Goldman Sachs BDC Inc

NYSE:GSBD

Earnings Call Transcript

[John Silas, executive]

Good morning. This is John Silas, a member of the Investor Relations team for Goldman Sachs BDC, Inc., and I would like to welcome everyone to the Goldman Sachs BDC, Inc. Fourth Quarter and Fiscal Year-end 2024 Earnings Conference Call. [Operator Instructions]

Before we begin today's call, I would like to remind our listeners that today's remarks may include forward-looking statements. These statements represent the company's belief regarding future events that by their nature, are uncertain and outside of the company's control. The company's actual results and financial condition may differ possibly materially from what is indicated in forward-looking statement as a result of a number of factors, including those described from time to time in the company's SEC filings. This audio cast is copyrighted material of Goldman Sachs BDC, Inc. and may not be duplicated, reproduced or rebroadcasted without our consent.

Yesterday, after the market closed, the company issued an earnings press release and posted a supplemental earnings presentation, both of which can be found on the homepage of our website at www.goldmansachsbdc.com under the Investor Resources section and which include reconciliations of non-GAAP measures to the most directly comparable GAAP measures. These documents should be viewed in conjunction with the company's annual report on Form 10-Q filed yesterday with the SEC. This conference call is being recorded today, Friday, February 28, 2025 for replay purposes.

I'll turn the call over to Alex Chi, Chief Executive Officer of Goldman Sachs BDC Inc.

[Alex Chi, executive]

Thank you, John. Good morning, everyone. Thank you for joining us for our fourth quarter -- I'm here today -- our Co-Chief Executive Officer, Tucker Greene -- our Chief Financial Officer.

I'll begin the call by -- activity, providing a brief overview of our fourth quarter results and then discussing strategic actions we took this quarter to best position GSBD for the long run. I'll then turn the call over to David and Tucker to describe our portfolio activity and performance in more detail. Before handing it off to Stan to take us through financial results. And then finally, we'll open the line for Q&A.

Our Direct Lending Platform had another strong year in 2024, which directly benefited GSBD. For the year, our Direct Lending Americas platform committed a total of approximately $13 billion, and deployed approximately $10.8 billion, which is more than double the activity in 2023, all the while remaining selective and disciplined in our approach in spite of tepid M&A market. While larger cap opportunities are experiencing greater pressure on spreads and terms given robust conditions in the public credit market and increased competition. The breadth of our platform allows us to seek attractive risk-adjusted returns for GSBD and other vehicles through our middle market origination capabilities, which also benefits from the differentiated origination capacity of being part of Goldman Sachs.

Along those lines, the fourth quarter marked another effective quarter for GSBD with respect to both new investments and harvest activity. We continue to increase the percentage of first lien positions in the portfolio moving away from second lien unsecured debt and preferred equity, while dramatically reducing exposure to annual recurring revenue loans. As we recycle older vintages, we've increased the percentage of first lien positions including first lien/last-out unitranche positions from 89.4% in December 2021 to 96.3% at year-end 2024.

Turning to our fourth quarter results. Our net investment income per share for the quarter was $0.48, and net asset value per share was $13.41 as of quarter end, a decrease of approximately 1% relative to the third quarter NAV which is largely due to net realized and unrealized losses in the quarter. Now with respect to the strategic actions that we took, our dividend has been set at a -- and was paid recently over the past -- our investment income for the quarter continued to exceed our $0.45 per share distribution. We've evaluated changes to our dividend policy and incentive fee structure to adapt to market dynamics, including current base rate and credit spread environment.

During these factors, our Board of Directors have approved the following changes to our dividend structure and incentive fee. First, beginning with the first quarter dividend of 2025 -- dividend to a base of $0.32 per share, introducing supplemental -- permanently reduced the quarterly incentive fee on both income and capital gains from 20% to 17.5% for the periods beginning with the calculation for the quarter ending March 31, 2025. Importantly, we anticipate making these distributions while aiming to remain below our targeted debt-to-equity leverage rate of -- relatively muted from our vantage point, we do expect an increase in deal volumes as 2025 unfolds, driven by continued deployment of private equity dry powder and pressure by GPs to distribute capital to LPs.

With that, let me turn it over to my co-CEO, David Miller.

[David Miller, executive]

Thanks, Alex. In 2024, GSBD committed its highest level of capital since integration of the BD complex 3 years ago with approximately $1.3 billion in new commitments. This is 3x more than new investment commitments of $423 million made in 2023. Of the commitments made to new portfolio companies during the year, GS played a lead role in approximately 71% of the deals. Not only were new investment commitments to spotlight, but we also had the highest prepayment year since integration, totaling $858.8 million. Of the investments in the portfolio of companies that were fully repaid or exited, approximately 82% for 2021 are older vintages, which allowed us to harvest older vintage investments and recycle into new originations.

During the quarter, we made new investment commitments of approximately $173 million across 18 portfolio companies, comprising of 6 new and 12 existing portfolio companies. 99.9% of our originations during the quarter were in first lien loans, which continues to reflect our bias and primarily maintaining exposure to investments that are higher up in the capital structure. During the quarter, we acted as co-lead arranger in the acquisition of [ Presomac by Centerbridge ]. Pressamac is a leading manufacturer of medium to high precision components to industries in the aerospace, defense and semiconductor industries -- and the largest lender in [ Arcline's ] acquisition of rotating machinery services.

This is an illustration of the credit platform deep sponsor relationships that generate repeat deal flow. Rotating machinery services is an independent provider of aftermarket repairs and engineered solutions for the turbomachinery equipment. Sales and repayment activity totaled $187.5 million during the quarter. Primarily driven by the full repayment and the exit of our investments in 9 portfolio companies.

Turning to portfolio composition. As of December 31, 2024 -- at fair value comprised of 97.6% senior secured loans, including 90.5% first lien -- and finally, turning to asset during the quarter, Bayside OpCo, LLC, doing business as Pro PT first lien senior secured debt position was restored to accrual status due to improvement in performance. At the end of the fourth quarter, investments on nonaccrual status decreased to 2% -- and remained at 4.5% of the total investment portfolio at amortized cost, which is the same as this quarter.

We are cognizant that recent headlines on tariffs various countries have been top line for investors. While there are plenty of uncertainties regarding the implementation and ultimate impact of tariffs, our preliminary analysis of borrower exposure in the GSBD portfolio reflects low or a limited potential exposure on a dollar basis. A vast majority of our portfolio companies are domiciled in the U.S. and serve U.S. customers with muted exposure to global supply chains.

I will now turn the call over to Stan Matuszewski to walk through our financial results.

[Katherine Schneider, executive]

Thank you, Tucker. We ended the fourth quarter of 2024 with total portfolio investments at fair value of $3.5 billion, outstanding debt of $1.9 billion and net assets of $1.6 billion. Our ending net debt to equity ratio as of the end of the fourth quarter was 1.17x, which continues to be below our target leverage of 1.25x. At quarter end, approximately 65.1% of our total principal amount of debt outstanding was in unsecured debt. On February 7, 2025, GSBD brought $365 million under its senior secured revolving credit facility. The proceeds were used to repay $360 million in aggregate principal amount outstanding plus accrued and unpaid interest on its 3.75% senior notes, which matured on February 10, 2025. The repayment resulted in full satisfaction of the company's obligation under the notes.

Following this drawdown, the company has approximately $626 million of borrowing capacity remaining under the revolving credit facility. If you recall, GSBD issued a 3-year unsecured note in March of 2024 to take advantage of the attractive rate environment and to further diversify our financing sources. Given the current active market, we continue to assess opportunities for potential future issuances based on market conditions. Before continuing to the income statement, as a reminder, in addition to GAAP financial measures, we also reference certain non-GAAP or adjusted measures. This is intended to make our financial results easier to compare to results prior to our October 2020 merger with Goldman Sachs Middle Market Lending Corp., or MML.

Non-GAAP -- were $56.6 million and $55.6 million as compared to $68.2 million and $67.2 million, respectively, in the prior quarter. On a fair basis, GAAP net investment income was -- Excluding the impact of asset acquisition accounting -- with MMLC, adjusted net investment income for the quarter was $0.47 per share equating to an annualized net investment income yield on book value of 14.0%. Total investment income for the 3 months ended December 31, 2024, and September 30, 2024, was $103.8 million and $10.4 million respectively -- including these onetime adjustments, Q4 2024 income -- our undistributed taxable investment income or spillover as of 12/31 2024 is approximately $152 million or $1.30 on a per share basis. As Alex mentioned earlier in the call, we plan to distribute $0.16 per share in each of the next 3 quarters.

With that, I'll turn it back to Alex for closing remarks.

[Alex Chi, executive]

Thanks, Stan, and thanks, everyone, for joining our earnings call. We're optimistic about a more active environment in the year and remain focused testing in new attractive opportunities using the full breadth of the Goldman Sachs [ platform ].

So with that, let's open the line for Q&A.

[Operator]

[Operator Instructions] We'll go to our first question from Finian O'shea with Wells Fargo Securities.

[Finian O'Shea, analyst]

Alex, can you -- I think you had a comment on reducing your target leverage or running lower for a while. Can you expand on that sort of the why and how much?

[Alex Chi, executive]

Look, with respect to our leverage, my reference there was just to make sure that we're monitoring it closely in context of the spillover. Our target leverage, as you know, has always been 1.25x. We finished the quarter at 1.17x and we don't anticipate any meaningful increases from there.

[Finian O'Shea, analyst]

Okay. But yes, I just trying to -- I guess, think about the new $0.32, right? You probably run with a little bit of headroom to that. Your target leverage, you've kind of generally run with a little bit of headroom to that too anyway. So it's getting at is leverage going to become meaningfully more conservative than that target and drive, say, earnings closer to that that $0.32 seeing if we should think that way.

[Alex Chi, executive]

That's a good question, Fin. We don't anticipate that. We don't feel that we need to meaningfully increase our leverage in order to meet our dividend. I think we restructured our dividend with a new base of $0.32 per share, again, just reflecting the current environment with respect to base rates and spreads. And that's a dividend that we believe will be stable over time. And so we'll supplement that with supplementals as we described. And then we have the next 3 quarters spill over. And so having additional leverage capacity is just 1 component of it. We'll continue to also just meet that with the payments and also with with some additional edge capacity as you said. But again, we're not planning to increase our coverage at all.

[Finian O'Shea, analyst]

Okay. No, that's helpful. Can you give a picture on like, say, how many names or what portion of the book that you are seeking to rotate out of or exit?

[Alex Chi, executive]

Yes. With respect to just the overall portfolio, about 60% of our portfolio will be just --

[Operator]

[indiscernible]

[Unknown Analyst]

-- I mean is all of that -- it's not always taken into account when people [ ask ] dividends. But can you give any color --

[Stanley Matuszewski, executive]

It's Stan. Yes, when we model that to assess our ability for the fund to cover, we did model in some recycling in the portfolio, for example --

[Unknown Executive]

-- some additional -- we also modeled some additional flexibility to the extent that we have any additional realized/unrealized losses. But again, we spent a significant amount of time factoring in all the different considerations, including the maturity next year.

[Robert Dodd, analyst]

Got it. On the -- you gave a little bit of color on tariffs. Do you have exposure to contracting, et cetera? Obviously, I don't think you ever want to direct, but software businesses is in there and some of those -- so I mean, do you -- any thoughts on those separate from tariffs? Do you have potential exposure to that side of policy changes in [ D.C. ] right now?

[Unknown Executive]

It's a great question. It's something that we've been very focused on. So we did conduct a name-by-name analysis of our entire portfolio across our direct lending platform. Look, it's impossible to know for sure what the exact impact is going to be. We did look at specific government contract exposure, supply chains, our analysis of any first order or second order effect is at a low to mid-single-digit percentage of our portfolio has exposure to any potentially meaningful impact. Just as a reminder, this is a predominantly U.S. portfolio, doing business with U.S. customers. Primarily software, services-oriented businesses. So we don't have any significant supply chain exposure into the countries on the spotlight nor do we have any significant exposure to government contracts.

[Robert Dodd, analyst]

Got it. And then just 1 quick one. On the PIK, PIK up from 9% to 15%, 12%, if we normalize from some things. But that's still an increase. we assume that increase is not originated in a lot of [ things ] in the fourth quarter or third one. So that would imply that's loan modifications. So can you give us any color on what the weighted average revenue and EBITDA growing? Is there --

[Unknown Executive]

Rating 3 and 4 has actually come down quarter-over-quarter from around 9.5% for both buckets to 6.8%. And if you look at the metrics, such as leverage and interest coverage, we've seen some slight improvements in those as well. So I'd say, generally, credit health of the portfolio broadly is stable to improving. The other thing I'd just point to is that where we see PIK even in these instances of either the restructurings where there may be -- as well.

[Operator]

We'll go next to Mark Hughes with Truist.

[Mark Hughes, analyst]

Yes. Thank you. This is related to question and I missed some of the earlier calls, so I apologize, but I think you said you had a desire to reduce your exposure to ARR loans. I think what about 20% of the portfolio is in software. Can you talk about the ARR exposure now and where you would like that to go to?

[Unknown Executive]

Yes. I mean we don't disclose that exactly, but it's -- exposure over the last year or 2, it's less than half what it was when we integrated the platform. So it's a focus of ours. In addition to that, I'd say we're being very selective on what we choose to do on a going-forward basis across the platform, for example, we continue to be active participants in that space, but these are very high-quality companies, average rule of 50 plus. And when you say, well, we what would chain the bar from a recurring revenue perspective is certainly over that rule of 50, and we only did 2 of them on the platform last year. So it's a very selective bias, which is resulting in a much lower exposure in GSBD from a recurring revenue perspective.

[Mark Hughes, analyst]

Very good. And when you look at the spreads, maybe spread compression over the last 2, 3 quarters, is any of that due to more competition from new or other direct lenders or is that more just broader market forces, BSL market, et cetera?

[Unknown Executive]

I think you had to split it into large gap in middle market no question, we've seen spread compression would say that whether its the ongoing supply-demand imbalance with significant capital going into the branding private credit space without the corresponding M&A flow. And then in the large cap space, yes, we have seen much more robust activity in the BSL space. But having said that, we remain optimistic about a pickup of activity later in the year, all -- but clearly, with more M&A flow, that will help the dynamic there.

[Mark Hughes, analyst]

And then could you talk about the prospects for repricing activity -- repricing?

[David Miller, executive]

I mean look at the block, we think the bulk of the repricing activity has happened in the portfolio over the last 12 to 18 months, as you've seen that come down but there could be select instances on a going forward basis where stuff gets repriced. And generally, where you're seeing that today is some sort of credit-enhancing event, either the company has continued to perform well, they're selling the division paying down some of the debt. So leverage is going down. In exchange for that, they're asking for repricing. But I think the bulk of it has happened in the book today.

[Unknown Executive]

And if you look in the fourth quarter and look at the use of proceeds for our deployment activity, more than half of it was actually were new deals, which were leveraged buyouts from acquisition financing and just about 1/3 of it was related to refinancings and repricings.

[Operator]

[Operator Instructions] We'll go next to Derek Hewett with Bank of America.

[Derek Hewett, analyst]

Most of my questions were already addressed. But could you talk about the incentive fee and if credit remains relatively stable from here with the kind of the full load of the incentive fee in the first quarter numbers?

[Unknown Executive]

Yes. So I would say in terms of the incentive fee, as you've noted in our remarks and in our press release, right, we are reducing that from 20% down to 17.5%, but we are also maintaining the look back as we think that's a shareholder-friendly. And so with the look back, as you're well aware, right, there's variability over time. So certainly, I think that with the upcoming quarters we have the ability to earn that fee obviously subject to the cap or the look back over time as well as any future kind of gains or losses as well. But it will fluctuate, right, over time as a result of -- I'm sure you're aware

[Operator]

And this does conclude today's conference call. You may now disconnect.