment Management

And I guess those even considering the fact that, in the first half of the year, we did see some tightening of spreads and some loosening of covenants a little bit that you don’t that I got to the point in the industry where that’s going to compromise the overall vintage for the year?

David B. Golub

That’s correct. I mean I think that, again I think your statement is exactly right, which is we saw some tightening of spreads and some loosening of credit standards. But even when that was most profound, which was the June, July area before the August changes in credit markets generally, we’re looking at overall structures with typically 40% junior capital, 40% equity and not cyclically high EBITDA. So EBITDA had positive momentum.

So, look, I think the factor that could make me wrong is if we have a gigantic explosion in Europe, which causes a double dip recession of profound proportions in the U.S. I think that’s a possibility, but I think that’s a low probability of that right now. I think the much more likely scenario is one of continuing muddling growth in our economy. And in that scenario, my expectation would be 2011 underwriting would hold up pretty well.

David Miyazaki – Confluence Investment Management

Okay, great. That’s very helpful. And then, you talked a little bit about the origination post the end of the quarter. And pardon me if I missed this, have you seen a lot of repayment since the end of the quarter?

David B. Golub

We did not comment in our comments about repayments, well I take it back, we did. Ross go ahead.

Ross A. Teune

Yeah, no. We have seen about $33 million of repayments through November, so it’s certainly a little bit higher than where we ended up this past quarter, which was what $28 million in repayment. So, it will be a little bit higher this quarter, but not a significant increase in prepayments.

David Miyazaki – Confluence Investment Management

Okay, thanks a lot guys.

David B. Golub

There is a little bit of uncertainty, I just want to add an asterisk around that. You always get somewhat surprised by some prepayments around 12/31 as borrowers look to use some excess cash sometimes to pay down debt balances. So, I want to just add the asterisk there that we haven't seen this whole movie yet on repayments in this quarter.

Operator

And our next question is from the line of J.T. Rogers with Janney Montgomery Scott. Please proceed with your question.

John Rogers – Janney Montgomery Scott

Good afternoon, David. Given the way the market is right now, what is your ideal asset mix. And how long does it take to get there given the current pace of investment and repayment you're seeing?

David B. Golub

That's a great question. So let’s flip to page 4 of the presentation that has the asset mix progression quarter-over-quarter that Ross referenced in his comments. And if you look at that chart, you can see that we’re currently running with roughly 44% senior secured debt, 39% unitranche, 15% second lien and sub debt and 2% equity.

Our idea would be approximately 10% less in senior secured debt with that 10% mixed between the other asset categories. I think we want to be dynamic in this. It’s not a one time setting for that type mix goal. But if you ask me today where I’d like us to be that would be a good approximation of where I’d like us to be.

And I think we will make substantial progress towards that goal in the 12/31 quarter. So I think you can see in this chart as Ross pointed out, we moved the mix over 20 points in the year and we’re talking about moving it approximately 10 more and we shared with you the numbers for our originations today this quarter. So I think we’re pretty close.

John Rogers – Janney Montgomery Scott

It looks like you’re continuing the rotated portfolio with good pace in December, definitely on those numbers you shared. Are there any industry that you're focusing on given the macro environment or are there anything that you’re stressing for new investments?

David B. Golub

When you say stressing, do you mean avoiding, or do you mean or emphasizing?

John Rogers – Janney Montgomery Scott

Focusing on. Either way, are there any industry you are avoiding in particular, or there industries that you focus on you like to grow if you like the fundamentals you’re seeing in them?

David B. Golub

I’d say, no real change from where we’ve been for quite sometime. We’re avoiding businesses and industries that are particularly economically sensitive. For example, anything construction related or real estate focus we’re avoiding. We have found significant opportunities in mission critical business-to-business software and in areas within healthcare services where there is not a lot of reimbursement risk, Medicare and Medicaid reimbursement risk.

We’re very focused on avoiding Medicare and Medicaid reimbursement risk within our healthcare portfolio. So I would say resilient sectors, defensive sectors are of particular interest to us. And if I were to say, two, that we found a fair bit of opportunity and recently it would be mission critical, business-to-business software and healthcare service away from Medicare and Medicaid reimbursement risk.

John Rogers – Janney Montgomery Scott

Okay, great. And then just one last question; from a credit perspective, for the $45.1 million of free ranked investments you have in the portfolio, what are the trends you’re seeing in those assets generally; are they improving, are they getting worse?

David B. Golub

Again, very good question. I’d say that’s a generalization across our portfolios. We’re seeing most companies showing improved profitability year-over-year despite the widely reported economic statistics that caused up market change in sentiment in August. So, on the ground, what I think of is being the main street results as a generalization, we’re seeing businesses continue to succeed and generating improvements on a year-over-year basis. Having said that, there is some isolated examples where that’s not the case, which is pretty normal. It’s hard for me to gauge any patterns or conclusions from those exceptions from our portfolio, they just seem to be exceptions.

John Rogers – Janney Montgomery Scott

Great. Thanks a lot.

Operator

Our final question comes from the line of Ross Haberman from Haberman Management. Please proceed with your question.

Ross Haberman – Haberman Management

How are you, David.

David B. Golub

Hi, Ross?

Ross Haberman – Haberman Management

I just had two quick questions, I was wondering I got on a little late if you could shed some more light on some of your children ads you described on. And are they actually any of them in defaults or bankruptcy today?

David B. Golub

So we have, if you look at slide 10, we have $2.89 million in our number two ranked category that consists of three loans. Two of those loans we’ve wrote down in the quarter, one of them is our company called Den-Mat, which we actually, the company was sold this quarter, and so we’re now out of that situation.

The two others following to this category of as I said, just kind of exceptional cases that don't reflect particular trends we see across the portfolio. One of them is American Fire Protection and the other is Prommis Solutions, the good news is these are small positions. And we’re cautiously optimistic that we’re not going to see further losses on these three positions.

But one of the fun parts of this job is that we get to deal with workout credits and its one another things I think we at Golub Capital do really well. But I'm being a little sarcastic, it's not so much fun. It’s just a slog to deal with situations where companies are not performing at the level that you’d like them to be performing at.

Ross Haberman – Haberman Management

I know you haven’t done lot of experience with this, but typically will you just want to get rid of it and write it down, or if it goes for bankruptcy, will you end up taking up take convert it to equity, will you through the whole conversion, or try to get rid of it as quickly as possible and not spend the time and the effort on because as you said, it’s a small position and not worthy at the time?

David B. Golub

Our philosophy on it is that we’re in the business of maximizing recovery value and every nickel counts. And so if the right answer from the standpoint of maximizing recovery value is for us to convert our position equity and basically become the owner of the company, we’ll do that. We have the capability to that. We’ve done that before. If the right answer is to have the company be sold and to take our legs and keep moving, then we’ll do that.

It’s very specific granular decisions that are got to be based on the facts and circumstances of that credit. One of the advantages that we have with our scale is that we have a specialist workout department and we have great people there and whatever needs to be done we can do.

Ross Haberman – Haberman Management

Got it. And just, I just have one follow-up question regarding, you talked bout the growth of the subordinated debt group. How big would you grow that, is the first question; and do you in many cases also have the senior debt in those same credits?

David B. Golub

How big would we grow that. So, if you look again at that chart that we were talking about with respect to mix on page 4 of the presentation, we right now are at about 15% in second lien and subordinated debt and I can see it in an environment where second lien and subordinated debt assets were particularly attractive that we could grow that to as high as 20% to 25% of the portfolio. So obviously going to be something that we’re going to vary based on the attractiveness of those assets relative to unitranche and other assets.

Right now, we particularly write unitranche assets relative to subordinated debt, so we are more focused on building the unitranche portfolio than we are on building our subordinated debt piece. That’s the first part of your question.

The second part was, do we tend to own both senior and subordinated debt in the same deal; and the answer is, sometimes yes and sometimes no. It again is dependent on the nature of the particular credit that we’re talking about. And sometimes we see advantages to being in both and sometimes we only want to be in one or the other.

Ross Haberman – Haberman Management

Got it, okay. Again, thanks a lot. Appreciate the help.

David B. Golub

Thank you, Ross.

Operator

There are no further questions at this time. I will turn the call back to you.

David B. Golub

Thank you, Suzy. Well, again on behalf of both Ross and myself, we appreciate you're taking the time to join us today for the update on Golub Capital BDC, and as always if you have further questions, please feel free to call either of us. Look forward to speaking to you again in the quarter.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Have a good day.

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