Golub Capital(GBDC) - 2020 Q4 - Annual Report

PART I This section provides an overview of the company's business, operational structure, investment strategies, and associated risks Business Overview Golub Capital BDC, Inc. is an externally managed BDC and RIC, investing in U.S. middle-market one-stop and senior secured loans General Business Overview This section outlines the company's investment objective, target market definition, and typical investment parameters - The company's investment objective is to generate current income and capital appreciation by investing primarily in one-stop and other senior secured loans of U.S. middle-market companies[22][433] - Middle-market companies are generally defined as having earnings before interest, taxes, depreciation and amortization (EBITDA) of less than $100.0 million annually[21][39] - The company typically invests $10.0 million to $75.0 million per company, focusing on below investment grade securities with floating interest rates[23][24][436][437] Recent Corporate Activities This section details the company's recent strategic transactions, including the GCIC acquisition, SLF equity purchases, and a rights offering - On September 16, 2019, Golub Capital BDC acquired GCIC, converting each GCIC common stock share into 0.865 shares of Golub Capital BDC common stock, resulting in the issuance of 71,779,964 shares[25][26][452][453] - On January 1, 2020, Golub Capital BDC acquired the remaining 12.5% equity interests in SLF and GCIC SLF from RGA and Aurora for $17.0 million, making them wholly-owned subsidiaries and consolidating their financial statements[27][28][455][456] - A transferable rights offering completed on May 15, 2020, raised approximately $300.4 million in net proceeds from the issuance of 33,451,902 shares at $9.17 per share[29][457] Investment Management and Administration This section describes the roles of GC Advisors and Golub Capital LLC in managing investments and providing administrative services - GC Advisors, a registered investment adviser and affiliate of Golub Capital, manages the company's investment activities, including sourcing, research, due diligence, structuring, and monitoring[32][33] - The company pays GC Advisors a base management fee (1.375% of average-adjusted gross assets, excluding cash/cash equivalents) and an incentive fee, with a cumulative cap of 20.0% of Cumulative Pre-Incentive Fee Net Income per share[32][88][90][91] - Golub Capital LLC, an affiliate of GC Advisors, provides administrative services and access to experienced investment professionals and deal flow through a staffing agreement[34][125][128] Investment Strategy and Process This section outlines the company's target market, key investment criteria, and the four-phase investment process - The company targets U.S. middle-market companies, often controlled by private equity investors, seeking capital for growth, acquisitions, recapitalizations, refinancings, and leveraged buyouts[38] - Key investment criteria include sustainable market positions, scalable revenues, experienced management, stable cash flows, substantial equity cushion (35-45% of total capitalization), and low capital expenditure requirements[39][44] - The investment process involves four phases: Origination (sourcing through a network of contacts), Underwriting (systematic approach focusing on downside risk and credit considerations), Execution (closing deals efficiently), and Monitoring (active assessment of risk profile using internal performance ratings)[42][44][48][49] - Investments are structured primarily as senior secured loans, including one-stop loans (blending senior and junior debt characteristics), with typical maturities of three to seven years[58][59][60] Portfolio Holdings and Diversification This section presents the company's top portfolio company and industry concentrations as of September 30, 2020 Top 10 Portfolio Company Investments as of September 30, 2020 | Portfolio Company | Investments at Fair Value (In thousands) | Percentage of Total Investments | |:------------------------------------|:---------------------------------------|:--------------------------------| | Diligent Corporation | $87,659 | 2.1% | | E2open, LLC | $84,174 | 2.0% | | Bullhorn, Inc. | $83,641 | 2.0% | | Transaction Data Systems, Inc. | $82,940 | 2.0% | | DCA Investment Holding, LLC | $81,780 | 1.9% | | GS Acquisitionco, Inc. | $75,924 | 1.8% | | Integration Appliance, Inc. | $68,822 | 1.6% | | Whitcraft LLC | $61,479 | 1.5% | | Veterinary Specialists of North America, LLC | $57,066 | 1.3% | | Apptio, Inc. | $57,009 | 1.3% | | Total | $740,494 | 17.5% | Top 10 Industries by Investment as of September 30, 2020 | Industry | Investments at Fair Value (In thousands) | Percentage of Total Investments | |:--------------------------------|:---------------------------------------|:--------------------------------| | Software | $924,825 | 21.8% | | Healthcare Providers and Services | $583,926 | 13.8% | | IT Services | $356,500 | 8.4% | | Specialty Retail | $311,117 | 7.3% | | Health Care Technology | $219,166 | 5.1% | | Healthcare Equipment and Supplies | $172,274 | 4.1% | | Hotels, Restaurants and Leisure | $165,722 | 3.9% | | Commercial Services and Supplies | $126,680 | 3.0% | | Food and Staples Retailing | $119,614 | 2.8% | | Insurance | $109,156 | 2.6% | | Total | $3,088,980 | 72.8% | - Golub Capital BDC, Inc. is an externally managed BDC and RIC, focusing on one-stop and senior secured loans to U.S. middle-market companies[20][22][433] - The company completed the acquisition of GCIC on September 16, 2019, issuing 71,779,964 shares of common stock to former GCIC stockholders[25][26][452][453] - On January 1, 2020, the company acquired the remaining 12.5% LLC equity interests in SLF and GCIC SLF from RGA and Aurora for $17.0 million, making them wholly-owned subsidiaries[27][28][455][456] - A transferable rights offering was completed on May 15, 2020, issuing 33,451,902 shares of common stock at $9.17 per share, generating approximately $300.4 million in net proceeds[29][457] Investment Portfolio Composition (Fair Value) as of September 30, 2020 and 2019 | Investment Type | Sep 30, 2020 (Fair Value) | Sep 30, 2020 (%) | Sep 30, 2019 (Fair Value) | Sep 30, 2019 (%) | |:----------------|---------------------------|------------------|---------------------------|------------------| | Senior secured | $640,213 | 15.1% | $589,340 | 13.7% | | One stop | $3,485,585 | 82.2% | $3,474,116 | 80.9% | | Second lien | $19,640 | 0.5% | $19,473 | 0.5% | | Subordinated debt | $575 | 0.0% | $369 | 0.0% | | LLC equity interests in SLF and GCIC SLF | $0 | 0.0% | $123,644 | 2.9% | | Equity | $92,197 | 2.2% | $85,990 | 2.0% | | Total | $4,238,210 | 100.0% | $4,292,932 | 100.0% | Internal Performance Ratings (Fair Value) as of September 30, 2020 and 2019 | Rating | Definition | Sep 30, 2020 (Fair Value) | Sep 30, 2020 (%) | Sep 30, 2019 (Fair Value) | Sep 30, 2019 (%) | |:-------|:-----------|---------------------------|------------------|---------------------------|------------------| | 5 | Least risk, above expectations | $257,409 | 6.1% | $115,318 | 2.7% | | 4 | Acceptable risk, as expected | $3,085,610 | 72.8% | $3,787,809 | 88.2% | | 3 | Below expectations, increased risk | $836,560 | 19.7% | $337,358 | 7.9% | | 2 | Materially below expectations, materially increased risk | $57,754 | 1.4% | $52,434 | 1.2% | | 1 | Substantially below expectations, substantially increased risk, not anticipated full repayment | $877 | 0.0% | $13 | 0.0% | | Total | | $4,238,210 | 100.0% | $4,292,932 | 100.0% | Summary Risk Factors This section provides a high-level overview of principal risks, including market disruptions, interest rate changes, and operational dependencies - The company operates in a period of capital markets disruption and economic uncertainty, exacerbated by events like the COVID-19 pandemic, which could negatively affect portfolio companies and operations[182][183][185][187] - Changes in interest rates affect the cost of capital and net investment income, especially with floating-rate debt and investments, and the discontinuation of LIBOR poses additional risks[189][190][199][201] - The company is highly dependent on GC Advisors for its success, and potential conflicts of interest exist due to shared management, fee structures, and allocation policies with other managed accounts[202][210][211][216] - Investments in leveraged, private, and middle-market companies are risky, with potential for loss, lack of liquidity, and vulnerability to economic downturns and defaults[329][331][332][333][339] - The company's securities involve an above-average degree of risk, including trading at a discount to NAV, potential dilution from rights offerings, and fluctuations in market price[371][372][374][401][402][406][407] Management Agreements This section details contractual agreements with GC Advisors and Golub Capital LLC, outlining fee structures, potential conflicts, and administrative services - The Investment Advisory Agreement with GC Advisors outlines services including portfolio composition, investment evaluation, structuring, execution, and monitoring[85] - The base management fee is 1.375% annually of average adjusted gross assets (excluding cash/cash equivalents), payable quarterly in arrears[88] - The incentive fee has two components: an income component (based on Pre-Incentive Fee Net Investment Income exceeding a 2.0% hurdle rate, with a 'catch-up' provision) and a capital gains component (20.0% of Capital Gain Incentive Fee Base)[95][97][98][99] - A fee limitation (Incentive Fee Cap) ensures cumulative incentive fees do not exceed 20.0% of Cumulative Pre-Incentive Fee Net Income per share since April 13, 2010[90][91][93] - The Administration Agreement with Golub Capital LLC covers office facilities, administrative services, and reimbursement of allocable overhead and expenses, subject to board review[125] - A license agreement grants the company a non-exclusive, royalty-free license to use the 'Golub Capital' name, contingent on GC Advisors remaining the investment adviser[127] Regulatory Framework This section outlines the regulatory framework as a BDC and RIC, detailing requirements for asset diversification, leverage limits, and distribution policies - As a BDC, the company must maintain at least 70% of its total assets in 'qualifying assets,' primarily securities purchased from eligible U.S. middle-market companies in private transactions[131][134] - Stockholders approved a reduced asset coverage requirement of 150% (from 200%) effective February 6, 2019, allowing the company to borrow $2 for every $1 of investor equity, excluding SBA debentures due to exemptive relief[138][255] - To qualify as a RIC, the company must derive at least 90% of its gross income from specified sources and meet asset diversification tests, distributing at least 90% of its investment company taxable income annually[163][166] - The company operates SBIC Funds as wholly-owned subsidiaries, which can incur SBA-guaranteed debentures up to twice their regulatory capital, subject to SBA regulations and limits ($175.0 million per SBIC, $350.0 million under common management)[153][154] - Failure to qualify as a RIC would subject the company to corporate-level income tax and inability to deduct dividend distributions, significantly reducing net assets and distributions[178][179] Risk Factors This section details various risks impacting the company's business, investments, and securities, covering market volatility, operational dependencies, and regulatory compliance Risks Relating to Our Business and Structure This section addresses risks related to market disruptions, interest rate changes, competition, management dependence, and regulatory constraints - The company is exposed to capital markets disruption and economic uncertainty, including the impact of COVID-19, which can increase funding costs, limit capital access, and negatively affect portfolio companies[182][183][184][185][187][188] - Changes in interest rates, particularly the discontinuation of LIBOR, could significantly affect the company's cost of capital and net investment income, potentially reducing distributions[189][190][191][198][199][200][201] - The company operates in a highly competitive market for investment opportunities, which could lead to lower returns, increased default rates, and less favorable loan terms[193][194][195][196][197] - Significant potential conflicts of interest exist due to GC Advisors' obligations to other clients, its fee structure (based on gross assets and capital gains), and its involvement in valuation processes[210][211][212][213][214][216][217][218][219][220][221] - The company's ability to raise additional capital is constrained by BDC regulations (150% asset coverage ratio) and RIC distribution requirements (90% of taxable income), limiting funds for new investments[243][246][248] - The use of leverage (borrowed money) amplifies potential gains and losses, increasing the risk of substantial loss if asset values decline or interest rates rise[252][253][254] - The company is subject to risks associated with its Debt Securitizations (CLOs) and Revolving Credit Facilities, including subordination of its interests, potential mandatory redemptions, and indirect liability for representations and warranties[261][262][263][264][266][267][268][269][270][271][272][273][274][275][276][277][278][279][280][281][282][283][284][285][286] - SBIC Funds are subject to SBA regulations, limiting investment scope and potentially restricting distributions to the parent company if compliance fails[289][290] - The majority of portfolio investments are valued at fair value by the board, using unobservable inputs and significant judgment, leading to inherent uncertainty and potential material differences from realized values[297][298][641] - New or modified laws and regulations, including those affecting the financial services industry or taxation, could adversely impact the company's business, operations, and financial condition[303][305][306][307][308][309][310] Risks Relating to Our Investments This section covers risks inherent in debt investments, including economic downturns, illiquidity, prepayment, credit default, and concentration risks - Economic recessions or downturns could impair portfolio companies, increasing non-performing assets and decreasing portfolio value, especially for leveraged middle-market companies[329][330][332][333][334] - Debt investments are typically below investment grade ('junk bonds'), carrying high risk and volatility, with potential for significant principal loss[331] - The illiquid nature of investments in private and middle-market companies restricts timely disposal at fair prices, making it difficult to sell during adverse events and potentially leading to workouts or losses[339] - Portfolio companies may prepay loans, reducing yields if returned capital cannot be reinvested at equal or greater expected yields, and increasing price volatility for fixed-income securities[342] - The company is subject to credit and default risk, as portfolio companies may be unable to repay or refinance loans, especially with rising interest rates, leading to potential losses[343][344][345] - The portfolio may be concentrated in a limited number of companies and industries, increasing the risk of significant loss from defaults or industry downturns[348] - Investments in leveraged companies carry bankruptcy risks, where debt may be recharacterized as equity, and the company may be required to assume operations upon default, incurring additional liabilities[349][350][351][338] - Failure to make follow-on investments in portfolio companies could impair the value of initial investments or result in missed opportunities[352] - Foreign investments involve additional risks such as currency fluctuations, political instability, and less liquid markets, which hedging strategies may not fully mitigate[361][363][365][366] Risks Relating to Our Securities This section discusses risks associated with the company's securities, including trading at a discount to NAV, distribution uncertainty, and debt instrument risks - Investing in the company's securities involves an above-average degree of risk, with shares of closed-end investment companies often trading at a discount to their net asset value[371][372] - There is a risk that investors may not receive distributions or that distributions may not grow, with a portion potentially being a return of capital, decreasing tax basis[373] - The market price of the company's securities can fluctuate significantly due to various factors, including market volatility, regulatory changes, and operating performance[374] - The 2024 Unsecured Notes are unsecured and structurally subordinated to secured indebtedness and liabilities of subsidiaries, offering limited protection to holders[376][377][378][379][380][381][382][383][384] - If an active trading market for the 2024 Unsecured Notes does not develop, holders may face illiquidity and inability to resell at fair market value[385][386] - Default on other indebtedness could prevent payments on the 2024 Unsecured Notes, potentially leading to acceleration of debt and bankruptcy[387][388][389][390] - A downgrade of credit ratings or an increase in market interest rates could decrease the liquidity and market value of the 2024 Unsecured Notes[391][392][393] - Issuance of preferred stock or convertible debt could increase volatility of common stock NAV and market value, and preferred stockholders would have senior rights and voting power[396][397][400] - Stockholders may experience dilution if they do not fully exercise subscription rights in rights offerings or if the subscription price is below NAV[401][402][403] Unresolved Staff Comments No unresolved staff comments to report - No unresolved staff comments[410] Properties The company does not own material real estate, with headquarters provided by Golub Capital LLC - The company does not own any real estate or physical properties materially important to its operation[411] - Headquarters are located at 200 Park Avenue, 25th Floor, New York, NY 10166, provided by Golub Capital LLC pursuant to the Administration Agreement[411] Legal Proceedings The company and its affiliates are not currently subject to any material legal proceedings - The company, GC Advisors, and Golub Capital LLC may be involved in legal and regulatory proceedings arising from their operations[412] - Currently, none of these entities believe they are subject to any material legal proceedings[412] Mine Safety Disclosures No mine safety disclosures to report - No mine safety disclosures[413] PART II This section details common equity market data, selected financials, management's discussion, and market risk disclosures Market for Common Equity, Stockholder Matters, and Equity Purchases This section reviews common stock market performance, distribution policy, dividend reinvestment plan, and stock performance graph - The company's common stock trades on The Nasdaq Global Select Market under the symbol 'GBDC'[416] Common Stock Price Range, NAV, and Distributions (Fiscal Years 2019-2020) | Period | NAV | High Closing Price | Low Closing Price | Premium (Discount) High to NAV | Premium (Discount) Low to NAV | Distributions Declared | |:-------|:----|:-------------------|:------------------|:-------------------------------|:-----------------------------|:-----------------------| | FY2020 | | | | | | | | Q4 | $14.33 | $13.44 | $11.31 | (6.2)% | (21.1)% | $0.29 | | Q3 | $14.05 | $12.65 | $9.58 | (10.0)% | (31.8)% | $0.29 | | Q2 | $14.62 | $18.14 | $9.55 | 24.1% | (34.7)% | $0.33 | | Q1 | $16.66 | $18.56 | $17.70 | 11.4% | 6.2% | $0.46 | | FY2019 | | | | | | | | Q4 | $16.76 | $18.97 | $17.72 | 13.2% | 5.7% | $0.32 | | Q3 | $15.95 | $18.43 | $17.34 | 15.5% | 8.7% | $0.32 | | Q2 | $15.95 | $18.65 | $16.62 | 16.9% | 4.2% | $0.32 | | Q1 | $15.97 | $19.01 | $16.38 | 19.0% | 2.6% | $0.44 | - The company intends to make quarterly distributions to stockholders and has adopted an 'opt out' dividend reinvestment plan (DRIP)[421][592] - To maintain RIC tax status, the company must distribute at least 90% of its investment company taxable income annually[418][615] Selected Consolidated Financial Data This section summarizes key consolidated financial data for the past five fiscal years, including operations, per share, and balance sheet metrics Selected Consolidated Financial Data (Fiscal Years 2016-2020) | Metric | 2020 | 2019 | 2018 | 2017 | 2016 | |:---------------------------------------------------|:---------|:---------|:---------|:---------|:---------| | Statement of Operations Data (In thousands): | | | | | | | Total investment income | $298,953 | $172,298 | $152,171 | $137,764 | $127,871 | | Base management fee | $59,243 | $27,872 | $24,214 | $23,815 | $22,020 | | Incentive fee | $13,831 | $8,902 | $13,110 | $7,560 | $7,266 | | Interest and other debt financing expenses | $74,858 | $43,531 | $33,174 | $31,534 | $27,724 | | Net investment income | $139,059 | $86,072 | $76,021 | $69,546 | $64,980 | | Net realized gain (loss) on investment transactions | $(18,660) | $(4,442) | $17,536 | $9,402 | $6,254 | | Net change in unrealized appreciation (depreciation) | $(65,527) | $(100,209) | $(11,587) | $3,340 | $(2,030) | | Net increase (decrease) in net assets from operations | $54,872 | $(18,579) | $81,970 | $82,288 | $69,204 | | Per share data: | | | | | | | Net asset value | $14.33 | $16.76 | $16.10 | $16.08 | $15.96 | | Net investment income | $0.94 | $1.36 | $1.27 | $1.23 | $1.25 | | Per share distributions declared | $1.37 | $1.40 | $1.36 | $1.53 | $1.28 | | Balance Sheet data at period end (In thousands): | | | | | | | Investments, at fair value | $4,238,210 | $4,292,932 | $1,782,841 | $1,685,015 | $1,660,612 | | Total assets | $4,444,284 | $4,394,863 | $1,835,552 | $1,754,176 | $1,756,509 | | Total debt | $2,023,698 | $2,124,392 | $845,683 | $781,100 | $865,175 | | Total net assets | $2,396,193 | $2,222,854 | $968,854 | $957,946 | $878,825 | | Other data: | | | | | | | Weighted average yield on income producing investments at fair value | 7.6% | 8.6% | 8.3% | 7.8% | 7.6% | | Number of portfolio companies at period end | 254 | 241 | 199 | 185 | 183 | Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on financial condition, operations, and liquidity, discussing revenue, expenses, corporate activities, and accounting policies Forward-Looking Statements This section highlights that the report contains forward-looking statements subject to risks and uncertainties that may cause actual results to differ - The report contains forward-looking statements regarding future operating results, business prospects, investment effects, and market conditions, which involve risks and uncertainties[428] - Actual results may differ materially from projections due to factors like the COVID-19 pandemic, interest rate changes, and regulatory shifts[428][429] Overview This section provides a general overview of the company's structure, investment objectives, and management fee arrangements - The company is an externally managed BDC and RIC, listed on Nasdaq under 'GBDC', aiming for current income and capital appreciation from U.S. middle-market loans[431][432][433] - Investment activities are managed by GC Advisors under an Investment Advisory Agreement, with fees including a base management fee and an incentive fee, subject to a cumulative cap[434][435] Weighted Average Yields and Total Returns (Fiscal Years 2019-2020) | Metric | FY2020 | FY2019 | |:------------------------------------|:-------|:-------| | Weighted average income yield | 7.6% | 8.6% | | Weighted average investment income yield | 8.0% | 9.0% | | Total return based on average net asset value | 2.5% | (1.8)% | | Total return based on market value | (22.8)%| 8.8% | COVID-19 Pandemic Impact and Response This section details the adverse effects of the COVID-19 pandemic on portfolio companies and management's proactive response - The COVID-19 pandemic has adversely affected portfolio companies and operations, leading to government restrictions and economic dislocations[458][459][460] - Management proactively engaged with portfolio companies, executing over 90 credit-enhancing amendments and observing sponsors injecting over $700.0 million in new equity[461][462] - Over 80% of the portfolio (fair value) is in industry subsegments identified as less exposed to COVID-19 impacts, with less than 1% in most significantly exposed sectors[466] Net Change in Unrealized Appreciation (Depreciation) on Debt Investments by Internal Performance Rating (Q4 FY2020) | Internal Performance Rating Category | Weighted Average Price (June 30, 2020) | Weighted Average Price (Sep 30, 2020) | Net Change in Unrealized Appreciation (Depreciation) per share (Q4 FY2020) | % of Net Change in Unrealized Appreciation (Dep4eciation) (Q4 FY2020) | |:-------------------------------------|:---------------------------------------|:--------------------------------------|:-------------------------------------------------------------------|:-------------------------------------------------------------------| | 4 and 5 (Performing At or Above Expectations) | 98.7 | 99.0 | $0.24 | 63.0% | | 3 (Performing Below Expectations) | 90.9 | 91.5 | $0.08 | 21.0% | | 1 and 2 (Performing Materially Below Expectations) | 57.4 | 57.9 | $0.06 | 16.0% | | Total | 96.3 | 97.0 | $0.38 | 100.0% | Recent Developments This section outlines recent corporate actions, including unsecured note issuance, credit facility changes, and dividend declarations - On October 2, 2020, the company issued $400.0 million in 3.375% unsecured notes due 2024, with an affiliate purchasing $40.0 million[470] - The DB Credit Facility was terminated on October 9, 2020, following repayment of all outstanding borrowings[471] - Borrowing capacity under the MS Credit Facility II was permanently decreased by $75.0 million to $325.0 million on October 23, 2020[471] - A quarterly distribution of $0.29 per share was declared on November 20, 2020, payable on December 30, 2020[472] Market Trends This section discusses market opportunities in the middle-market lending segment and the company's competitive advantages - The company targets small and middle-market companies ($10 million to $2.5 billion in annual revenues) in recession-resistant industries, expecting continued significant investment opportunities[473] - Specialized lending requirements for middle-market companies, including labor-intensive due diligence and extensive monitoring, create opportunities as traditional banks de-emphasize this segment[474][475][477] - Despite increased competition in direct lending, the company believes its scale, product suite, and relationships will enable attractive risk-adjusted returns, especially in uncertain market environments[478] Consolidated Results of Operations This section analyzes the company's consolidated financial performance, including investment income, expenses, and net asset changes Consolidated Operating Results (Fiscal Years 2019-2020) | Metric | FY2020 (In thousands) | FY2019 (In thousands) | Variance (2020 vs. 2019) | |:-------------------------------------------------------------------|:----------------------|:----------------------|:--------------------------| | Interest income | $318,480 | $162,249 | $156,231 | | Income from accretion of discounts and origination fees | $16,437 | $8,572 | $7,865 | | GCIC acquisition purchase premium amortization | $(39,920) | $(1,381) | $(38,539) | | Dividend income from LLC equity interests in SLF and GCIC SLF | $1,905 | $1,219 | $686 | | Total investment income | $298,953 | $172,298 | $126,655 | | Total expenses | $159,894 | $86,226 | $73,668 | | Net investment income (loss) | $139,059 | $86,072 | $52,987 | | Net realized gain (loss) on investment transactions | $(16,277) | $(4,442) | $(11,835) | | Net change in unrealized appreciation (depreciation) on investment transactions excluding purchase premium | $(107,830) | $2,480 | $(110,310) | | Net change in unrealized depreciation on investment transactions due to purchase premium | $42,303 | $(102,689) | $144,992 | | Net increase (decrease) in net assets resulting from operations | $54,872 | $(18,579) | $73,451 | Summary of Expenses (Fiscal Years 2019-2020) | Expense Category | FY2020 (In thousands) | FY2019 (In thousands) | Variance (2020 vs. 2019) | |:-----------------------------------|:----------------------|:----------------------|:--------------------------| | Interest and other debt financing expenses | $71,324 | $41,435 | $29,889 | | Amortization of debt issuance costs | $3,534 | $2,096 | $1,438 | | Base management fee | $59,243 | $27,872 | $31,371 | | Income incentive fee | $13,831 | $14,482 | $(651) | | Capital gain incentive fee | $0 | $(5,580) | $5,580 | | Professional fees | $4,727 | $2,636 | $2,091 | | Administrative service fee | $6,037 | $2,682 | $3,355 | | General and administrative expenses | $1,198 | $603 | $595 | | Total expenses | $159,894 | $86,226 | $73,668 | - Net realized loss of $18.7 million in FY2020 was primarily due to restructures, sales, or write-offs of portfolio companies and a $4.0 million realized loss from SLF/GCIC SLF consolidation[503] - Net change in unrealized depreciation of $65.5 million in FY2020 was mainly due to COVID-19 economic effects, partially offset by better-than-expected portfolio performance and credit market recovery[505] Liquidity and Capital Resources This section details the company's cash flow, debt facilities, and asset coverage, highlighting its financial flexibility - Net increase in cash and cash equivalents, foreign currencies, restricted cash and cash equivalents, and restricted foreign currencies was $99.9 million in FY2020[507] - Operating activities provided $187.7 million in cash, while financing activities used $87.8 million in FY2020[507] Outstanding Debt under Revolving Credit Facilities (In thousands) | Facility | Sep 30, 2020 Outstanding | Sep 30, 2019 Outstanding | |:-------------------|:-------------------------|:-------------------------| | MS Credit Facility II | $313,292 | $259,946 | | WF Credit Facility | $199,554 | $253,847 | | DB Credit Facility | $153,524 | $248,042 | | Adviser Revolver | $0 | $0 | Outstanding Debt under Debt Securitizations (In thousands) | Securitization | Sep 30, 2020 Outstanding | Sep 30, 2019 Outstanding | |:-----------------------|:-------------------------|:-------------------------| | 2014 Debt Securitization | $0 | $126,334 | | 2018 Debt Securitization | $408,200 | $408,200 | | GCIC 2018 Debt Securitization | $542,378 | $541,000 | | 2020 Debt Securitization | $189,000 | $0 | Outstanding SBA-Guaranteed Debentures (In thousands) | SBIC Fund | Sep 30, 2020 Outstanding | Sep 30, 2019 Outstanding | |:----------|:-------------------------|:-------------------------| | SBIC IV | $0 | $90,000 | | SBIC V | $151,750 | $165,000 | | SBIC VI | $66,000 | $32,000 | - The company's asset coverage for borrowed amounts was 232.2% as of September 30, 2020 (excluding SBA debentures), above the 150% requirement[531] Portfolio Composition, Investment Activity and Yield This section describes the investment portfolio's composition, new commitments, and non-accrual loan status - As of September 30, 2020, the company had investments in 254 portfolio companies with a total fair value of $4.2 billion[535] New Investment Commitments by Asset Mix (Fiscal Years 2019-2020) | Investment Type | FY2020 (In thousands) | FY2020 (%) | FY2019 (In thousands) | FY2019 (%) | |:----------------|:----------------------|:-----------|:----------------------|:-----------| | Senior secured | $106,268 | 17.9% | $87,314 | 14.4% | | One stop | $481,662 | 80.9% | $505,334 | 83.3% | | Second lien | $0 | 0.0% | $1,513 | 0.2% | | Subordinated debt | $138 | 0.0% | $23 | 0.0% | | LLC equity interests in SLF | $0 | 0.0% | $1,750 | 0.3% | | Equity | $7,010 | 1.2% | $10,663 | 1.8% | | Total | $595,078 | 100.0% | $606,597 | 100.0% | - Proceeds from principal payments and sales of portfolio investments were $706.0 million in FY2020, up from $367.0 million in FY2019[538] Portfolio of Investments by Asset Class (Principal, Amortized Cost, Fair Value) as of September 30, 2020 | Asset Class | Principal (In thousands) | Amortized Cost (In thousands) | Fair Value (In thousands) | |:--------------------|:-------------------------|:------------------------------|:--------------------------| | Senior secured: Performing | $645,886 | $649,259 | $627,471 | | Senior secured: Non-accrual | $37,849 | $27,026 | $12,742 | | One stop: Performing | $3,518,814 | $3,540,446 | $3,429,012 | | One stop: Non-accrual | $81,897 | $75,239 | $56,573 | | Second lien: Performing | $19,640 | $19,886 | $19,640 | | Subordinated debt: Performing | $537 | $541 | $575 | | Equity | N/A | $86,503 | $92,197 | | Total | $4,304,623 | $4,398,900 | $4,238,210 | - As of September 30, 2020, 91.2% of the debt portfolio at fair value had interest rate floors[543][544] - Non-accrual loans represented 2.4% of total debt investments at cost and 1.7% at fair value as of September 30, 2020[541] Contractual Obligations and Off-Balance Sheet Arrangements This section outlines the company's contractual payment obligations and off-balance sheet risks, including unfunded commitments Contractual Payment Obligations as of September 30, 2020 (In thousands) | Obligation | Total | Less Than 1 Year | 1 – 3 Years | 3 – 5 Years | More Than 5 Years | |:--------------------------|:----------|:-----------------|:------------|:------------|:------------------| | 2018 Debt Securitization | $408,200 | $0 | $0 | $0 | $408,200 | | 2018 GCIC Debt Securitization | $542,378 | $0 | $0 | $0 | $542,378 | | 2020 Debt Securitization | $189,000 | $0 | $0 | $0 | $189,000 | | SBA debentures | $217,750 | $0 | $0 | $51,750 | $166,000 | | WF Credit Facility | $199,554 | $0 | $0 | $199,554 | $0 | | MS Credit Facility II | $313,292 | $0 | $0 | $313,292 | $0 | | DB Credit Facility | $153,524 | $0 | $0 | $153,524 | $0 | | Unfunded commitments | $141,795 | $141,795 | $0 | $0 | $0 | | Total contractual obligations | $2,165,493| $141,795 | $0 | $718,120| $1,305,578 | - The company has outstanding commitments to fund investments totaling $141.8 million, including $41.6 million on undrawn revolvers, which are off-balance sheet risks[584] - Material future commitments include the Investment Advisory Agreement with GC Advisors and the Administration Agreement with the Administrator[585][586] Distributions This section details the company's quarterly distribution policy, RIC tax requirements, and dividend reinvestment plan - The company intends to make quarterly distributions, with amounts determined by the board based on estimated earnings[588] - Distributions are subject to the 1940 Act's asset coverage requirements and RIC tax regulations, which may require distributions to avoid adverse tax consequences[589][615] - An 'opt out' dividend reinvestment plan allows stockholders to reinvest cash distributions into additional common stock, potentially leading to dilution for non-participants[592] Related Party Transactions This section describes various transactions with related parties, including management, administrative, and investment advisory agreements - The company has various related party transactions, including the Investment Advisory Agreement with GC Advisors (whose managers have pecuniary interests), and administrative services from Golub Capital LLC[593] - GC Advisors serves as collateral manager for debt securitizations, with fees offsetting the base management fee[593] - The company has an Adviser Revolver with GC Advisors for short-term borrowings and affiliates of GC Advisors participated in the May 2020 rights offering and October 2020 unsecured notes offering[593] Critical Accounting Policies This section explains the company's critical accounting policies, focusing on fair value measurements, revenue recognition, and RIC tax status - Fair value measurements are critical, especially for illiquid investments (Level 3), which are valued in good faith by the board using unobservable inputs like EBITDA and revenue multiples, and market interest rates[597][598][599][600][603][605][606] - Revenue recognition policies include accruing interest income, amortizing premiums/discounts, capitalizing PIK interest (if collectible), and recognizing fee income when earned[611] - Loans are placed on non-accrual status when 90 days past due or collection is doubtful, reversing unpaid interest and ceasing discount accretion[613] - The company operates as a RIC, distributing substantially all net taxable income to avoid federal income taxes, with tax-basis differences reclassified in financial statements[615][617] - Investment income increased by $126.7 million from FY2019 to FY2020, primarily due to a $2.3 billion increase in average earning debt investments from the GCIC acquisition and SLF/GCIC SLF consolidation, partially offset by purchase premium amortization[488] Investment Income Yield by Debt Security Type (Fiscal Years 2019-2020) | Debt Security Type | FY2020 Yield | FY2019 Yield | |:-------------------|:-------------|:-------------| | Senior secured | 6.5% | 7.4% | | One stop | 7.8% | 8.8% | | Second lien | 10.2% | 11.1% | | Subordinated debt | 11.2% | 8.8% | - Interest and other debt financing expenses increased by $29.9 million from FY2019 to FY2020, driven by a rise in average outstanding borrowings from $1.1 billion to $2.2 billion, mainly due to the GCIC acquisition[493] - The effective annualized average interest rate on total debt decreased to 3.4% in FY2020 from 4.2% in FY2019, primarily due to a lower average LIBOR[494] - Net realized loss on investment transactions was $18.7 million in FY2020, primarily from restructures, sales, or write-offs of portfolio companies and consolidation of SLF/GCIC SLF, partially offset by equity investment sales[503] - Net change in unrealized appreciation (depreciation) was $(65.5) million in FY2020, with $53.2 million in appreciation on 140 companies (better performance, market recovery) and $118.9 million in depreciation on 136 companies (COVID-19 impact, increased spreads)[505] - Cash and cash equivalents, foreign currencies, restricted cash and cash equivalents, and restricted foreign currencies increased by $99.9 million in FY2020, with $187.7 million from operating activities and $87.8 million used in financing activities[507] - As of September 30, 2020, the company had $141.8 million in outstanding unfunded commitments, including $41.6 million on undrawn revolvers, and believes it has sufficient liquidity to cover these obligations[532] Contractual Obligations as of September 30, 2020 (In thousands) | Obligation | Total | Less Than 1 Year | 1 – 3 Years | 3 – 5 Years | More Than 5 Years | |:--------------------------|:----------|:-----------------|:------------|:------------|:------------------| | 2018 Debt Securitization | $408,200 | $0 | $0 | $0 | $408,200 | | 2018 GCIC Debt Securitization | $542,378 | $0 | $0 | $0 | $542,378 | | 2020 Debt Securitization | $189,000 | $0 | $0 | $0 | $189,000 | | SBA debentures | $217,750 | $0 | $0 | $51,750 | $166,000 | | WF Credit Facility | $199,554 | $0 | $0 | $199,554 | $0 | | MS Credit Facility II | $313,292 | $0 | $0 | $313,292 | $0 | | DB Credit Facility | $153,524 | $0 | $0 | $153,524 | $0 | | Unfunded commitments | $141,795 | $141,795 | $0 | $0 | $0 | | Total | $2,165,493| $141,795 | $0 | $718,120| $1,305,578 | Quantitative and Qualitative Disclosures about Market Risk This section analyzes exposure to interest rate risk, detailing the impact of hypothetical rate changes on net investment income and the use of interest rate floors - The company is subject to financial market risks, primarily from changes in interest rates, as many loans and borrowings have floating interest rates, typically based on LIBOR[619] - As of September 30, 2020, over 90% of floating-rate loans at fair value were subject to a minimum base rate (floor) of 1.01%[619] - A prolonged reduction in interest rates, like the decrease in LIBOR due to COVID-19, could reduce gross investment income and potentially net investment income[620] Annualized Impact of Hypothetical Base Rate Changes on Net Investment Income (as of September 30, 2020) | Change in interest rates | Increase (decrease) in interest income (In thousands) | Increase (decrease) in interest expense (In thousands) | Net increase (decrease) in investment income (In thousands) | |:-------------------------|:----------------------------------------------------|:-----------------------------------------------------|:----------------------------------------------------------| | Down 25 basis points | $(830) | $(4,419) | $3,589 | | Up 50 basis points | $1,661 | $8,837 | $(7,176) | | Up 100 basis points | $12,238 | $17,674 | $(5,436) | | Up 150 basis points | $33,166 | $26,512 | $6,654 | | Up 200 basis points | $54,144 | $35,349 | $18,795 | Consolidated Financial Statements and Supplementary Data This section presents audited consolidated financial statements, including statements of financial condition, operations, cash flows, and related notes Management's Report on Internal Control over Financial Reporting Management affirms responsibility for internal control over financial reporting and assesses its effectiveness as of September 30, 2020 - Management is responsible for establishing and maintaining adequate internal control over financial reporting, designed to provide reasonable assurance for financial statement preparation[628] - As of September 30, 2020, management assessed the effectiveness of internal control over financial reporting as effective, based on the COSO criteria[631] Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued an unqualified opinion on the consolidated financial statements and internal control over financial reporting - Ernst & Young LLP audited the consolidated financial statements and internal control over financial reporting, expressing an unqualified opinion on both as of September 30, 2020[635][636][646][647] - A critical audit matter identified was the valuation of Level 3 investments due to significant unobservable inputs and assumptions, requiring complex judgments[641] Consolidated Statements of Financial Condition This section presents the company's assets, liabilities, and net assets as of September 30, 2020 and 2019 Consolidated Statements of Financial Condition (In thousands) as of September 30, 2020 and 2019 | Assets | Sep 30, 2020 | Sep 30, 2019 | |:---------------------------------------------------------------------------------------------------|:-------------|:-------------| | Investments, at fair value | $4,238,210 | $4,292,932 | | Cash and cash equivalents | $24,569 | $6,463 | | Restricted cash and cash equivalents | $157,566 | $76,370 | | Total Assets | $4,444,284 | $4,394,863 | | Liabilities | | | | Debt (less unamortized debt issuance costs) | $2,017,802 | $2,119,453 | | Management and incentive fees payable | $17,347 | $12,884 | | Total Liabilities | $2,048,091 | $2,172,009 | | Total Net Assets | $2,396,193 | $2,222,854 | | Net asset value per common share | $14.33 | $16.76 | Consolidated Statements of Operations This section details the company's investment income, expenses, and net assets from operations for fiscal years 2018-2020 Consolidated Statements of Operations (In thousands) for the Years Ended September 30, 2020, 2019 and 2018 | Metric | 2020 | 2019 | 2018 | |:-------------------------------------------------------------------|:---------|:---------|:---------| | Total investment income | $298,953 | $172,298 | $152,171 | | Total expenses | $159,894 | $86,226 | $76,150 | | Net investment income | $139,059 | $86,072 | $76,021 | | Net realized gain (loss) on investment transactions | $(18,660) | $(4,442) | $17,536 | | Net change in unrealized appreciation (depreciation) on investment transactions | $(65,527) | $(100,209) | $(11,587) | | Net increase (decrease) in net assets resulting from operations | $54,872 | $(18,579) | $81,970 | | Basic and diluted earnings (loss) per common share | $0.37 | $(0.28) | $1.33 | | Dividends and distributions declared per common share | $1.37 | $1.40 | $1.36 | Consolidated Statements of Changes in Net Assets This section outlines changes in net assets, including stock issuances and distributions, for fiscal years 2018-2020 Consolidated Statements of Changes in Net Assets (In thousands) for the Years Ended September 30, 2020, 2019 and 2018 | Metric | 2020 | 2019 | 2018 | |:-------------------------------------------------------------------|:---------|:---------|:---------| | Balance at September 30, beginning of period | $2,222,854 | $968,854 | $957,946 | | Issuance of common stock, net of offering and underwriting costs | $300,427 | $1,345,157 | $0 | | Net increase (decrease) in net assets resulting from operations | $54,872 | $(18,579) | $81,970 | | Distributions to stockholders | $(222,420) | $(84,625) | $(81,307) | | Balance at September 30, end of period | $2,396,193 | $2,222,854 | $968,854 | Consolidated Statements of Cash Flows This section presents the company's cash flows from operating and financing activities for fiscal years 2018-2020 Consolidated Statements of Cash Flows (In thousands) for the Years Ended September 30, 2020, 2019 and 2018 | Cash Flow Activity | 2020 | 2019 | 2018 | |:-------------------------------------------------------------------|:---------|:---------|:---------| | Net cash provided by (used in) operating activities | $187,684 | $(118,462) | $(8,480) | | Net cash (used in) provided by financing activities | $(87,808) | $157,160 | $(8,303) | | Net change in cash and cash equivalents, foreign currencies, restricted cash and cash equivalents and restricted foreign currencies | $99,876 | $38,698 | $(16,783) | | Cash and cash equivalents, foreign currencies, restricted cash and cash equivalents and restricted foreign currencies, end of period | $184,430 | $84,208 | $45,705 | Notes to Consolidated Financial Statements This section provides detailed explanations of the company's organization, accounting policies, related party transactions, and financial statement components - Note 1 details the company's organization as a BDC and RIC, the acquisition of GCIC, and the purchase of SLF and GCIC SLF equity