Earnings Call Transcript - GBDC Q1 2026

Operator, Operator

Hello, everyone, and welcome to GBDC's earnings call for the fiscal quarter ended December 31, 2025. 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 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 GBDC's SEC filings. For materials we intend to refer to on today's earnings call, please visit the Investor Resources tab on the homepage of our website, which is www.golubcapitalbdc.com and click on the Events and Presentations link. Our earnings release is also available on our website in the Investor Resources section. As a reminder, this call is being recorded. With that, I'm pleased to turn the call over to David Golub, Chief Executive Officer of GBDC.

David B. Golub, CEO

Hello, everybody, and thanks for joining us today. I'm joined by Tim Topicz, our Chief Operating Officer; and Chris Ericson, our Chief Financial Officer. For those of you who are new to GBDC, our investment strategy is focused on providing first lien senior secured loans to healthy, resilient middle market companies that are backed by strong and partnership-oriented private equity sponsors. Yesterday, we issued our earnings press release for the fiscal quarter ended December 31, and we posted an earnings presentation on our website. We'll be referring to this presentation during the call today. I'm going to start, as I usually do, with headlines and a summary of performance for the quarter. Then Tim and Chris are going to walk you through our operating and financial performance for the quarter in detail. And finally, I'll wrap up with some observations on current market conditions and our outlook for the coming period. Let's start with three headlines. The first headline is that despite continuing industry headwinds, GBDC had an okay quarter, not great, but solid given the environment. Adjusted NII per share was $0.38, which translates to an adjusted NII ROE of 10.2%. Adjusted net income per share was $0.25 for an adjusted ROE of 6.7%, and GBDC paid a $0.39 per share distribution. So what are these headwinds? I described all four last quarter. First, lower base rates; second, tighter spreads, not just in our market, but across almost every credit asset class other than subprime. Third, muted M&A activity, although the second half of calendar '25 improved relative to the first half; and fourth, continued high levels of credit stress. The second headline is that we expect these headwinds to continue for some time, and we're planning for a challenging 2026. The third headline, consistent with our comments on last quarter's call, is that our Board of Directors revisited GBDC's dividend policy. After careful evaluation and in light of the headwinds I just described, the Board decided to reset the company's quarterly base dividend to $0.33 per share or about 9% of NAV per share. We also plan to maintain the quarterly variable supplemental dividend policy going forward. We believe this change is consistent with our long-standing dividend priorities: maintaining a stable net asset value over time, minimizing excise taxes over time, adjusting our base distribution level infrequently, and paying as high a dividend yield on NAV as sustainable, consistent with those goals. Now I'll pass the call over to Tim Topicz to discuss operating performance in the quarter in more detail.

Timothy Topicz, COO

Thanks, David. Let's begin on Slide 4. GBDC's $0.38 per share of adjusted net investment income and $0.25 per share of adjusted earnings were driven by four key factors this quarter. Let me walk through each of those in turn. First, overall credit performance generally remains solid. Approximately 89% of GBDC's investment portfolio at fair value remains in our highest performing internal rating categories. Investments on nonaccrual status remained very low at just 0.8% of the total investment portfolio at fair value. This level is well below that of our BDC peer industry average. And although adjusted net unrealized and realized losses increased to $0.13 per share, they were primarily related to fair value markdowns on a small tail of underperforming borrowers at GBDC, including $0.06 per share in markdowns on equity investments in these borrowers. The second key earnings driver, GBDC's investment income yield of 10% was down 40 basis points sequentially, mostly driven by lower base rates and to a lesser extent, lower weighted average spread across the portfolio. These negative headwinds were in part offset by the third key earnings driver, a continued decline in GBDC's borrowing costs, reflecting the impact of GBDC's predominantly floating rate debt capital structure. And finally, GBDC's earnings continued to benefit from a market-leading fee structure and one of the lowest operating expense loads in the public BDC sector. Now shifting to investment activity. GBDC's investment portfolio decreased by a modest 1.5% quarter-over-quarter to $8.6 billion at fair value. We remain highly selective and conservative in our underwriting. We closed on just 3.1% of the deals we reviewed in the quarter at a weighted average LTV of approximately 43%. We leaned on existing sponsor relationships and portfolio company incumbencies for approximately 60% of our origination volume and made loans to 18 new borrowers. We continue to leverage our scale to lead deals, acting as sole or lead lender in 96% of our transactions in the quarter. And we continue to focus on the core middle market, which we believe continues to offer better risk-adjusted returns potential than the larger borrower market. The median portfolio company EBITDA for our originations in the quarter was $81 million. Continuing on Slide 4, let me briefly summarize distributions paid and certain balance sheet changes in the quarter. Total distributions paid in the quarter were $0.39 per share. As David mentioned at the outset, our Board of Directors has updated the base distribution level to $0.33 per share. And in addition, we'll evaluate on a quarterly basis a variable supplemental distribution that will seek to distribute 50% of the earnings in excess of $0.33 per share. Continuing on with other balance sheet updates. Net debt to equity remained stable quarter-over-quarter, ending at 1.23x within our targeted range of 0.85x to 1.25x. During the quarter, we continued our opportunistic repurchasing of GBDC shares on an accretive basis. Total shares repurchased in calendar year 2025 grew to 5.5 million shares or $76.5 million in aggregate value. In the quarter, these capital management transactions resulted in $0.01 per share of accretion to net asset value. I'm going to turn it over to Chris now to take us through our financial results in detail.

Christopher Ericson, CFO

Thanks, Tim. Turning to Slide 7. You can see how the earnings drivers Tim just described and distributions paid in the quarter translated into GBDC's December 31, 2025, NAV per share of $14.84. Adjusted NII per share of $0.38, a $0.39 per share base distribution paid out during the quarter, adjusted net realized and unrealized losses of $0.13 per share and $0.01 per share of NAV accretion from share repurchases. Together, these results drove a net asset value per share decrease to $14.84. Turning to Slide 10. This details our origination activity for the quarter. Net funds growth defined as funded commitments and delayed draw term loan and net revolver draws less exits and sales and net of market value changes in portfolio fair value decreased by $130 million for the quarter. This was primarily due to repayments and exits outpacing funded new originations and delayed draw term loans and net revolver draws. Looking at the bottom of the slide, the weighted average rate on new investments was 8.6%, a decline of 30 basis points from the prior quarter, primarily the result of lower base rates at origination. Investments that repaid in the quarter were at a weighted average rate of 9.4%. Slide 11 shows GBDC's overall portfolio mix. As you can see, the portfolio breakdown by investment type remained consistent quarter-over-quarter with one-stop loans continuing to represent around 87% of the portfolio at fair value. Slide 12 shows that GBDC's portfolio remains highly diversified by portfolio company with an average investment size of approximately 20 basis points across 420 distinct portfolio companies. Additionally, our largest borrower represents just 1.6% of the debt investment portfolio and our top 10 largest borrowers represent just 12% of the portfolio. We believe GBDC is one of the most diversified and granular portfolios in the public BDC sector, modulating credit risk through position size. As of December 31, 2025, 92% of our investment portfolio consisted of first lien senior secured floating rate loans to borrowers across a diversified range of what we believe to be resilient industries. The economic analysis on Slide 13 highlights the drivers of GBDC's net investment spread of 4.6%. Let's walk through the slide in detail. I'll start with the dark blue line, which is our investment income yield. As a reminder, the investment income yield includes the amortization of fees and discounts, which decreased approximately 40 basis points sequentially to 10%. Our cost of debt, the teal line, decreased approximately 20 basis points to 5.4%, reflecting our approximately 80% floating rate debt funding structure. Net-net, GBDC's weighted average net investment spread, the gold line, declined modestly quarter-over-quarter to 4.6%. Moving on to Slides 14 and 15, let's take a closer look at our credit quality metrics. On Slide 14, you can see that nonaccruals increased quarter-over-quarter to 80 basis points of total investments at fair value and 1.3% of total investments at amortized cost, but remain at very low levels in absolute terms and relative to the broader BDC sector. During the quarter, the number of nonaccrual investments increased to 14 investments as the return to accrual status of one portfolio company investment following a restructuring was offset by the addition of six portfolio company investments during the quarter. Slide 15 shows the trend in internal performance ratings. As Tim noted earlier, approximately 89% of the total investment portfolio remained in our top two internal performance rating categories. The proportion of investments rated 3, which signals a borrower may have the potential to or is expected to perform below expectations as compared to that underwriting, increased modestly to 10.1% of the total investment portfolio. The proportion of investments rated 1 and 2, which are the investments we believe are most likely to see significant credit impairment, remained very low at just 1.3% of the portfolio at fair value. As we usually do, we're going to skip past Slides 16 through 19. These slides have more detail on GBDC's financial statements, dividend history and other key metrics. I'll wrap up this section by reviewing GBDC's liquidity and investment capacity on Slides 20 and 21. First, let's focus on the key takeaways on Slide 21. Our debt funding structure remains highly diversified and flexible. Our debt maturity profile remains well positioned with 49% of our debt funding in the form of unsecured notes across a well-laddered maturity profile. Consistent with our asset liability matching principle, 81% of GBDC's total debt funding is floating rate or swapped to a floating rate, levels that we believe are among the highest in the sector. GBDC is well positioned to continue to modulate the impact of lower interest rates on investment income through offsetting lower interest expense on its borrowings. And overall, our liquidity position remains strong, and we ended the quarter with approximately $1.3 billion of liquidity from unrestricted cash, undrawn commitments on our corporate revolver and the unused unsecured revolver provided by our adviser. Now I'll hand it back over to David for closing remarks.

David B. Golub, CEO

Thanks, Chris. I spoke at the beginning of this call about the four headwinds our industry has been facing: lower base rates, tighter spreads, muted M&A, and a protracted credit cycle. I want to shift now to talk about the impacts of these headwinds. There are likewise four I want to highlight. First, private credit ROEs have come down, including across the BDC space. By our estimates, public BDC net returns are on average about four percentage points lower year-over-year based on earnings reports through September 30. We've seen similar findings from consultants who cover the broader private credit fund space. Now this isn't a surprise, funds of floating rate loans are necessarily impacted by lower base rates, lower spreads, and credit losses. Second impact, dispersion between good managers and let's call them not-so-good managers has increased. There's always been a lot of alpha in private credit. Now it's particularly high. Again, not a surprise; the overwhelming driver of alpha in private credit comes from minimizing realized credit losses, and periods of credit stress put this to the test. Third impact, the headwinds have generated a lot of press, maybe not as colorful as last quarter's cockroaches, but still plentiful. And fourth, we've seen shareholders respond. We've seen shareholders respond by revaluing public BDCs and by increasing redemptions from semi-liquid BDCs. So where does the puck go from here? One of the advantages that comes with age and experience is pattern recognition. Now this moment doesn't feel exactly like prior periods, but there are some elements that ride. So I want to share my take. After a period of growth and new entrants, the private credit industry is maturing and will now, in my judgment, go through a Darwinian moment. Some firms will adapt and thrive, and some won't. This isn't a bad thing. We've been here before. And in some ways, this Darwinian moment feels a little overdue. And it's true, we're warriors, not optimists, but this doesn't mean we're pessimists either. Based on our experience through multiple cycles over the last 30-plus years, this is actually the kind of environment where we and other private credit specialists outperform. We have a playbook for doing that. It's a playbook that has served us well for decades, including through a number of periods more stressful than this one. The playbook involves being very selective when making new loans, focusing on early detection of borrower underperformance, working with sponsors for early intervention, and addressing problems proactively. Our approach, it's really all about minimizing realized credit losses and being ready to play offense as opportunities arise. We're confident that this playbook will once again serve us well as we manage through this one. With that, operator, could you please open the line for questions?

Operator, Operator

Your first question comes from the line of Finian O'Shea of Wells Fargo.

Finian O'Shea, Analyst

So David, to start, the big topic, of course, is software. You're not only one of the leading private credit firms but one of the leading early investors in software. So of course, we'll ask you about that. I know this is a tough one, but any thoughts on the recent developments from AI firms that have spooked the software market and of course, the private credit market. Do they give you concern in your software portfolio that's, of course, more enterprise SaaS-based? Maybe concern from what happened in the last couple of weeks, but also concern as to what the progress from AI might look like in a few years from now when a lot of these credits will still be on your books?

David B. Golub, CEO

Thanks, Fin. Yes, let's discuss the current situation with SaaSpocalypse. There is a genuine issue here; this goes beyond a mere market reaction. I see two main insights behind the recent market movements. First, AI is progressing faster than many anticipated, particularly in the development of tools that simplify coding. Recent advancements serve as a clear example of this trend. Second, certain software companies may be at risk of being disrupted by AI due to this rapid development. We align with both viewpoints and agree that the market recognizes there will be both winners and losers in the AI landscape. It is important for everyone to approach the situation with humility, as no one has all the answers. This technology is new, and its growth has even surprised experts in the field. I want to elaborate on our thoughts regarding the potential winners and losers, but first, I'll share what shapes our perspective. We have been investing in software companies for 20 years, completing 1,000 software deals in that timeframe, and we have only experienced five defaults, which is just 0.25% of our $145 billion in software commitments. Our team is highly skilled, with 25 dedicated professionals and over 200 years of collective experience across various credit and technology cycles. We have developed our own underwriting method, starting with a proprietary risk mapping framework that guides us toward attractive business models and away from those with vulnerabilities. Our proprietary diligence templates help us test resilience, including assessments of AI risk, which we have been monitoring for years. So, what do we favor? We prefer enterprise-critical platforms that share certain characteristics: they involve sticky, embedded workflows, have long implementation cycles, and make it difficult for clients to switch to competing products. We also favor market leaders with proprietary data sets, which are often unique and challenging for AI competitors to duplicate. Additionally, we like to collaborate with sponsors who are knowledgeable and proactive about AI, pushing their companies to stay ahead of disruptions. On the other hand, we avoid software that focuses on content creation, analytical overlays, or tool-based solutions, as we anticipate many failures in these areas. We continuously review our portfolio and believe in identifying problems early. During turbulent market conditions like the current ones, we promptly reassess our holdings. So far, we feel quite confident about our portfolio. While we acknowledge that there is some AI risk, we understand the need to remain humble and vigilant in our evaluations. Overall, we are optimistic about how our portfolio is positioned at this time.

Finian O'Shea, Analyst

Very helpful. I appreciate all that information. I will continue to follow up on this topic. Many inquiries question the loan-to-value ratios and their implications. It seems that you and your peers are still investing in software under typical capital structure parameters, but that reflects last quarter's information. Has there been a similar pause in the public markets, whether on your end or in private equity? More importantly, if that pause does occur, does it increase the risk, similar to the situation in healthcare services a few years back, where models relied on roll-ups for achieving EBITDA synergies? Is there a comparable element in software where a higher cost of equity and debt could become problematic?

David B. Golub, CEO

I think it's too early to draw conclusions, but let's consider a few different scenarios. In one scenario, it becomes significantly more difficult for software companies, even strong ones, to secure capital in the broadly syndicated loan market or the high-yield market. This could actually benefit private credit specialists like us, as it would create more opportunities, lead to better pricing, and result in improved capital structures. However, we and others will need to make choices about which transactions are truly resilient and which are not. I'm confident we can navigate that. I see this scenario as generally positive. The second scenario is that this is just a temporary setback and the market rebounds quickly, returning to previous conditions. I find that unlikely, as the insights regarding AI risk suggest we may not see a rapid recovery. The third scenario is a middle ground where the market becomes more selective about which companies and credits it favors. I believe this third scenario is where we are headed in the long term, and I suspect we will first go through the first scenario before reaching the third.

Ethan Kaye, Analyst

Firstly, in your prepared remarks, you suggested you're planning for a challenging 2026. Just hoping you can kind of dig into that a bit. Is that more broadly related to the leveraged lending sector? Do you also foresee some kind of budding challenges at GBDC? And is this a commentary on both earnings and credit or one or the other? Just any expansion on that comment would be helpful.

David B. Golub, CEO

Sure. So as I mentioned in the prepared remarks, we think that the market environment right now is challenging. SOFR is down; it's probably going to go down a little more. Spreads are at pretty much a 5-year low. And while they feel like they've stabilized some, the back book is still not at the same level that the front book is at. M&A, which everybody went into this year saying, oh, this year, it's finally going to happen, we're going to see the breaking the dam, I'm still seeing a muted M&A environment. And I'd like to see more. I'm not saying it won't happen; I'm saying we haven't seen it yet. And finally, on credit, I think we are in a credit cycle. I've been saying this now for many quarters. I think we're seeing elevated levels of credit stress in both the broadly syndicated market and in the private credit market, and everybody is working through their issues, including us. I think we're well positioned, Ethan, relative to the industry. But I think there's been a fair amount of happy talk in the industry, and I want to be very candid with you and with our investors that this is a challenging environment right now. It's harder for us to produce the ROEs that we want to be producing in the current environment than it's been in recent years. That doesn't mean that I'm not optimistic about GBDC's long-term prospects. I am. But I think part of our job is being very candid about when we're in an environment with headwinds and when we're in an environment with tailwinds.

Ethan Kaye, Analyst

Understood. I appreciate that. And then one other I wanted to ask a bit about the deployment outlook. I know you kind of just mentioned you're not seeing a broad recovery in M&A yet. But I guess, if you do see that, right, leverage is kind of towards the top of the range, and you guys are actively buying back shares here, which looks prudent. But hoping you can give a bit of color on how you're kind of weighing these competing capital allocation opportunities in the face of maybe finite capital resources.

David B. Golub, CEO

So I think you said it very well. We've got to balance multiple goals. In the context of shares trading at a meaningful discount to NAV, we will continue to be active in repurchasing shares because we think that's good for shareholders. We also, in the context of portfolio turnover, will be looking for the best opportunities to redeploy that capital in attractive new loans. So we've got multiple things that we're going to be doing at the same time. We've got to find the right balance.

Robert Dodd, Analyst

I'm hesitant to focus too much on the software aspect, but what do you think about the risks posed by unforeseen factors? When you discuss your advantages, often referred to as proprietary entrenched software and sticky data, what are the chances that these advantages may not be as substantial as they currently appear? It seems to be a trend across the market where both you and your competitors highlight similar advantages. To be straightforward, AI agents are becoming increasingly adept at collecting data and utilizing it for their own needs. What do you perceive as the risks that these advantages might diminish, particularly with the rapid development of AI? Some advancements are occurring more quickly than experts predicted just a few years ago. Is there a possibility that, in two years, these technologies could be better at overcoming those advantages than we currently anticipate?

David B. Golub, CEO

That's a great question, Robert. Let's consider this from a few different angles. In a scenario where AI advancements continue rapidly, companies with many customers and strong relationships may face risks beginning with slower growth. This initial effect could lead to lower equity valuations tied to these slower growth trajectories, which would include a decrease in acquiring new clients and possibly losing some existing ones. The next level of risk could be significant enough that it results not just in slower growth but negative growth, meaning a drop in revenues. However, for strong software companies, an immediate collapse seems unlikely—more of a gradual decline than an outright failure. The most extreme scenario would be if AI develops such a powerful capability that it swiftly replaces existing products. I consider this the least likely of the three outcomes. As we assess the current situation, it indicates that we should prioritize observing the equity market's response first, followed by the credit market. For AI to truly pose a risk to credit markets, we would need to encounter the second or third scenario, moving beyond the first one in a significant way.

Robert Dodd, Analyst

I appreciate that insight. Following up on that point, in scenario one, if you invest in these assets, they might grow slower and equity holders could lose capital, but there might be an opportunity to exit. Do you anticipate doing fewer software deals going forward considering the risk-return? The deals that are being completed still seem to be fairly priced, though that pricing is widening a bit. Given that the risks could be quite significant, do you foresee a shift in the amount of software you’d want to include in the portfolio over the next five years?

David B. Golub, CEO

So my expectation, Robert, is that the market is going to reprice risk. So it's hard to answer that question without making an assumption about how the market digests information and what that means in terms of go-forward spreads. The broadly syndicated market has repriced spreads. You're not going to see new software deals come out at the same spread levels that existing borrowers are at, where their loans are trading at 95 or 90 or 85. The market is saying those deals are underpriced. So I think it's hard to answer your question without seeing some more data about how private markets digest what's going on right now and in particular, what that means for pricing and structure and leverage in new deals. I will be surprised if Golub Capital doesn't continue to be a leading software lender. We're very good at this. We've got a deep set of relationships with the sponsors who are best in the business at this. But in terms of answering your question about a specific capital deployment goal, I think it's premature to answer that.

Paul Johnson, Analyst

Just sticking with software here. Can you just maybe talk about, in general, the software trends, maybe sort of like pre-AI disruption risk or kind of the disruption risk that's getting priced into the market today. I ask is the Golub Altman index or the middle market index that you guys put out. I noticed that the tech sector revenue growth has kind of fallen off over here over the last several quarters. And what has kind of been the underlying trends, I guess, broadly for that industry? And maybe kind of what's driving the slower growth there?

David B. Golub, CEO

Sure. Thanks, Paul. It's a great question, and I think important for us all to be focused on some of those trends in addition to be thinking about longer-term AI risks. So if we look at the Golub Altman index numbers in sequence, what we see is that the technology/software area has been, over time, persistently growing faster than the rest of our portfolio. Having said that, like the rest of the portfolio, we've seen some slowdown in year-over-year growth in that sector. And if you then kind of peel back this onion some more, what we see is selectively a slowdown in bookings. This isn't just true in the Golub Capital portfolio. I think across software, in both larger companies and midsized companies, we've seen over the course of the last two years, some slowdown in new bookings trends. Said differently, corporate clients are moving more slowly to adopt and pay for new software products relative to the prior period. So why is that? Well, it's hard to figure out that next layer of the onion because there's actually a bunch of different reasons. Part of it is companies dealing with cost pressure. Part of it is companies digesting prior investments in tech. I don't think it's a generalized move away by corporate customers, a generalized move away from adopting new software applications and using them to improve their businesses. I think that's continuing. I think we're seeing a bit of a cyclical pattern right now where software bookings are lower than they've been. And I think that will likely come back. Thank you, operator. I just want to thank everybody for their time this morning. As always, if you have any questions that we didn't get to today, please feel free to reach out, and we look forward to following up with you next quarter.

Operator, Operator

Ladies and gentlemen, this concludes today's call. We thank you for participating. You may now disconnect your lines.