Golub Capital(GBDC) - 2021 Q4 - Annual Report

Part I Business Golub Capital BDC is an externally managed BDC and RIC primarily investing in one-stop and senior secured loans for U.S. middle-market companies, leveraging Golub Capital's $40.0 billion platform General Overview - Golub Capital BDC is an externally managed, closed-end, non-diversified BDC and RIC, primarily investing in one-stop and senior secured loans of U.S. middle-market companies, often sponsored by private equity firms[16] - The company aims to generate current income and capital appreciation by leveraging Golub Capital's loan origination channels and disciplined underwriting, with Golub Capital managing over $40.0 billion as of September 30, 2021[18] - On September 16, 2019, the company acquired Golub Capital Investment Corporation (GCIC), issuing 71,779,964 common shares to former GCIC stockholders[21][22] - On May 15, 2020, a transferable rights offering issued 33,451,902 common shares, raising approximately $300.4 million in net proceeds[23][24] Investment Strategy and Process - The investment process, comprising Origination, Underwriting, Execution, and Monitoring, emphasizes a disciplined, downside-focused approach leveraging Golub Capital's extensive network[45][47][50][52] - Investments are internally rated on a 1-to-5 scale, with 5 indicating least risk and 1 most risk, for portfolio monitoring and valuation[53] Internal Performance Rating Distribution (at Fair Value) | Internal Performance Rating | September 30, 2021 | September 30, 2020 | | :--- | :--- | :--- | | 5 (Least Risk) | 10.2% | 6.1% | | 4 | 80.7% | 72.8% | | 3 | 8.1% | 19.7% | | 2 | 1.0% | 1.4% | | 1 (Most Risk) | 0.0% | 0.0% | - The company primarily structures investments as senior secured, one-stop, second lien, subordinated loans, and minority equity co-investments[60][61][63][64][66] Top 10 Portfolio Industries as of September 30, 2021 | Industry | Investments at Fair Value (in thousands) | Percentage of Total Investments | | :--- | :--- | :--- | | Software | $1,084,864 | 22.2% | | Healthcare Providers and Services | $532,463 | 10.9% | | IT Services | $302,487 | 6.2% | | Specialty Retail | $292,446 | 6.0% | | Insurance | $234,529 | 4.8% | | Hotels, Restaurants and Leisure | $172,285 | 3.5% | | Healthcare Equipment and Supplies | $157,959 | 3.2% | | Health Care Technology | $150,565 | 3.1% | | Automobiles | $140,499 | 2.9% | | Diversified Consumer Services | $134,232 | 2.7% | Management Agreements - The company pays GC Advisors a base management fee of 1.375% annually of average adjusted gross assets (excluding cash and cash equivalents) and an incentive fee[85][86] - The incentive fee includes income-based and capital gains-based components, both capped at 20% of Cumulative Pre-Incentive Fee Net Income, with the income fee subject to a 2.0% quarterly hurdle rate of net assets[88][94][96] - The Administration Agreement requires the company to reimburse Golub Capital LLC for allocable overhead and expenses, including costs for the CFO, CCO, and their staffs[119][120] Regulation - As a BDC, the company must invest at least 70% of its total assets in qualifying assets, primarily securities of eligible U.S. portfolio companies[127] - Following February 5, 2019 stockholder approval, the company is subject to a minimum asset coverage ratio of 150%, allowing it to borrow up to $2 for every $1 of investor equity, an increase from the previous 200% ratio[134] - The company's SBIC subsidiaries, SBIC IV, SBIC V, and SBIC VI, surrendered their licenses on November 4, 2020, May 4, 2021, and September 21, 2021, respectively, with all SBA-guaranteed debentures repaid[148][149][150] - To maintain RIC status, the company must distribute at least 90% of its investment company taxable income annually, avoiding corporate-level U.S. federal income taxes on distributed income[158] Risk Factors The company faces significant business, investment, and securities risks, including interest rate sensitivity, market competition, LIBOR transition, adviser dependence, leverage, illiquidity, and market disruptions - Business and structural risks include dependence on GC Advisors, potential conflicts of interest, interest rate changes, LIBOR discontinuation, and BDC regulations[77] - Investment risks include economic recessions impairing portfolio companies, illiquidity of private debt, credit and default risk, and portfolio concentration[78] - Investor risks include shares trading at a discount to net asset value, distribution uncertainty, and unsecured notes subordination to secured debt[81] - The COVID-19 pandemic has caused significant market volatility and economic uncertainty, potentially adversely affecting the company's portfolio, operations, and financial results[414][415] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[438] Properties The company does not own any real estate; its headquarters are provided by Golub Capital LLC under the Administration Agreement - The company does not own any material physical properties; its headquarters are provided by its Administrator, Golub Capital LLC[439] Legal Proceedings The company, its adviser, and administrator are not currently subject to any material legal proceedings - The company is not currently subject to any material legal proceedings[440] Mine Safety Disclosures This item is not applicable to the company's operations - None[441] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on Nasdaq under "GBDC", with fiscal year 2021 closing prices ranging from $12.66 to $16.10 and total distributions of $1.16 per share Fiscal Year 2021 Stock Price and Distribution Summary | Quarter | NAV per Share | High Closing Price | Low Closing Price | Distributions Declared per Share | | :--- | :--- | :--- | :--- | :--- | | Q1 2021 | $14.60 | $14.15 | $12.66 | $0.29 | | Q2 2021 | $14.86 | $15.36 | $14.08 | $0.29 | | Q3 2021 | $15.06 | $16.10 | $14.72 | $0.29 | | Q4 2021 | $15.19 | $16.01 | $15.17 | $0.29 | - The company declared total distributions of $1.16 per share for fiscal year 2021 and $1.37 per share for fiscal year 2020[449] - On November 19, 2021, the board declared a quarterly distribution of $0.30 per share, payable on December 30, 2021[449] Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal year 2021 saw total investment income of $307.1 million, net investment income of $167.7 million, and a $173.2 million net gain on investments, with the portfolio valued at $4.9 billion and a 200.0% asset coverage ratio Overview Portfolio Composition by Investment Type (at Fair Value) | Investment Type | As of Sep 30, 2021 | As of Sep 30, 2020 | | :--- | :--- | :--- | | Senior secured | 16.0% | 15.1% | | One stop | 79.3% | 82.2% | | Second lien | 0.9% | 0.5% | | Subordinated debt | 0.0% | 0.0% | | Equity | 3.8% | 2.2% | | Total | 100.0% | 100.0% | Key Performance Indicators | Metric | Year ended Sep 30, 2021 | Year ended Sep 30, 2020 | | :--- | :--- | :--- | | Weighted average income yield | 7.4% | 7.6% | | Total return based on average net asset value | 13.7% | 2.5% | | Total return based on market value | 28.9% | (22.8)% | - The company continues to reverse unrealized depreciation from early 2020, as portfolio companies have generally performed better than expected post-COVID-19 pandemic onset[486] Consolidated Results of Operations Consolidated Operating Results (in thousands) | Metric | Year ended Sep 30, 2021 | Year ended Sep 30, 2020 | | :--- | :--- | :--- | | Total investment income | $307,125 | $298,953 | | Total net expenses | $139,453 | $159,894 | | Net investment income | $167,672 | $139,059 | | Net gain (loss) on investment transactions | $173,151 | $(84,187) | | Net increase in net assets | $340,280 | $54,872 | - Investment income increased by $8.2 million year-over-year, primarily due to reduced GCIC acquisition premium amortization and higher fee and accretion income, partially offset by lower LIBOR rates[501] - Net expenses decreased by $20.4 million, mainly due to lower interest expense from reduced LIBOR rates and a $10.6 million decrease in the income incentive fee[507][508][511] - The company recorded a net gain on investments of $173.2 million in fiscal year 2021, a reversal from the $84.2 million net loss in fiscal year 2020, driven by $165.2 million in net unrealized appreciation[517][519] Liquidity and Capital Resources - As of September 30, 2021, the company had $2.6 billion of debt outstanding, with a 200.0% asset coverage ratio, exceeding the 150% regulatory requirement, targeting a GAAP debt-to-equity ratio between 0.85x and 1.25x[541] - During fiscal 2021, the company issued $400.0 million of 2.500% unsecured notes due 2026 and $350.0 million of 2.050% unsecured notes due 2027, and entered a new $475.0 million JPM Credit Facility[529][538][539] - New investment commitments significantly increased to $2.3 billion in fiscal year 2021 from $595.1 million in fiscal year 2020, driven by increased merger and acquisition activity[547][548] - As of September 30, 2021, non-accrual loans represented 1.3% of the total debt portfolio at cost and 1.0% at fair value, a decrease from 2.4% and 1.7% respectively, at fiscal year 2020 end[551][552] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate fluctuations, with 90% of its loan portfolio having interest rate floors averaging 0.99%, and a 150 basis point rate increase estimated to yield an $11.5 million net increase in investment income - The company's primary market risk is interest rate fluctuations, affecting floating-rate assets and liabilities, with a weighted average LIBOR floor of 0.99% on loans as of September 30, 2021[593] Annualized Impact of Hypothetical Interest Rate Changes (as of Sep 30, 2021) | Change in Interest Rates | Net Increase (Decrease) in Investment Income (in thousands) | | :--- | :--- | | Down 25 basis points | $2,558 | | Up 50 basis points | $(5,111) | | Up 100 basis points | $(4,006) | | Up 150 basis points | $11,531 | | Up 200 basis points | $27,151 | Consolidated Financial Statements and Supplementary Data This section presents audited consolidated financial statements, including key figures as of September 30, 2021, such as total investments at fair value of $4.9 billion, total assets of $5.2 billion, total debt of $2.6 billion, and NAV per share of $15.19 Financial Statements Consolidated Statement of Financial Condition Highlights (in thousands) | Metric | As of Sep 30, 2021 | As of Sep 30, 2020 | | :--- | :--- | :--- | | Total Investments, at fair value | $4,894,886 | $4,238,210 | | Total Assets | $5,164,915 | $4,444,284 | | Total Debt (less unamortized costs) | $2,551,378 | $2,017,802 | | Total Net Assets | $2,582,692 | $2,396,193 | | Net Asset Value per share | $15.19 | $14.33 | Consolidated Statement of Operations Highlights (in thousands) | Metric | Year ended Sep 30, 2021 | Year ended Sep 30, 2020 | | :--- | :--- | :--- | | Total investment income | $307,125 | $298,953 | | Net investment income | $167,672 | $139,059 | | Net gain (loss) on investment transactions | $173,151 | $(84,187) | | Net increase in net assets | $340,280 | $54,872 | Notes to Consolidated Financial Statements - The company's investments are primarily Level 3 in the fair value hierarchy, with valuations based on significant unobservable inputs and management judgment, using market comparable company analysis and market interest rate yield analysis[967][968] - As of September 30, 2021, the company had various debt facilities including the 2018 Debt Securitization ($408.2 million), GCIC 2018 Debt Securitization ($544.2 million), JPM Credit Facility ($472.1 million), 2024 Notes ($400.0 million), 2026 Notes ($400.0 million), and 2027 Notes ($350.0 million)[985][992][1027][1033][1037][1040] - For fiscal year ended September 30, 2021, distributions of $1.16 per share were characterized for tax purposes as $1.13 from ordinary income and $0.03 from long-term capital gains[1055][1075] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[1083] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal controls during the fourth fiscal quarter - Management concluded that as of September 30, 2021, the company's disclosure controls and procedures were effective[1084] - No material changes in internal control over financial reporting were identified during the fourth fiscal quarter of 2021[1086] Other Information No other information was reported under this item - None[1087] Part III Directors, Executive Officers and Corporate Governance Information for this item is incorporated by reference from the company's 2022 Annual Meeting of Stockholders Proxy Statement - Information is incorporated by reference from the company's 2022 Proxy Statement[1090] Executive Compensation Information for this item is incorporated by reference from the company's 2022 Annual Meeting of Stockholders Proxy Statement - Information is incorporated by reference from the company's 2022 Proxy Statement[1091] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information for this item is incorporated by reference from the company's 2022 Annual Meeting of Stockholders Proxy Statement - Information is incorporated by reference from the company's 2022 Proxy Statement[1092] Certain Relationships and Related Transactions, and Director Independence Information for this item is incorporated by reference from the company's 2022 Annual Meeting of Stockholders Proxy Statement - Information is incorporated by reference from the company's 2022 Proxy Statement[1093] Principal Accountant Fees and Services Information for this item is incorporated by reference from the company's 2022 Annual Meeting of Stockholders Proxy Statement - Information is incorporated by reference from the company's 2022 Proxy Statement[1094] Part IV Exhibits and Financial Statement Schedules This section lists all exhibits filed as part of the annual report, including merger agreements, corporate governance documents, and required certifications - This section lists all financial statements, schedules, and exhibits filed with the Form 10-K[1097]