Earnings Call Transcript - GSBD Q3 2025

John Silas, Investor Relations Team Member

Good morning. This is John Silas from the Investor Relations team at Goldman Sachs BDC, Inc. I want to welcome everyone to the Goldman Sachs BDC, Inc. Third Quarter 2025 Earnings Conference Call. Before we start, I want to remind our listeners that today's comments may include forward-looking statements. These statements reflect the company's expectations about future events that are inherently uncertain and beyond the company's control. The company’s actual results and financial status could differ significantly from what is stated in these forward-looking statements due to various factors, including those discussed in the company’s SEC filings. This audiocast is copyrighted material of Goldman Sachs BDC, Inc. and cannot be duplicated or shared without our permission. Yesterday, after the market closed, the company released its earnings press release and posted a supplemental earnings presentation, both available on our website at www.goldmansachsbdc.com, in the Investor Resources section, which includes reconciliations of non-GAAP measures to the nearest GAAP measures. These documents should be reviewed alongside the quarterly report on Form 10-Q that was filed with the SEC yesterday. This conference call is being recorded today, Friday, November 7, 2025, for replay purposes. I will now pass the call to Vivek Bantwal, Co-CEO of Goldman Sachs BDC, Inc.

Vivek Bantwal, Co-CEO

Thank you, John. We will start the call by sharing our views on recent performance as the macro environment gradually improves. Following that, we will cover our investment activity and outline GSBD's positioning as we enter the fourth quarter. Shortly afterward, David Miller and Tucker Greene will provide a detailed overview of portfolio activity and performance before passing it to Stan Matuszewski to discuss the financial results. The M&A market has remained resilient despite the uncertainty in the first half of the year, with total M&A dollar volumes in Q3 2025 rising 40.9% year-over-year compared to Q3 2024. This increase is mainly due to renewed risk appetite among investors, lower borrowing costs, clearer market conditions, and adjusted valuation expectations between buyers and sellers. As David will explain later, this uptick in activity has directly benefited GSBD, with our new investment commitments and repayments during the quarter reaching the highest level since we integrated the platform in 2022. Recent base rate cuts, with more expected through year-end and into 2026, should boost deal activity, though spreads remain tight across the middle market and large cap compared to a constrained spread environment in the public markets. Our earlier decision this year to modify our dividend policy and reduce the base dividend positions us well for a lower yield environment, where focusing on credit selection will be crucial. Moreover, during periods of heightened competition for quality deals, our closeness to our investment banking division serves as an advantage, allowing us to be highly selective in our evaluations. Broader credit dynamics are a concern for investors and have drawn attention to what we view as specific issues rather than a larger systemic problem. We feel confident about the risk dynamics within private credit, given the robust fundamentals of our portfolio. We continue to assess the effects of tariffs, the ability of companies to manage debt, and the risks associated with software investing, particularly in light of the recent surge in AI investments. We understand the transformative potential of AI but remain focused primarily on mitigating downside risks. Over the past two years, we have established a proprietary framework to evaluate both software and AI disruption risk in our underwriting process. We concentrate on mission-critical, market-leading companies with essential systems of record across all our software investments. Now, moving on to our third quarter results, our net investment income per share for the quarter was $0.40, and the net asset value per share as of the end of the quarter was $12.75, reflecting a 2.1% decline from the second quarter NAV, partly due to a $0.16 per share special dividend and some markdowns on previously underperforming assets. This quarter represents the final instance of three special dividends declared earlier this year, along with updates to our dividend policy. The Board has announced a third quarter 2025 supplemental dividend of $0.04 per share, payable around December 15, 2025, to shareholders on record as of November 28, 2025. Adjusting for the supplemental dividend related to this quarter's earnings, the adjusted NAV per share is $12.71, noted as a non-GAAP financial measure resulting from the dividend policy changes. The Board also declared a fourth quarter base dividend of $0.32 per share for shareholders on record as of December 31, 2025. We concluded the quarter with a net debt-to-equity ratio of 1.17x as of September 30, 2025, compared to 1.12x as of June 30, 2025.

David Miller, Co-CEO

Thanks, Vivek. During the quarter, we made new investment commitments of approximately $470.6 million across 27 portfolio companies, comprised of 13 new and 14 existing portfolio companies. This marks the highest level of new investment commitments since Q4 of 2021, which demonstrates our unique position in a competitive deal environment, where we can be selective on credit quality and exhibit discipline where we want to lean in. 100% of our originations during the quarter were in first lien loans, reflecting our continued bias in maintaining exposure to the top of the capital structure. Of the 13 new portfolio companies, we served as lead on 7 which is a tangible indication of the power of the GS platform. The impact of the GS franchise was on full display through our financing of the acquisition of Shields Health Solutions. This was part of the broader take private of Walgreens, of which 4 silos were financed uniquely with GS Private Credit participating only in the Shields transaction. This is a deal where investment banking colleagues advised the sponsor. Shields Health Solutions is one of the largest specialty pharmacy operators in the U.S. At the time of the investment, the transaction represented one of the largest take privates of all time. Another notable investment this past quarter was to support Newtek Merchant Solutions, a wholly owned subsidiary of the publicly traded bank holding company, Newtek, which offers a range of financial service products to small and medium-sized businesses. Our financing package was used to support the refinancing of existing debt and to fund a payment to increase the bank holding capital base. Due to our continued relationship with the CEO, GS Private Credit was able to secure the role of admin agent and sole lender to the company. The integration of our platform in 2022 allowed us to evaluate and invest in more high-quality opportunities that span from the middle market to large cap. And these 2 examples shine a light on our continued ability to do so at attractive pricing. We believe our platform is well positioned by the unique opportunities that channels Goldman Sachs ecosystem to take advantage of an active environment.

Tucker Greene, President and COO

Thanks, David. For our portfolio companies as of September 30, 2025, total investments at fair value were $3.2 billion, comprising of 98.2% in senior secured loans, 1.5% in a combination of preferred and common stock and a negligible amount in warrants. We continue to see increased repayment activity with $374.4 million for the quarter. 86% of these repayments in the quarter were from pre-2022 investments, leaving less than 50% of our current portfolio at fair value and legacy assets. This rotation remains a key focus for the GSBD portfolio as it recycles into new credits. One notable payoff during the quarter was total vision. GS first invested in the company in 2021 and financed an acquisition in 2022. Total Vision owns and operates optometry practices across California, which provide professional and retail services to patients. We received full repayment of the credit facility and equity co-investment. This illustrates the power of our platform and our team's enhanced management capabilities in the health care space. Throughout this past quarter, we utilized our 10b5-1 stock repurchase plan during the quarter. We repurchased north of 2.1 million shares for $25.1 million, which was NAV accretive. At the end of the quarter, total investments at fair value and unfunded commitments in our portfolio were $3.8 billion in 171 portfolio companies operating across 40 different industries. The weighted average yield of our debt and income-producing investments at amortized cost at the end of the third quarter was 10.3% as compared to 10.7% at the end of the second quarter. Despite a modest tightening in portfolio yield quarter-over-quarter, our portfolio companies have both top line growth and EBITDA growth quarter-over-quarter and year-over-year on a weighted average basis. Our weighted average net debt to EBITDA remained flat quarter-over-quarter at 5.8x, and our interest coverage increased quarter-over-quarter at 1.9x from 1.8x. As of September 30, 2025, we placed one position from an existing portfolio company on nonaccrual status. However, our overall investments on nonaccrual status decreased to 1.5% of fair value from 1.6% as of the end of the second quarter.

Stanley Matuszewski, CFO

Thank you, Tucker. We ended the third quarter of 2025 with total portfolio investments at fair value and commitments of $3.8 billion, outstanding debt of $1.8 billion and net assets of $1.5 billion. Our ending net debt to equity ratio at the end of the third quarter was 1.17x, which continues to be below our target leverage of 1.25x. At quarter end, approximately 70% of our total principal amount of debt outstanding was in unsecured debt. As of September 30, 2025, the company had approximately $1.143 billion of borrowing capacity remaining under the revolving credit facility. Given the tightening of credit spreads we've observed in the market, we continue to look for ways to optimize the pricing of our financing sources. During the quarter, we issued $400 million of a 5-year investment grade unsecured note with a coupon of 5.65%. We also hedged the issuance by swapping the coupon from fixed to floating to match GSBD's floating rate investments. Over 50 investors participated in the company's day of live marketing, which resulted in the peak order book being 4x oversubscribed. 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 MMLC. These non-GAAP measures remove the purchase discount amortization impact from our financial results. For the third quarter, GAAP and adjusted after-tax net investment income was $45.3 million and $44.8 million, respectively, as compared to $44.5 million and $43.5 million, respectively, in the prior quarter. On a per share basis, GAAP net investment income was $0.40. Adjusted net investment income for the quarter in connection with the merger with MMLC was unchanged at $0.40 per share, equating to an annualized net investment income yield on book value of 12.5%. Total investment income for the 3 months ended September 30, 2025, and June 30, 2025, was $91.6 million and $91 million, respectively. We observed PIK as a percent of total investment income decreased marginally to 8.2% for the third quarter from 8.3% in the second quarter of 2025.

David Miller, Co-CEO

Thanks, Stan, and thanks, everyone, for joining our earnings call. Although the perception of risk embedded within the credit market has changed, we continue to apply our staunch underwriting philosophy and remain focused around the maintenance of our dividend that we proactively addressed. In light of a lower-yielding environment, we believe fund managers will be rewarded for their credit selection. With that, let's open the line for Q&A.

Operator, Operator

We'll go first to Arren Cyganovich with Truist Securities.

Arren Cyganovich, Analyst

In your comments, you had mentioned that the M&A activity to a level that you had not seen for a few years. Maybe you could just talk to us about your thoughts about sustaining into next year and whether or not this is kind of more of a shorter term or maybe start of a longer-term trend here?

Vivek Bantwal, Co-CEO

Thank you for the question. Yes. Listen, we think this is the start of a longer-term trend. This was, in our minds, really a question of when, not if. Because when you look at a, the sort of cumulative amount of sort of dry powder in the private equity community, and you juxtapose that with the capital that's invested in existing investments that have now been kind of sort of in portfolio for a period of time. And then you think about the fact that these more recent private equity vintages from a DPI perspective is really behind historical vintages. And so there's kind of a growing kind of need for private equity firms to, a, exit existing portfolios; and then b, given the dry powder sort of investing in new portfolios. So when you sort of look at all of those metrics it speaks to the need for kind of more M&A on the forward. The question then became sort of when. We started to see some signs that early this year, obviously, as you kind of got into April, there was sort of a pullback as you saw kind of broader volatility and focus on tariffs and the like. And what we've seen more recently is really kind of back to that risk-on sentiment where people are looking to kind of do things strategically. And so we're seeing that in the sponsor community, but we're also seeing that in the corporate community in terms of M&A activity. And so we think we're in the early stages of that, and we think that as we get into 2026, we'll see more of that.

Arren Cyganovich, Analyst

Okay. How much of the increase in activity would be necessary for spreads to start to widen out, essentially with enough supply to offset some of the high demand?

David Miller, Co-CEO

Look, that's a little hard question to say. We're not really anticipating spreads to widen much. We're hopeful that, that might happen with the pickup M&A. But given the dry powder, we're not planning on that in the near term. I think what we like about our platform as we continue to see a bunch of just unique originations that we can get higher spreads because of that unique origination platform, that being tied to Goldman Sachs. But your regular way A+ credit, we don't think it's going to have meaningful spread widening anytime soon.

Arren Cyganovich, Analyst

You had one new investment on nonaccrual at Dental Brands, which has been on the watch list for a while. Can you talk a bit about the performance there? Nonaccruals were relatively stable, but you experienced some unrealized and realized losses during the quarter. Were there any impacts from previous nonaccruals?

David Miller, Co-CEO

Look, I mean, as you mentioned, this has been in the portfolio for some time. We have had some more junior securities that were already risk rated 4 as a result of underperformance in a previous restructuring. The company continues to underperform our expectations. So we put a more senior tranche on nonaccrual now. So it's not a new name. It's been risk rated 4 for some time. But the good news is this is a tiny position in this fund. I think it's sub $800,000 of exposure. So it doesn't meaningfully move the needle for us from an overall nonaccruals. And as Tucker mentioned in his prepared comments, it did tick down slightly from 1.6% to 1.5% as a percentage of fair value. So we feel overall portfolio quality has been stable where we've seen continued write-downs is on the more legacy names where we're not seeing a big turnaround. So we took additional markdowns there on those names. But other than outside of those legacy names, we feel pretty good about the portfolio.

Operator, Operator

The question-and-answer portion has concluded. I would now like to turn the call back over to Vivek for any closing comments.

Vivek Bantwal, Co-CEO

Thanks, everyone, for their time this morning. And if more questions come up, feel free to contact our team. Thank you, everyone, and have a great weekend.