Golub Capital CEO Discusses F1Q2011 Results - Earnings Call Transcript

| About: Golub Capital (GBDC)
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Golub Capital BDC, Inc. (NASDAQ:GBDC) F1Q2011 (Qtr. End 12/31/10) Earnings Call February 10, 2011 1:00 PM ET


David Golub – CEO

Ross Teune – CFO


Jim Young – West Family

Bill Oldman [ph] – Harbridge Rye Fund [ph]

Jonathon Bock – Stifel Nicolaus & Co.


Good afternoon. Welcome to the Golub Capital BDC, Inc.’s December 31, 2010 quarterly 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 our homepage of our website, www.golubcapitalbdc.com and click on the Investor Presentation’s link to find the December 31, 2010 investor presentation.

Golub Capital BDC’s earnings release is also available on the company’s website in the Investor Relations section.

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

David Golub

Thanks, Brian. Good afternoon, everybody and thanks for joining us today. I hope you’ve been able to review the earnings release and the investor presentation that we’ve posted on our website.

I’m joined today by Ross Teune, our Chief Financial Officer. And today’s call we’re going to handle in the following way, we’re going to cover four items. The first I’m going to provide an overview of the December 31 quarter, and discuss what we’re seeing in the current market environment. Second, Ross is going to summarize the financial results for the quarter, then I’m going to make some brief concluding remarks, and finally we’ll open up the line for questions and answers.

So with, let me get started with Part 1.

I’m pleased to report we had another solid quarter. Net investment income for the quarter ended December 31, was $0.30 a share up from $0.25 a share last quarter, and that’s primarily due to strong asset growth over the course of the last two quarters.

We had another quarter of net realized and unrealized gains on investments. For the quarter ended December 31, net gains were $0.04 a share, down from $0.10 a share last quarter. And acrretively, the company generated net EPS of $0.34 a share. We’re very pleased that our board approved a dividend increase to $0.32 a share.

There are three themes I want to highlight today. I’m going to use some parts of the investor presentation to illustrate these themes, so if you could take that out or put that on your computer screen and turn to Page 2 of the presentation.

So three themes, the first of the themes; new business was very strong last quarter. Our new investment commitments for the quarter totaled 113.7 million, that was up from what was a strong prior quarter at 83.7 million.

From the standpoint of growth and investments in the quarter, we saw the 113.7 million partially mitigated by a high level of payoffs during the quarter, about 64 million. So on a net basis, the total fair value of investments grew by 37.5 million or about 11% from the prior quarter.

As I discussed last quarter, we saw a very high level of deal activity in Q4 2010, particularly in the November/December timeframe, after our last call, driven partly by the expectation of 2011 tax increases. It’s normal in our industry to see a pattern where after a particularly busy quarter we tend to see a slowdown, and we’re seeing this now. We think this is not just a Golub Capital phenomenon but a middle-market wide phenomenon.

Having said this, we expect 2011 as a whole to be another strong year for new originations. The fundamental drivers you’ve heard me talk about in prior quarters, the likelihood of a return to normal, or perhaps even strong levels of middle-market M&A activity as well as a high level of refinancing activity and link this r [inaudible] be there over the course of 2011 and in turn they’re going to drive demand for our kind of debt capital.

So that’s the first point, strong origination. Second, I want to shift and talk about mix of our assets. Our plan since our IPO has been to CHIP the mix of our assets to more unitranch, second lien, subordinated debt and equity investments, and during the quarter ended December 31, we made some good progress towards that goal.

If you look at the asset mix table on the lower left hand side of the page, the percentage of unitranch second lien sub-debt equity investments increased from 34% of the portfolio at September 31 to 41% of the portfolio at December 31.

Interestedly, this shift, it will have had a positive effect on the yield of our investment portfolio going forward. It didn’t have much impact this quarter because most of the junior debt investments we made happened to close towards the tail-end of the quarter. You can see this if you look at the yield table on the lower right hand side of the page, weighted average yield, which excludes the impact of fee amortization, that remained relatively flat quarter-on-quarter at 8.1%. But if flip quickly to Page 7 you’ll see that we are now providing some additional information that’s actually came in response to a question that we got last quarter. We’re providing some additional information on how our yields on new investments look compared to yields on investments that paid off during the quarter.

You can see it in the middle of the page. The weighted average rate on our new investments was 8.8% and this compared favorably to the weighted average rate of 7.1% on investments that paid off or were sold.

So a higher interest rates that we’re seeing on our new investments will help our weighted average yields going forward.

Third theme I want to talk about is credit. Our credit quality remains quite strong. As we did last quarter, we had realized and unrealized gains, net of realized and unrealized losses this quarter. We have only one loan in the portfolio that’s on non-accrual and it represents a very small percentage of the overall portfolio by value. And if you look at our portfolio rating table on Page 8, you’ll see that the percentage of loans in our two highest quality buckets, those rated 4 or 5, they represent over 92% of the total portfolio at 12/31. That’s actually up from 86.5% at September 30.

So I told you in prior quarters actually expect this ratings to start to look not as good, as we add more loans and we start to see a natural progression, it continues to get better. But I will reiterate what I’ve said which is we anticipate a downward migration to a degree in these statistics as we add more unitranch and junior debt assets.

I’m now going to hand it over Ross, whose going to discuss the financial performance for the quarter in more detail, and then I’m going to come back with some brief concluding remarks and open up the floor for questions.

Ross Teune

Thanks, David. As David mentioned, we had a good quarter. As David already touched on highlights on Page 2. If you want to turn to Page 3, I’ll quickly walk through the quarterly income statement.

A few highlights to note, total investment income for the quarter was $9.1 million. This was an increase of approximately 1.7 million from the prior quarter primarily due to [inaudible] average investments the funds growth that David mentioned.

On the expense side, interest expense was up from the prior quarter primarily due to the higher cost of funds on the debt we issued via our securitization. This closed back in mid-July so this was the first full quarter of the debt at a higher rate.

In addition, we had higher average debt outstanding this quarter compared to prior quarter. Professional fees increased during the quarter due to an increase in legal fees. Some consulting cost associated with our Sarbanes-Oxley implementation as well as other costs associated with being a public entity.

Base management fees and administrative service fees increased as these expenses are based on average quarterly assets, which increased again due to the funds growth.

Towards the bottom of the page, looking at net realized and unrealized gains, net realized gains were $876,000 during the quarter. This is the result of sales of approximately 13 million and lower-yielding broadly-syndicated loans. There was a small net unrealized loss of 147,000 for the quarter, which is primarily due to the sales of broadly syndicated loans which causes an unrealized loss for the quarter as the previous unrealized gain is reversed and flips to a realized loss. This offset – I’m sorry, realized gain, which offset a broader improvement in middle market loan evaluations.

Turning over to the next slide, the balance sheet, a few highlights. You can see we had total investments of 382 million as of the end of the quarter, up 37.5 million. Total cash and restricted cash available for investment was 69 million and total debt increased by about $20 million due to $20 million in new SBIC divestures.

Turning to Page 5, David mentioned in his opening remarks, we made progress during the quarter in shifting the asset mix. If you look at the chart on the right, 60% of our new origination during the quarter were in the unitranche’s second lien subordinated debt and equity investment product categories.

I’m looking at the chart at the left, at the end of period assets, as David mentioned, the end of period investments at the end of December, unitranche second lien subordinated debt and equity investment product categories increased to 41% up from 34% for the prior quarter.

Turning on to Slide 6, the investment spread analyst, you can see that our total yield increased during the quarter to 10.6% due to higher income from amortization of fees and discount as a result of the increase in repayments during the quarter.

As David mentioned, the overall yield excluding the fee amortization remain flat at 8.1%. As David mentioned it was part of our new junior debt originations that occurred at the tail-end of the quarter.

Turning over to Slide 7, looking at the top is the funds roll. On the funds rolled forward, we began the quarter with about 345 million in investments. We generated about 51 million in payoffs, funded approximately 98 million in new deals, and sold approximately 13 million in lower-yielding assets, ending the quarter with 382 million of that at that fair value.

In the middle of the slide, David kind of referred to the pricing on our new deals. The weighted average spread over LIBOR of our new investment funding was 7.1% while the weighted average rate was 8.8%. The weighted average rate takes into account LIBOR floors that exist in a lot of our new investment fundings.

In addition, the weighted average fee we received on deals was 2%. Weighted average rate and fees compare favorably to the weighted average rates and fees on investments originated in prior quarters and also compare favorably to the weighted average rates and investments that were paid off or sold.

I show in the middle of the slide, the investment portfolio remains predominately invested in floating-rate loans. In addition, we currently only have one non-accrual investment which represents less than 1% of the total investment portfolio at fair value.

Turning to Slide 8, with respect to portfolio company ratings, our credit quality remains strong with over 90% of the portfolio rated a 4 or a 5. We have only two category-two loans, one of which is non-accrual.

Consistent with prior quarters, independent valuation firms valued at approximately 25% of our portfolio. On the chart, on the right, the portfolio remains highly diversed by industry.

Turning to Page 9, as David mentioned through our increasing [inaudible] increase in our dividend of $0.32 a share, payable on March 30, to shareholders of record as of March 18.

On to the last slide, we continue to have sufficient liquidity with approximately 69 million in cash and restricted cash available for investment. In addition, we have approximately 35 million in liquid broadly syndicated loans that we anticipate selling in future periods as we find new higher-yielding opportunities to deploy this capital.

In addition, we also have available $28 million in SBIC divesture commitments that can be drawn, subject to customary SBA drawn procedures.

I’ll now turn it back to David, with some concluding remarks.

David Golub

Thanks, Ross. So in conclusion, we’re – had a good quarter. We’re well positioned to capitalize on what we think is going to be an attractive rest of 2011. Originations in December [inaudible] quarter were very strong, we think the pace is going to slow for the March 31 quarter but we continue to be optimistic about 2011. We made good progress this last quarter toward our goal of shifting the asset mix with the portfolio, more toward unitranche second lien subdebt and equity investments, expect – look for me to talk more about that in future quarters.

Credit quality remains real strong with only one non-accrual asset and a very high percentage of credits rated 4 or 5. And we’re pleased that our board approved a dividend increase to $0.32 a share. At this point, I’d like to open up the line for questions.


Thank you ladies and gentleman. (Operator Instructions). And our first question comes from the line of Jim Young with West Family. Please proceed with your question.

Jim Young – West Family

Yeah, hi. Could you talk about the relative risk and how you think about – how you thought about the new originations, which are on one hand yielding a higher averages straight of [inaudible] percents of the new investments, but it seems that you’re a little bit lower in the capital stack. And how you’re trading off that risk and reward from your perspective. And then secondly, on the new originations, can you give us a flavor as to what types of deals these were?

David Golub

Sure, the first question which is how do we look at where we want to play in at [inaudible] is a great question is a great question Jim, and I heard one to answer outside of looking at the specifics of a particular transaction. When we look at a new deal, one of the great advantages we have as a market leader in both senior debt and junior debt in the middle market as we get to pick where we want to focus our attention. And we’ll think very strategically about that question right at the outset of our examination of a new deal. Sometimes we’ll look to play only in the senior, sometimes we’ll look to play only in the junior debt and sometimes we’ll be interested in working with sponsors on multiple possibilities at the same time. The fundamental questions that we look to answer when we’re looking at junior debt opportunities, is are we comfortable that the company questions – you know, [inaudible], do we think it’s quite unlikely that the company’s going to have a problem. We’re more sensitive on the resilience question in the context of junior debt investments than we are in the context of senior debt investments. And we’re also pickier, frankly. I mean, the – it is more challenging to find a good junior debt investment than it is to find a good senior debt investment. Right now, we think there’s good value in both middle market senior and junior. It’s not always the case, there are times when we find one part of the capital stack to be overly competitive while other parts aren’t. Right now, we think that there are good opportunities in both areas.

If we shift and talk about specific’s portfolio companies, I’m not sure I want to handle that question right now. We’ve got 98 portfolio companies in the portfolio and I think if we get two granular we run the risk with this form of having some of the participates feel like we’re getting to granular, so what I would suggest is that perhaps you get in touch with me or with Ross separately and we’d happy to give you some specific examples.


And there are no further questions at this time.

David Golub

Great, we’ll thank you everyone, and Jim in the context of there being no other questions.


We do apologize, one has just come in, would you like to take it at this time?

David Golub



All right, our next question from the line of Bill Oldman with Harbridge Rye Fund, please proceed with your question.

Bill Oldman – Harbridge Rye Fund

Thank you, congratulations on a great question.

David Golub

Thanks Bill.

Bill Oldman– Harbridge Rye Fund

My question has to do with your growth and how you think about what you – I think probably will [inaudible] do to raise some more equity, capital at some point. And how you – how we as current investors should think about that in terms of what the timing of that might be, and how it relates to I think, last call you mentioned premium, some sort of premium to book value, but you also have to think about where you are with your cash and your leverage ratio, etc. So how do – how are you thinking about that as you go forward into 2011?

David Golub

You didn’t like my answer last quarter?

Bill Oldman– Harbridge Rye Fund

No, I just want to hear it again I guess.

David Golub

I’m just teasing. Look, my view on – our view on this last [inaudible] growth is very simple which is we think that it is in our existing shareholders interest if we can add additional equity capital over time, subject to a couple of key conditions. One of the key conditions is that if it be at a good price and another is a good – of the key conditions is that it be at a time when we can deploy that capital in an effective and timely way. So, you know, if one looks at our stock performance, it’s clear that all shareholders would benefit from more float and more trading activity to create additional liquidity but we’re not going to do something just to address the float and liquidity question, it’s got the two criteria’s that I just mentioned. It’s got to be for shareholders from a price standpoint and it’s got to be at a time when we have attractive timely uses for the capital.

Bill Oldman– Harbridge Rye Fund

That’s very helpful, thank you. And leverage wise, do you – are there limitations – I think there’s some structural limitations on where you can go in terms of leverage to maintain your BDC status, is that right? Can you just remind us of that? And how well – how far you’d go in terms of pushing the leverage debt to equity number?

David Golub

So, so the technical rule is that as a BDC we’re restricted to a one-to-one debt-to-equity ceiling. So that’s the technical rule. I would add [inaudible] that there’s some exception to this so for example, many BDCs with SBIC subsidiaries have applied for and received exemptive relief where SBIC debt does not count towards that one-to-one ceiling. We have applied for such exemptive relieve, we have not yet heard back from the FCC, which is normal. But we anticipate getting that exemptive relieve granted. Our approach to leverage is we believe most importantly of all, in the right kind of leverage so we’re not big fans of 364 day bank facilities, or market value triggered leverage of the sword that can get – can cause problems during downturns. We prefer to use the kinds of leverage that we are currently using which is securitization leverage. We completed $174 million debt securitization last July selling triple A rated notes at LIBOR plus 240, these are very flexible long duration no market value trigger notes. And we’re also user now of SBIC diventures, again, long-term, highly flexible, reasonably priced. We anticipate you know, utilizing these forms of leverage prospectively as well, and I stress this point, Bill:, because from our perspective, the form of leverage is actually as important or more important than the overall level of leverage. As we look at the overall level of leverage, we think that something in the 50 to 70% range is probably right with frankly a use of higher levels of leverage, prior to growing the balance sheet on the equity side, and we anticipate staying broadly in that range. Another key factor in our thinking we think that it’s safer and better to use more leverage against more senior assets and less leverage against more junior assets, so we would anticipate adjusting our overall leverage levels, depending on where we stand from a mix of our total asset standpoint.

Bill Oldman– Harbridge Rye Fund

That’s great, thank you.

David Golub

Brian, any other questions?


Yes, our next question comes from the line of Jonathon Bock with Stifel Nicolaus & Company. Please proceed with your question.

Jonathon Bock – Stifel Nicolaus & Co.

Hi, guys, just filling in for Troy Ward, just a few questions on the repayment. Could you provide a breakout of the 64 million of sales and repayments, what percentage for sales and what percentage were prepaid?

David Golub

I believe that the sales – correct me if I’m wrong Ross, were the 13 million so don’t make me do the percentages in my head Jonathon, but 13 million of the 64 million would have been sales.

Jonathon Bock – Stifel Nicolaus & Co.

Okay, and talking about the increase in the high yield issuance.

David Golub


Jonathon Bock – Stifel Nicolaus & Co.

All right, thank you. You know, based on what is perceived to be a pretty hot high yield market, could you give us some perspective on expected portfolio prepaid over the next several quarters and that middle market kind of area, where you play?

David Golub

It’s a great question, in any environment, or we’re in one like this now, in any environment where you’re seeing a tightening of credit spreads, you can anticipate that you’re going to see a higher than normal level of repayments. We have the great benefit in being a lower middle market player, we have the great benefit of not really competing head-to-head against the high yield market, and the vast preponderance of our credits. The vast preponderance of our obligors are too small to access the high yield market through an offering. But, I think that if I address your question as not just how high yield related question, but a repayment related question, our working assumption and expectation is that this year’s going to see a relatively high level of repayment activity.

Jonathon Bock – Stifel Nicolaus & Co.

Okay, great. Now, would you guys happen to have the amount of unearned fee income on your maybe earlier vintage 07, '08 type of assets in the portfolio today?

David Golub

In our schedule investments we provide par value we provide the unamortized cost. I mean the difference between those two is the unamortized fee income, you know, for the portfolio. If – so we can give it to you in the aggregate Jonathon, we can’t give it to you for specific vintage years.

Jonathon Bock – Stifel Nicolaus & Co.

No, that’s fine, I can pull that. Now then, one last question, talking about prepayment protection on those assets, do you have substantial kind of [inaudible] premium, what success fees, what do [inaudible] look like on investment that maybe will be likely paid over the next 4 to 8 quarters?

David Golub

We’re not anticipating particularly meaningful prepayment premiums on debt that gets prepaid or redeemed over the course of the coming period. In general, we see prepayment protection on junior debt not on senior debt, and because our junior debt assets you know, starting last April when we completed the IPO were relatively low, we have a relatively low portion of our overall portfolio in securities that have prepayment protection and that are not really, really new. So, I don’t think that’s going to be a big factor for us.

Jonathon Bock – Stifel Nicolaus & Co.

Okay, great, thanks.


There are no further questions at this time.

David Golub

Great, thanks everybody.


Ladies and gentlemen, that does conclude the conference call for today, we thank you for your participation and ask that you please disconnect your lines at this time.

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