Earnings Call Transcript - GSBD Q4 2024

John Silas, Investor Relations Team Member

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. Please note that all participants will be in listen-only mode until the end of the call when we will open the line for questions. 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 those forward-looking statements 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 reviewed in conjunction with the company's annual report on Form 10-K filed yesterday with the SEC. This conference call is being recorded today, Friday, February 28, 2025, for replay purposes. I'll now turn the call over to Alex Chi, Co-Chief Executive Officer of Goldman Sachs BDC, Inc.

Alex Chi, Co-Chief Executive Officer

Thank you, John. Good morning, everyone, and thank you for joining us for our fourth-quarter and fiscal year-end 2024 earnings conference call. I'm here today with David Miller, our Co-Chief Executive Officer; Tucker Greene, our Chief Operating Officer; and Stan Matuszewski, our Chief Financial Officer. I'll begin the call by discussing our 2024 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 our financial results. 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 a tepid M&A market. While larger cap opportunities are experiencing greater pressure on spreads and terms given robust conditions in the public credit markets 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 investment commitments 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 fixed $0.45 per share rate since our IPO in 2015 and was paid consistently over the past 39 quarters. While our net 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 the current base rate and credit spread environment. Considering 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 and on an ongoing basis, we are resetting the quarterly dividend to a base of $0.32 per share and introducing supplemental variable distributions each quarter in an amount of at least 50% of the company's NII in excess of the amount of the base dividend. Moreover, with an approximate current balance of $152 million in undistributed taxable income or spillover as of the end of the fourth quarter, the Board of Directors has declared a special dividend of $0.16 per share payable to shareholders of record as of March 31, 2025, and has authorized two additional $0.16 per share special dividends, which we expect to pay in the second and third quarters of this year. This results in a per-share dividend of at least $0.48 per share for the next three quarters before any supplemental dividends. Second, we will continue to maintain a shareholder-friendly incentive fee structure including the current three-year look back. However, we are amending the incentive fee to permanently reduce the quarterly incentive fee and cap on both income and capital gains from 20% to 17.5% for 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 ratio of 1.25 times. Looking ahead, while first-quarter deal activity overall has remained 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 distributors to free up capital to LPs. With that, let me turn it over to my Co-CEO, David Miller.

David Miller, Co-Chief Executive Officer

Thanks, Alex. In 2024, GSBD committed its highest level of capital since integration of the BDC complex three years ago, with approximately $1.3 billion in new commitments. This is 3 times 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% were 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 six 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 Precinmac by Centerbridge. Precinmac is a leading manufacturer of medium to high precision components for industries in the aerospace, defense, and semiconductor industries. We also served as administrative agent and lead arranger in the largest lender in Arcline's acquisition of Rotating Machinery Services. This illustrates the credit platform’s deep sponsor relationships that generate repeat deal flow. Rotating Machinery Services is an independent provider of aftermarket repairs and engineered solutions for 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 nine portfolio companies. Turning to portfolio composition, as of December 31, 2024, total investments in our portfolio were $3.48 billion at fair value, comprised of 97.6% senior secured loans, including 91.5% first-lien, 4.8% first-lien/last-out unitranche, 1.9% in a combination of preferred and common stock, 1.3% second-lien debt, as well as a negligible amount of unsecured debt. With that, let me turn it over to our Chief Operating Officer, Tucker, to discuss portfolio fundamentals and credit quality.

Tucker Greene, Chief Operating Officer

Thanks, David. At the end of the fourth quarter, the company held investments in 164 portfolio companies operating across 39 different industries. The weighted average yield of our investment portfolio at amortized cost at the end of the fourth quarter was 10.1% compared to 10.9% from the prior quarter. The weighted average yield of our total debt and income-producing investments and amortized cost at the end of the fourth quarter was 11.2% compared to 11.8% at the end of the third quarter. Importantly, our portfolio companies had both top-line growth and EBITDA growth quarter-over-quarter and year-over-year on a weighted average basis. The weighted average net debt to EBITDA of the companies in our investment portfolio decreased slightly to 6.2 times during the fourth quarter compared to 6.3 times during the third quarter. At the same time, the current weighted average interest coverage of the companies in our investment portfolio at quarter-end increased to 1.8 times in the fourth quarter compared to 1.7 times during the third quarter. And finally, turning to asset quality. During the quarter, Bayside OpCo, LLC, operating 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 non-accrual status decreased to 2% of the total investment portfolio at fair value, from 2.2% as of September 30, 2024, and remained at 4.5% of the total investment portfolio at amortized cost, which is the same as last quarter. We are cognizant that recent headlines on tariffs between the U.S. and various countries have been top of mind 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 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.

Stanley Matuszewski, Chief Financial Officer

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 1.17 times, which continues to be below our target leverage of 1.25 times. At quarter-end, approximately 65.1% of our total principal amount of debt outstanding was in unsecured debt. On February 7, 2025, GSBD borrowed $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 three-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. For the fourth quarter, GAAP and adjusted after-tax net investment income were $56.6 million and $55.6 million respectively, as compared to $68.2 million and $67.2 million, respectively, in the prior quarter. On a per-share basis, GAAP net investment income was $0.48. Excluding the impact of asset acquisition accounting in connection with the merger 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 three months ended December 31, 2024, and September 30, 2024 was $103.8 million and $110.4 million, respectively. We also note that we saw PIK as a percent of total investment income increased to 15% for the fourth quarter ended December 31, 2024, from 9% in the third quarter of 2024. Of note, there was a one-time adjustment for two portfolio companies. Excluding these one-time adjustments, Q4 2024 PIK income as a percent of total investment income would have been 12%. Our undistributed taxable net investment income or spillover as of December 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 three quarters. With that, I'll turn it back to Alex for closing remarks.

Alex Chi, Co-Chief Executive Officer

Thanks, Stan, and thanks, everyone for joining our earnings call. We're optimistic about a more active deal environment in the year ahead and remain focused on investing 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

Thank you. We'll go to our first question from Finian O'Shea with Wells Fargo Securities.

Finian O'Shea, Analyst

Hi, everyone. Good morning. Alex, could you please share your thoughts on reducing your target leverage or maintaining a lower level for a while? Can you explain the reasons behind that and how much you're considering? Thanks.

Alex Chi, Co-Chief Executive Officer

Yeah. Hey, Fin. Thanks for joining the call. Thanks for the question. 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 1.25 times. We finished the quarter at 1.17 times, and we don't anticipate any meaningful increases from there.

Finian O'Shea, Analyst

Okay. But yeah, I just want to think about the new $0.32. You probably have a bit of flexibility with that. Your target leverage generally allows for some flexibility as well. So what I'm getting at is whether leverage will become significantly more conservative than that target and if that will push earnings closer to $0.32, and whether we should be considering it that way.

Alex Chi, Co-Chief Executive Officer

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. Again, we restructured our dividend with a new base of $0.32 per share, just reflecting the current environment regarding base rates and spreads. And that's a dividend that we believe will be stable over time. We will supplement that with additional distributions as we described. And then we have the next three quarters of spillover. Having additional leverage capacity is just one component of it. We'll continue to also just meet that with the payments and some additional leverage capacity as you said. But again, we're not planning to increase our target leverage 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, Co-Chief Executive Officer

About 60% of our portfolio, when looking from a vintage perspective, is from 2021 and earlier. We have been focused on harvesting that part of the portfolio and reinvesting it into newer vintage investments. As mentioned in David's comments, around 80% of the repayments we received in the quarter came from that earlier vintage. Even within that 60%, it's still a high-quality portfolio. There are several investments we are monitoring and planning to rotate out of, but we do not have a specific percentage target for exiting.

Finian O'Shea, Analyst

Okay. Very well. Thanks.

Alex Chi, Co-Chief Executive Officer

Thanks, Fin.

Operator, Operator

We’ll go next to Robert Dodd with Raymond James

Robert Dodd, Analyst

Hi, everyone. Regarding the dividend, I want to clarify that you indicated plans for it to remain stable. When determining that level, did you consider not only the success rate but also the 26 notes that will mature and lead to increased borrowing costs? Don't adjustments to dividends typically reflect such factors? Could you provide some insight on whether these elements, including the upcoming refinancing and escalation of costs next year, were taken into account?

Stanley Matuszewski, Chief Financial Officer

Hey, Robert. Thanks for the question. 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, at lower spreads, the base rates, the curve, as well as any changes in our capital structure as well. So yes, those are considered.

Alex Chi, Co-Chief Executive Officer

And we also modeled in 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

Thank you for clarifying that. You mentioned tariffs earlier. Do you have any involvement in government contracting? Although I understand you might not want to be too direct, some software companies deal with federal contracts. Can you share any thoughts on the potential impacts of policy changes in Washington, D.C., particularly regarding cryptocurrency like DOGE, aside from the tariffs?

Alex Chi, Co-Chief Executive Officer

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, and our analysis of any first-order or second-order effects indicates that 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 and service-oriented businesses. So we don't have any significant supply chain exposure to the countries currently in the spotlight, nor do we have any significant exposure to government contracts.

Robert Dodd, Analyst

Got it. Thank you. And then just one quick one. On the PIK, so PIK up from 9% to 15%, 12%, if we normalize some things, but that's still an increase. And we're assuming that increase is not because we originated in a lot of PIK first-liens in the fourth quarter or third quarter. So that would imply that's loan modifications. So can you give us any color there and while you said, obviously, you weighted average revenue and EBITDA growing? Is there an increase in struggling companies within the portfolio? Can you give us any thoughts there?

Alex Chi, Co-Chief Executive Officer

No. I think if you look, Robert, the concentration of the investments that are picking from a pure numerical perspective, I would say, it's not a broad swath of the portfolio. I mean, certainly, if you look at the risk ratings where we describe the risk of either repayment or not being able to be paid interest or principal on these loans, that rating 3 and 4 has actually come down quarter-over-quarter from around 9.5% for both buckets to 6.8%. 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 amendments or restructurings where there may be some liquidity shortfall at these portfolio companies or tight liquidity in the near term, those situations are often accompanied by either capital that the sponsor is putting in, or other concessions such as tighter covenants and things like that that we're getting. So we think we do have tighter control over those portfolio companies as well.

Robert Dodd, Analyst

Got it. Thank you.

Alex Chi, Co-Chief Executive Officer

Thanks, Robert.

Operator, Operator

We'll go next to Mark Hughes with Truist.

Mark Hughes, Analyst

Yeah. Thank you. This is a related 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 about 20% of the portfolio is in software. Can you talk about the ARR exposure now and where you would like that to go?

Stanley Matuszewski, Chief Financial Officer

Yeah. I mean, we don't disclose that exactly, but as you’re right, our recurring revenue exposure over the last year or two is less than half of 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, what would change the bar from a recurring revenue perspective, it certainly is over that rule of 50, and we only did two 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 two, three 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, etc.?

Alex Chi, Co-Chief Executive Officer

Yeah. I think you had to split it into large cap and middle market. No question, we've seen spread compression, but I’d say that, it’s both a result of just the ongoing supply-demand imbalance with significant capital going into the direct lending private credit space without the corresponding M&A flow. In the large cap space, yes, we have seen much more robust activity in demand in the BSL space. But having said that, we remain optimistic about a pickup of activity later in the year; all the ingredients, significant privately held dry powder that needs to be deployed, DPI pressure from sponsors to sell companies, return capital to their investors. Remember, we do have the advantage of having the ability to speak to the M&A side of the house. There are a significant number of companies that are on the runway ready to be sold. We just think that given the uncertainty of tariffs and the regulatory environment, sellers are just waiting for a clearer picture. It just gives them time to post another quarter or two of good performance, which really helps them maximize value when they do finally decide to pull the trigger and sell the companies. By the way, to that point, I don't think any of them are concerned about the financing markets being there for buyers later on. So we're hopeful that'll help with spreads. We're not going to say we're going to miraculously see spreads go up, but clearly with more M&A flow, that will help the dynamics there.

Mark Hughes, Analyst

And then, could you talk about the prospect for repricing activity? How much you've already seen in the portfolio? How much perhaps is left to be done, the portfolio companies that are ripe for repricing?

David Miller, Co-Chief Executive Officer

Yeah. I mean, if you take a look at the book, 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. 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 a repricing. But I think the bulk of it has happened in the book today.

Alex Chi, Co-Chief Executive Officer

Yeah. If you look in the fourth quarter and consider the use of proceeds from deployment activity, more than half of it was actually were new deals for leveraged buyouts, acquisition financing, and just about a third of it was related to refinancings and repricings.

Mark Hughes, Analyst

Appreciate that. Thank you.

Alex Chi, Co-Chief Executive Officer

Thanks, Mark.

Operator, Operator

We'll go next to Derek Hewett with Bank of America.

Derek Hewett, Analyst

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

Stanley Matuszewski, Chief Financial Officer

Yeah. So I would say, in terms of the incentive fee, as you 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 shareholder friendly. With the look back, as you're well aware, there's variability over time. So certainly, I think that with the upcoming quarters, we have the ability to earn that full fee, subject to the cap over time as well as any future gains or losses. But it will fluctuate over time as a result of the look back as I'm sure you're aware.

Derek Hewett, Analyst

Okay. Thank you.

Operator, Operator

This does conclude the question-and-answer portion of today's call. At this time, I would like to turn the call back over to Alex Chi for any closing remarks.

Alex Chi, Co-Chief Executive Officer

Great. Well, thank you, everyone for joining our call, and we look forward to speaking with you all next quarter.