Goldman Sachs BDC, Inc. Price & Performance (GSBD)

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, 02/28/2025 for replay purposes. I'll now turn the call over to Alex Gee, Co Chief Executive Officer of Goldman Sachs BDC Inc.

Thank you, John. Good morning, everyone, and thank you for joining us for our fourth quarter and fiscal year end twenty twenty four earnings conference call. I'm here today with David Miller, our Co Chief Executive Officer Tucker Green, our Chief Operating Officer and Stan Majewski, 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 GSVD 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. And then finally, we'll open the line for Q and 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 $13,000,000,000 and deployed approximately $10,800,000,000 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 and 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 GSPD 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 GSPD 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 Elasta unitranche positions from 89.4% in December 2021 to 96.3% at year end twenty twenty four. 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 thirty nine quarters.

While our net investment income for the quarter continues 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 $152,000,000 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 03/31/2025, and is authorized two additional $0.16 per share special dividends, which we expect to pay in the second and third quarter 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 03/31/2025. 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 GPs to distribute capital to LPs. With that, let me turn it over to my co CEO, David Miller. Thanks, Alex.

In 2024, GSBD committed its highest level of capital since the integration of the BDC complex three years ago, with approximately $1,300,000,000 in new commitments. This is three times more than new investment commitments of $423,000,000 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 repayment year since integration, totaling $858,800,000 Of the investments in the portfolio of companies that were fully repaid or exited, approximately 82% were twenty twenty one or 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 $173,000,000 across 18 portfolio companies, comprising of 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 leader ranger in the acquisition of PresiMac by Centerbridge. PresiMac is a leading manufacturer of medium to high precision components to industries in the aerospace, defense and semiconductor industries.

We also served as administrative agent, leader ranger and the largest lender in Arcline's acquisition of Rotating Machinery Services. This is an illustration of 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 the turbomachinery equipment. Sales and repayment activity totaled $187,500,000 during the quarter, primarily driven by the full repayment and exit of our investments in nine portfolio companies. Turning to portfolio composition. As of 12/31/2024, total investments in our portfolio were $3,480,000,000 at fair value, comprised of 97.6% senior secured loans, including ninety one point five percent first lien, four point eight percent first lien last out unit tranche, one point nine % in a combination of preferred and common stock, one point three percent second lien debt as well as the 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.

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% as 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 as compared to 11.8% at the end of the third quarter. Importantly, our portfolio companies have 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 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 non accrual status decreased to 2% of the total investment portfolio at fair value from 2.2% as of 09/30/2024, 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 Madishevsky to walk through our financial results.

Thank you, Tucker. We ended the fourth quarter of twenty twenty four with total portfolio investments at fair value of $3,500,000,000 outstanding debt of $1,900,000,000 and net assets of $1,600,000,000 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 02/07/2025, GSPD borrowed $365,000,000 under its senior secured revolving credit facility. The proceeds were used to repay $360,000,000 in aggregate principal amount outstanding plus accrued and unpaid interest on its 3.75% senior notes, which matured on 02/10/2025. The repayment resulted in full satisfaction of the company's obligation under the notes. Following this drawdown, the company has approximately $626,000,000 of borrowing capacity remaining under the revolving credit facility. If you recall, GSPD issued a three year unsecured note in March of twenty twenty four 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 MMLC. These non GAAP measures remove the purchase discount amortization impact from our financial results. For the fourth quarter, GAAP and adjusted after tax net investment income were $56,600,000 and $55,600,000 respectively, as compared to $68,200,000 and $67,200,000 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%. Total investment income for the three months ended 12/31/2024 and 09/30/2024, was $103,800,000 and $110,400,000 respectively. We also note that we saw PIK as a percent of total investment income increased to 15% for the fourth quarter ended 12/31/2024 from 9% in the third quarter of twenty twenty four. Of note, there was a one time adjustment for two portfolio companies. Excluding these one time adjustments, Q4 twenty twenty four pick income as a percent of total investment income would have been 12%.

Our undistributed taxable net investment income or spillover as of twelvethirty onetwenty twenty four is approximately $152,000,000 or $1.3 on a per share basis. As Alex mentioned earlier on 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. Thanks, Stan. 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. With that, let's open the line for Q and A. Thank We'll go to our first question from Finian O'Shea with Wells Fargo Securities.

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? Thanks.

Yes. 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.

Okay. But yes, I just my 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 $0.32 seeing if we should think that way?

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, 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 three quarters of spillover. And so, having additional leverage capacity is just one component of it. We'll continue to also just meet that with the repayments and also with some additional leverage capacity that you said. But again, we're not planning to increase our target leverage at all.

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?

Yes. With respect to just the overall portfolio, about 60% of our portfolio, if you just look at it from a vintage perspective, is from 2021 and earlier. We've been very focused on harvesting that portion of the portfolio and redeploying it into newer vintage investments. As you heard from David's comments, about 80% of the repayments that we had in the quarter, again, were from that earlier vintage. So, look, even within that 60%, it's still a high quality portfolio. There are a number that we're monitoring that we'll look to continue to rotate out of. But we don't have a specific percentage target that we're actively looking to exit from.

We We'll go next to Robert Dodd with Raymond James.

Hi, guys. Just going back to that dividend for a second. On the '32, I just want to you mentioned obviously you plan on that stay stable. When you pick that level, I mean, did that take into account not just spreads, etcetera, etcetera, but I mean, you've got the 26 notes that when they mature, your borrowing costs are going to rise, etcetera. I mean, is all of that that's not always taken into account when people adjust dividends, but can you just add me color on is that factors in all of that including the refinancing increased costs that's going to come when that one matures next year?

Yes. Hey, Robert, thanks for the question. It's Dan. Yes, when we modeled that to assess our ability for the fund to cover that, 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 cap stack as well. So, yes, those are considered. And we also modeled in some additional we also modeled in some additional flexibility to the extent that we have any additional realized unrealized losses. But again, we spent this significant amount of time factoring in all the different considerations, including the maturity next year.

Got it. Thank you for the clarity on that. On the you gave us a little bit of color on tariffs. Do you have exposure to government contracting, etcetera? Obviously, I don't think you have a lot of direct, but there are software businesses in there and some of those deal with defense. So I mean, do you any thoughts on Doge? Is it separate from tariffs? Do you have potential exposure to that side of policy changes in D. C. Right now?

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. But, 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 that 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.

Got it. Thank you. And then on just one quick one on the PIC. So PIC up from nine to fifteen, twelve if we normalize some things. But that's still an increase. And we're assuming that increase is not because you originated a lot of pick first liens in the fourth quarter or third quarter. So that would imply that that's loan modifications. So can you give us any color there? And while you said, obviously, you weighted average revenue and EBITDA are growing, is there an increase in struggling companies within the portfolio? Can you give us any thoughts there?

I think if you look, Robert, at the concentration of the investments that are picking from a pure numbers 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 three and four 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. And the other thing I'd just point to is that where we see PIK even in these instances of either amendments or restructurings where there may be some liquidity shortfall at these portfolio companies or tight liquidity in the near term. Those 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 a tighter control over those portfolio companies as well.

Got it. Thank you.

Thanks, Robert.

We'll go next to Mark Hughes with Truist.

Yes. 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 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?

Yes. I mean, we don't disclose that exactly, but as you're right, saw, revenue exposure over the last year or two, 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 what would chin the bar from a recurring revenue perspective is certainly 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 GFPD from a recurrent revenue perspective.

Very good. And then 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, etcetera?

Yes. I think you had to split it into large cap in middle market. No question we've seen spread compression, let's say that it's both the result of just the ongoing supply demand imbalance with significant capital flowing into the direct lending private credit space without the corresponding M and A flow and in the large cap space, yes, we have seen much more robust activity and demand in the BSL space. But having said that, we remain optimistic about a pickup of activity later in the year. All the ingredients still there, significant privately 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 and A side of the house. There are 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 clear picture. And it just gives them time to post another quarter or two of good performance, which really just helps them maximize value when they do finally decide to pull the trigger and sell the companies.

And so, and 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, look, we're hopeful that will help with spreads. We're not going to sit here and say we're we think the spreads are going to miraculously go up. But clearly with more M and A flow that will help the dynamic there.

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?

Yes. 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 twelve to eighteen months as you've seen that come down. But there could be select instances on a going forward basis where stuff gets repriced. But generally, where you're seeing that today is some sort of credit enhancing event, either the company has continued to reform 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.

And if you look in the fourth quarter and look at the use of proceeds for unemployment activity, more than half of it was actually were new deals and for leveraged buyouts, acquisition financing and just about a third of it was related to refinancings and repricings.

Appreciate that. Thank you. Thanks, Mark.

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

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 full load of the incentive fee be in the first quarter numbers? Yes. 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. And so with the look back, as you're well aware, right, there is variability over time. So, certainly, I think that with the upcoming quarters, we have the ability to earn that full 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 over time as a result of the look back as I'm sure you're aware.

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.

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