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Golub Capital BDC, Inc. (NASDAQ:GBDC)

F3Q 2012 Earnings Call

August 6, 2012 1:00 pm ET

Executives

David B. Golub – Chief Executive Officer and Director

Ross A. Teune – Chief Financial Officer, Treasurer and Head-Investor Relations

Analysts

Greg Mason – Stifel, Nicolaus & Company, Inc.

Jonathan Bock – Wells Fargo Advisors LLC

Greg Mason – Stifel, Nicolaus & Co., Inc.

John T. G. Rogers – Janney Montgomery Scott LLC

Jim Young – West Family Investments

Operator

Good afternoon. Welcome to the Golub Capital BDC, Inc.’s June 30, 2012 Quarterly Earnings Conference Call. Before we begin, I’d 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 statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performances 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 Golub Capital BDC, Inc.’s filing with the Securities and Exchange Commission.

For a slide presentation that we intend to refer to on the earnings call, please visit the Events and Presentations link on the homepage of our website at www.golubcapitalbdc.com and click on the Investor Presentation link to find the June 30, 2012 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 call is being recorded for replay purposes. I will now turn the call over to David Golub, Chief Executive Officer of Golub Capital BDC.

David B. Golub

Thank you, Eric. Good afternoon, everybody, and thanks for joining us today. I’m joined today by Ross Teune, our Chief Financial Officer. Earlier today, we issued our third quarter earnings release and posted a supplemental earnings presentation on the website. We will be referring to this presentation throughout the call.

I’d like to start today by providing an overview of the June 30, 2012 quarterly financial results, Ross is then going to take you through the quarterly results in more details and I’ll come back and provide some details on our perhaps puzzling simultaneous announcement of both board approved share repurchase program and then At the Market or ATM common stock program, and I’ll also provide some commentary on current market conditions.

With that, let’s get started. Please turn to Slide 1 of the investor deck. Let me start by saying how delight I am that this will the last quarter I have to walk you all through the accounting for the total return swap. To remind you, pursuant SEC guidance, we report spread income from the swap below the net investment income line, but incentive fees related to the swap above the line. So, let’s look at net investment income two ways.

The first way, as reported net investment income for the quarter ended June 30 was $6.7 million or $0.26 per share and that compares to $7.1 million or $0.29 per share for the quarter ended March 31. Adjusted to include net spread payments of $1 million from the swap, NII was $0.30 per share for the quarter ended June 30 as compared to $0.33 per share for the quarter ended March 31. Given the weak originations for the quarter and I’ll talk more about originations for the quarter in a few minutes that adjusted NII levels right where we expected it to be.

Net income for the quarter was $5.4 million or $0.21 a share and that compared to $11.4 million or $0.48 per share for the quarter ended March 31. So, let’s look at net investment income inclusive of the TRS income of $0.30 versus EPS of $0.21, and let me walk you through bridge of the $0.09 differential between the two. There are three principal pieces.

The first is, we had a net realized and unrealized loss of $0.01 on the termination of the total return swap. The last page of the presentation that summarizes the inception to conclusion performance of the total return swap and you can see it was quite a successful investment for BDC generating about $3.9 million of total profit, but we experienced a small net loss not including spread payments during the period from quarter end to termination as loan prices fell modestly from March 31 to the termination date. So that’s one piece, we’ve lost $0.01 on the TRS.

The second piece is net realized and unrealized losses on investments, that constituted about $800,000 for the quarter or about $0.03 a share and that was primarily the result of a write-down on new non-earning asset. We’ll talk more about that later as well.

And finally, we lost $0.05 of share in net realized and unrealized losses on futures contracts designed to hedge interest rate risk associated with unpriced SBIC debentures. So the three pieces are a penny on the swap, $0.03 on changes in the fair value of investments, and $0.05 on the futures hedge.

I want to spend a minute on the futures head just to make sure everybody understands it. Firstly, I’d say, despite the net loss on the hedge, we still think it was the right thing to do to put this on. Let me remind you why we did it. So the way the SBIC program works, we draw down new SBIC debentures and pay a temporary rate until this June or September or March of each year.

In September and in March, the SBA permanently prices debentures off of then 10-year treasuries. So we drew down to new debentures in April and we didn’t want to take interest rate risk on those debentures until September, so we locked in the then current 10-year treasury rate through a futures contract. The bad news is that the hedge went against this because 10-year treasury yields fell, the good news is that we’ll get the full benefit of that lower rate for the life of the debentures when they become permanently priced in September.

So you’ve heard me say this before, this is a situation where a conservative strategy hedging our interest rate risk resulted in a bid of higher short-term earnings volatility will do that sort of thing all day long.

Turning to Slide 3 of the investor presentation as we communicated back in our call in early May, middle market originations declined from a robust quarter ended March 31, 2012 and totaled $25.6 million for the three months ended June 30. Due to slower middle market originations this past quarter, we elected to purchase $26.8 million in broadly syndicated loans, we will ultimately sell those loans and replace them with middle market loans as we have new originations.

We certainly would prefer to have steady and consistent originations each quarter, but it’s just not the nature of our business, it’s lumpy. When we look at originations on a year-to-date basis and those total $315 million that’s very consistent with our expectations, even though this quarter was light and I’d also say we have seen a meaningful pickup in our new activities and we currently anticipate a robust quarter in terms of originations for the period ended September 30. We also anticipate a higher percentage of higher yielding one-stop transactions in the quarter ended September 30 than what we’ve originated in the past quarter.

So, I’m now going to hand the ball to Ross, who is going to talk about the financial results in more detail. I will come back in a few minutes and provide some more details on the after-market common stock program, our share repurchase program, and also provide some commentary on current market conditions. Ross, over to you.

Ross A. Teune

Great, thanks, David. I’m still on Slide 3 of the investor presentation. Total originations for the quarter were $52.4 million. The breakout of that originations was $25.6 million of middle market originations and $26.8 million of investments in broadly syndicated loans. In future quarters, we do intend to sell the broadly syndicated loans and reinvest those proceeds in higher yielding middle market assets. Exits from repayments totaled $34.1 million, which results in overall net funds growth of $22.8 million.

Look at the investment mix table kind of the bottom of the slide there, due to the higher percentage of senior secured loans originated during the quarter, which does include the broadly syndicated loans, the overall percentage of senior secured loans in the portfolio increased modestly with the corresponding drop in one-stop investments.

Flipping over the balance sheet on the next slide, we ended the quarter with just over $700 million in assets. We had total cash and restricted cash of $63.1 million. Looking at the liabilities, borrowings were $329.8 million at the end of the quarter. This has broken down into $174 million. In floating rate debt issued through our securitization vehicle, a $123.5 million of fixed rate SBA debentures and $32.3 million on our revolving credit facility.

On the last page of the presentation as we provided in the last quarter as well, we provided a summary of the key terms and provisions of our three debt facilities. The slide highlights the very attractive low-cost and highly flexible debt capital that we put in place. At the end of June, net assets were $374.2 million and our net asset value per share was $14.58. Looking at leverage, from a GAAP perspective, our debt-to-equity ratio was approximately 0.9 times, however, calculated per regulatory limits, our debt to equity ratio was 0.6 times.

Flipping over to the next slide, the statement of operations, total investment income for the quarter was $14.8 million, this was up $0.5 million from the prior quarter. On the expense side, total expense is $8.1 million, increased by $0.8 million during the quarter primarily due to an increase in incentive fee expense.

We also had some increases in base management fees and administrative service expenses, these are formula driven expenses and these increased as average investments increased during the quarter.

To get net loss in our investments and derivates for the quarter ended June 30 was $1.3 million for which David kind of provided a breakdown in his opening remarks.

Turn to Slide 7, a couple of graphs here. First looking at the graph on the left, new investment commitments, as we mentioned, the bulk of our new originations during the quarter were in the senior secured bucket $52 million and the chart in the right provides a breakdown of end of period investments.

For the total portfolio, again as new originations were predominantly in senior secured loans, we did see a pickup in that category with the corresponding kind of decrease in our one stop investments.

Turning over to side to look at the spreads through the quarter. First focus on the red line, this line represents the interest income on all or all income earned on our investments excluding amortization from discounts and origination fees, due to the increase of senior secured deals in the investment portfolio of this quarter, we did see a decrease of approximately 30 basis points for an overall yield of 9.3%.

Looking at the dark blue line, this yield includes the amortization of origination fees and discounts and the yield for the quarter was 10%. This yield also dropped not only due to the increase in senior secured loans during the quarter, but also fall little bit as we had slower repayments during the quarter.

Turning to Slide 9, to new investments the weighted average rate on new middle market investments was 8.2%, this 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 over LIBOR and the impact of any LIBOR floor, for fixed rates obviously we’ll just be stayed at fixed rate.

The 8.2% does compare favorably to the weighted average rate of 6.7% for middle market investments that were sold or paid off during the quarter. The weighted average rate is down from the previous quarter and that is primarily due to the investment this quarter which again was focused on senior secured deals.

As shown on the middle of a slide, the investment portfolio remains predominantly invested in floating rate loans with floating rate loans comprising approximately 85% of the portfolio.

Turning to Slides 10 and 11, credit quality, overall fundamental quality remains quite strong, with non earning assets as a percentage of total investments, on a cost basis was 1.5% and less than 1% as a percentage of total investments on a fair value basis.

As shown on Slide 11, portfolio risk ratings have remained stable over the past several quarters with over 90% of the investments in our portfolio categories rated four or five. We did add one new non-earning account during the quarter extreme fitness, this account had a fair value of $1.4 million at the end of the quarter and a total cost basis of $2.8 million or carrying that approximately $0.50 on the dollar.

As a reminder, independent valuation firms review approximately 25% of our investments each quarter.

Turning to Slide 12, the board declared a distribution of $0.32 per share payable on September 27 to shareholders as of record on September 13.

Going to Slide 13, looking at liquidity and investment capacity, capital remains adequate with unrestricted cash of $18.1 million as of June 30 and restricted cash of $45.1 million. Restricted cash is again cash held in our securitization vehicle or SBIC and is available for new investments that qualify for acquisition by these entities.

In addition, subject to leverage and borrowing base restrictions, we had approximately $42.7 million available for additional borrowings on our $75 million revolving credit facility. In regards to our SBIC license, we had approximately $6.5 million in available and approved debentures. In addition, subsequent to quarter end, we received commitments approval from the SBA to issue an additional $20 million in debentures subject to customary SBA approval procedures.

With this incremental $20 million commitment, that will bring us up to a $150 million in debentures, which is the maximum that a single SBIC license can have outstanding. Due to this limitation, as we indicated on the last call, we have applied for a second SBIC license and we did receive an acceptance letter on April 19 indicating that the application was complete and has now been passed along for further review and processing.

Obviously, difficult to estimate how long the application process will take, but if approved, this will provide us with an incremental source of attractive long-term debt.

I’ll now turn it back to David who’ll provide some details on the ATM program that we filed concurrently with our queue today and will also provide some details on our share repurchase program that was authorized by our Board and give an update on current market conditions.

David B. Golub

Thanks, Ross. So, this morning, we filed a perspective supplement with the SEC that will allow us to issue up to $50 million in common stock through and aftermarket offering.

Aftermarket offering, let me talk about what it is. It’s an offering where GBDC sell shares directly into the market at market prices. Aftermarket programs have two big advantages; first, they’re much cheaper than traditional offerings that the company will pay much lower fees to its underwriters; and second, they allow the company to issue small amounts of equity on a just in time basis and this helps us as the management team to reduce the drag on returns from under deployed capital.

I want to emphasize that we’re putting in place this program now to create flexibility. We currently have sufficient capital for investment purposes, as Ross just summarized. We do not emphasize, do not anticipate issuing shares through this program in the near-term. Not only don’t we plan to issue shares in the near term. We also don’t plan to repurchase any shares in the near-term. At our Board meeting last week, our Board of Directors approved a share repurchase program, which allows us to repurchase up to $30 million of our common stock on the open market at prices below our net asset value.

The purpose of the share repurchase program is to enable us to jump into the market in the event of a meaningful drop in our share price that we don’t believe reflects economic reality. So, the approval is strictly for below NAV repurchases, that’s not where we’re right now and we just want to set ourselves up to be able to do accretive repurchases, when as and if the market lets us do so.

Now, before I provide an update on market conditions, I want to highlight one other thing, which is shares we purchased for employee incentive compensation purposes. We previously disclosed that we purchased $3.1 million of shares in our February 2012 offering. Since that offering, we’ve purchased an additional $3.2 million of shares in the open market with most of that occurring in the quarter ended June 30th.

We’re going to as a matter of practice now, provide an update on shares purchased for our employee incentive compensation programs in our 10-Q filings. We’re very proud of the ownership of GBDC by Golub Capital employees. We think the alignment if fosters between our investment team and our shareholders is a key part of our success.

Finally, I just want to talk briefly about current market conditions and our outlook for the remainder of the calendar year. As I communicated on our call last quarter, we anticipated and we experienced a relatively slow quarter in the period ended June 30 in terms of new originations. I also indicated earlier on this call that I’m pleased to report we expect higher level of originations for the September 30 quarter. July was very productive and our pipeline going into August and September is strong, especially for one stop loans, unlike some of our competitive [group], we’re very cautious about mezzanine and junior debt opportunities today, part of this is a function of competition and leverage creep and part of it is a function of our nervousness about the macro environment and that the possibility of macro economic surprises, we see really terrific opportunities today in senior and one stops, but we see scares of opportunities in junior debt.

I’m going to stop there and open the floor for questions. I want to thank you all for your time and support as always. Eric, you want to open the floor.

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Greg Mason with Stifel Nicolaus. Please go ahead.

Greg Mason – Stifel, Nicolaus & Company, Inc.

Great, thank you. Could you talk about what leverage you think is appropriate for the type of assets you’re putting on and then how does that translate in to your balance sheet? Do you view the regulatory leverage as the limitation in your balance sheet or the actual total leverage including SBIC, just trying to get a feel for where you want to take the leverage in your portfolio going forward?

David B. Golub

Sure. Thanks Greg for your question. So, we have a view that higher degrees of leverage are quite comfortable for senior and one-stop assets than for junior debt assets. So we’re going to dynamically adjust our leverage over time based on part on where we’re seeing the cost of that leverage come out and based impart on where we’re seeing the portfolio mix.

So right now, we are very attractive to the pricing of SBIC debentures, and as Ross indicated, we not only have got an incremental SBIC debenture capacity of $20 million, but we also have a fairly far advanced application in place for an additional licensee if granted, that will give us under current law an ability to issue an additional $75 million in debentures overtime. There is as well as, as I know, you know Greg, there is legislation pending that could potentially increase that $225 million cap.

The beauty of the SBIC debentures is that they don’t count for the purposes of our regulatory leverage and we are – to answer your question directly, we are focused on making sure that we manage with a significant margin of safety around regulatory leverage and we also look at managing to what we would view as optimal leverage. So there are two different standards that we look at and that we manage to at the same time. One is, what’s our optimal leverage; and the second is, what’s our regulatory leverage plus a significant cushion.

Right now, I think, both of those give us a significant amount of incremental room to increase our leverage from the 0.6 that we’re at from a regulatory standpoint and the 0.8 that we’re at on a GAAP basis. Our view is that with our current portfolio, we could increase our leverage meaningfully and that obviously would potentially assuming we invested wisely would potentially increase our ROE.

Greg Mason – Stifel, Nicolaus & Company, Inc.

Great. And then just as we think about increasing your leverage capacity, if you take the remaining availability on your revolving credit facility, I think they gets you to close to upper 0.6s, maybe close to 0.7 debt-to-equity on a regulatory basis. Are you looking to expand that revolving credit facility and have you had discussions around that?

David B. Golub

We have not yet had discussions around that, but it’s my view that we could increase that, whenever we want. I mean it would not be – in my judgment it would not be challenging to increase the size of that facility.

Greg Mason – Stifel, Nicolaus & Company, Inc.

Great. And then on the SBIC, it is valuable. We’ve seen from some other BDC’s seem to be taking longer to get their license. Are you hearing anything going on in the SBA that may be slowing that process down?

David B. Golub

I don’t – I think we see a lot of what we usually see, which is the SBA has a lot going on and it can be challenging to get through the process quickly.

Greg Mason – Stifel, Nicolaus & Company, Inc.

Okay, great. And then one last question and I’ll hop back into the queue. One-stops for last several quarters have been strong and it looks like the pipeline for one-stops are strong going forward, but this quarter it was almost zero. Can you talk about, what may be happened or what happened in the market this quarter virtually no one-stops?

David B. Golub

Yeah. I mean let’s first put it in context. I mean, the overall origination was nearly zero. I mean we had $20 million something of new origination, just very, very small number overall. We talked about how in the beginning of the quarter we had seen a relative low in new activity and that was part of the picture. Second part of the picture is that some transactions that we had hoped would close before June 30, slipped into July. So I wouldn’t draw to any conclusions about June 30 quarter mix, it was just a really small end.

Greg Mason – Stifel, Nicolaus & Company, Inc.

Great. Thank you, David.

Operator

(Operator Instructions) And our next question comes from the line of Jonathan Bock with Wells Fargo. Please go ahead.

Jonathan Bock – Wells Fargo Advisors LLC

Yeah, thanks for taking my question. David, this question relates to the $26 million in broadly syndicated purchases. Could you give us a little more color on the rationale behind those purchases, particularly in the event of the economy backs up on us, how confident are you that you will be able to liquidating those assets and rotate in to higher yielding investments?

David B. Golub

Sure, so let me go back a step and talk specifically about why we did it. So we did it in the context of a weak origination quarter where we felt we had an excess of available cash that was earning next to nothing. And we saw an opportunity to take a portion of that invested in some very highly liquid broadly syndicated loans where we have convection the underlying credit quality of the loans were very strong and we thought that that would be accretive from an earnings standpoint for shareholders until such time as we found middle market loans to deploy that capital into. So this, we viewed as an alternative to holding the capital in the form of cash where obviously today returns are near zero.

Having said, that was the strategy John, it probably doesn’t surprise you that we elected to purchase a number of broadly syndicated loans that fit very a specific set of parameters. The parameters where we wanted loans that were highly liquid, so we were confident that we could sell them whenever we wanted, even if there was a bump in the road in the liquidity of credit markets, and we wanted to buy loans where we were very comfortable with the underlying credit, so that if for whatever reason we were holding these loans for a longer than expected period of time, we were confident that they perform.

So, that’s what we’ve got in this group, it’s obviously in the context of the overall Golub Capital BDC portfolio, it’s a relatively small portfolio, $26 million worth of broadly syndicated loans, but it beats getting paid nothing on it.

Jonathan Bock – Wells Fargo Advisors LLC

Okay, great. And then the next question related to the dividend policy. Looking at net investment income around that $0.30 level that you mentioned versus the $0.32 dividend, could you refresh us on your view of div in coverage particularly from net investment income and maybe what you would see as a potential reasonable timeframe with what you be fully covering your dividends from NII?

David B. Golub

So, I’m going to make myself unpopular as usual by saying, I don’t really believe in looking at just NII. I believe in looking at realized and unrealized losses as being just as real as net investment income. If you look at our last three quarters and some of our EPS, it’s $0.97 and that compares to $0.96 of declared dividend. So, the way I look at it, we are fine from a dividend coverage standpoint. The treatment of the total return swap is a great illustration of why only looking at NII doesn’t make any sense. The spread income that we were receiving on the total return swap was just as real cash as any interest payment that we would be getting above the line. So I look at EPS not at anything and also if you wanted to look at net investment income plus the total return swap, a spread income year at $0.95 against the $0.96 of dividends for the first three quarters. So, I guess bottom line, I think we’re fine in terms of where we are now.

In terms of dividend policy, our Board has been clear that it wants to adjust dividends only when we see a change in earnings power that’s going to be sustained for an extended period. Board does not want to be moving dividend rates up and down on a quarter-to-quarter basis and we would anticipate raising the dividend at such time as we can sustain a level of earnings above the $0.32 per share on a continuing basis.

Jonathan Bock – Wells Fargo Advisors LLC

Thank you, Greg. Thank you. The last one related to extreme fitness maybe little bit more to tail on, what happens and the current situation here and trying to realize value for your shareholders with this investment?

David B. Golub

Sure. This happens from time-to-time when you have a portfolio company that suddenly you wake up one day and find that the things were not exactly as you expected. In this case, we had a situation where the company was overstating its income and its receivables. We have brought in turnaround consultants from Alvarez & Marsal, who are now running the company and effecting a series of operating changes in an effort to turn things around. We’re cautiously optimistic that, that efforts are going to be successful. We’re working closely with the sponsor and I don’t really have more than that to say.

Jonathan Bock – Wells Fargo Advisors LLC

That’s more than enough. Thank you very much.

Operator

Our next question is a follow up from Greg Mason with Stifel, Nicolaus. Please go ahead.

Greg Mason – Stifel, Nicolaus & Co., Inc.

Great. Thank you. One last question, you mentioned July was productive and a couple of loans slipped into July, would you be willing to tell us what has officially closed so far quarter to date?

David B. Golub

We don’t, as the policy release our originations on a monthly basis, but I’ve mentioned to a number of people in the past that if you do a Google search on Golub Capital, you will see press releases announcing new transactions. So, you can get a significant amount of insight on our new origination activity by doing that.

Greg Mason – Stifel, Nicolaus & Co., Inc.

Great. Thank you, David.

Operator

Our next question is from the line of John T. Rogers with Janney Capital Management. Please go ahead.

John T. G. Rogers – Janney Montgomery Scott LLC

Good afternoon, everybody. First question on restricted cash, how does that breakdown between the different buckets, SBIC, securitization vehicle, and I guess in the revolver?

David B. Golub

We’re checking on that, just give us one second.

Ross A. Teune

We had the bulk of it, let’s see – we had about $22 million in our SBIC. Within a restricted cash, we had about $19 million kind of in our CLO and then about $4 million kind of in the revolving credit facility. These numbers, JT you should understand move around on a day-to-day basis because we’ll have restricted cash on one of the vehicles certainly before funding into investments. We’ll have restricted cash that comes in when we get an interest payment or a principal payment into one of these vehicles. So we’re giving you a snapshot as of June 30th, but I just want to emphasize that it moves.

John T. G. Rogers – Janney Montgomery Scott LLC

So, I think that makes sense, just trying get an idea of how it might be deployed, what kind of assets that cash might fund. And you mentioned potential macro risk up on the horizon, you guys have a fairly diverse portfolio. I was wondering if you’re seeing any trends in company fundamentals that lead you to believe that we’re entering a slowdown or you see a macro shock up there or it is just more of a concern based on something is going on in Europe and rest of the world?

David B. Golub

I’d say we’re seeing some definite signs over the last four months of slowing growth, comparisons year-over-year used to be consistently positive. What we’re seeing now is consistent flat in both revenues and profitability. There is some exceptions on the plus sides and on the minus side, but the overwhelming picture is we’ve gone from fairly consistent year-over-year growth to fairly consistent year-over-year flatness. Feel good about, where the portfolio is positioned. We’ve been anticipating a slow muddling recovery. Since this recovery began and we’ve been positioning the portfolio accordingly. Overwhelmingly, we’ve seen here highly diverse in non-cyclical businesses and resilient businesses.

But having said that, I’d also tell you that, maybe this is just Golub Capital selling like a bunch of chickens again. We’re chicken, but we’re concerned about the possibility of any of a number of different kinds of macro shops coming up in the coming period. The degree of governmental dysfunction in Washington and the consequent uncertainty, that’s enclosing on businesses and the context of uncertainty around tax rates and uncertainty around fiscal policy. I think that’s a very big problem. Europe is a very big problem. China has some big unknowns to it and there is some worrying trends from our perspective. So, there are a number of different potential avenues for surprises here and our judgment is that it’s much more likely we’re going to have a negative surprise and a positive surprise.

John T. G. Rogers – Janney Montgomery Scott LLC

That makes lot of sense. And in terms of your credit underwriting, look at the base case scenario that’s you all are looking at now, is it a flat economic growth environment or negative economic growth environment and maybe slightly up?

David B. Golub

Our base case is pretty flat, but we’re spending most of our time on the downsize scenarios. And in the downside scenarios, one of the lessons we’ve learned from the last downturn is that, you’ve got to be very creative in thinking about downsize and then thinking about degree of downsize, when you’re crafting those scenarios. Now, we’re unlikely to see a modest 10% down scenario.

John T. G. Rogers – Janney Montgomery Scott LLC

Okay, great. Thanks at lot.

Operator

Our next question is from the line of Jim Young with West Family Investments. Please go ahead.

Jim Young – West Family Investments

Yeah, hi. Could you provide us with an update with respect to the status of the pending legislation to increase the $225 million cap from the SBA?

David B. Golub

I can try. There is legislation pending and there is great debate on whether it’s going to pass or not. I don’t mean to sound flip, but that’s – that is the bottom line. It has received verbal support on a bipartisan basis, but at the same time as of this moment I don’t know very many people, who have a high degree of confidence that it will pass before the election.

Jim Young – West Family Investments

Okay. And then, secondly, can you just give us an assessment of how you’re thinking about the relative risk award in mezzanine, as you had characterized earlier that you are not as enthused about this area. Can you just elaborate on that? Thank you.

David B. Golub

Sure. We – coming out of the financial crisis, there is a very dramatic change in the senior side of middle-market lending. Tremendous number of competitors left the business either because they were banks that had problems in other areas, hedge funds will have redemptions, non-bank finance companies you had either credit problems or financing problems. So, in our core middle-market senior and one stop lending business, we still see relatively limited competition and very attractive conditions.

On the mezz side, a little different, there is more competition. There is an increasing movement of folks who have the ability to be invested in the high yield market and middle market mezz – towards middle market mezz, because high yields are so poor. I heard one person recently talk about the high yield market as being a need of a new name, it’s not that medium yields market. So we are seeing some increased competition in mezzanine, and that combined with our own macro cautiousness is beating us, just be very careful about new mezzanine investments.

Jim Young – West Family Investments

Thank you.

Operator

And there are no further questions on the phone line, so I’m turning the call back over to you.

David B. Golub

Thank you. Again, I just want to thank everyone for their time and attention today. And as always if anyone has a question that they’d like to ask that we didn’t cover today or that you come up with after today’s call, please feel free to call either Ross or myself. Thanks everybody. Bye-bye.

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.

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Source: Golub Capital BDC's CEO Discusses F3Q 2012 Results - Earnings Call Transcript

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