Golub Capital(US:GBDC)2024-05-06 20:28Part I. Financial Information Item 1. Financial Statements The unaudited statements for the period ended March 31, 2024, show increased assets and NAV per share, improved net income, and detailed portfolio composition Consolidated Statements of Financial Condition Total assets grew to $5.94 billion and NAV per share increased to $15.12 as of March 31, 2024 Financial Condition (In thousands) | Financial Metric | March 31, 2024 | September 30, 2023 | | :--- | :--- | :--- | | Total Investments, at fair value | $5,394,737 | $5,516,613 | | Total Assets | $5,942,626 | $5,733,472 | | Total Liabilities | $3,348,986 | $3,185,594 | | Total Net Assets | $2,593,640 | $2,547,878 | | Net Asset Value per common share | $15.12 | $15.02 | Consolidated Statements of Operations Net increase in net assets from operations rose to $93.6 million for the quarter, a significant year-over-year improvement Results of Operations | Metric (In thousands, except per share data) | Three Months Ended Mar 31, 2024 | Three Months Ended Mar 31, 2023 | Six Months Ended Mar 31, 2024 | Six Months Ended Mar 31, 2023 | | :--- | :--- | :--- | :--- | :--- | | Total investment income | $164,230 | $146,953 | $329,000 | $283,830 | | Net investment income - after tax | $86,533 | $70,206 | $170,068 | $131,869 | | Net increase in net assets from operations | $93,558 | $58,503 | $169,334 | $84,084 | | Basic and diluted EPS | $0.55 | $0.34 | $1.00 | $0.49 | - An incentive fee of $5,157 thousand was waived for the three and six months ended March 31, 2024, with no such waiver in the prior year periods12 Consolidated Statements of Changes in Net Assets Total net assets increased by $45.8 million to $2.59 billion, driven by operations and offset by distributions - Net assets increased from $2,547,878 thousand at September 30, 2023, to $2,593,640 thousand at March 31, 202414 - Key changes in net assets for the six months ended March 31, 2024 included: net investment income of $170,068 thousand, net realized loss of $(12,722) thousand, and distributions of $(153,092) thousand14 Consolidated Statements of Cash Flows Net cash from operations increased significantly to $313.0 million, resulting in a total net cash increase of $322.0 million Cash Flow Summary | Cash Flow Activity (In thousands) | Six Months Ended Mar 31, 2024 | Six Months Ended Mar 31, 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $313,014 | $82,703 | | Net cash provided by (used in) financing activities | $8,993 | $(125,656) | | Net change in cash and equivalents | $322,007 | $(42,953) | Consolidated Schedules of Investments The investment portfolio's fair value was $5.39 billion, concentrated in debt investments across diversified industries Investment Portfolio Summary (In thousands) | Investment Category | Fair Value (Mar 31, 2024) | Percentage of Net Assets | | :--- | :--- | :--- | | Non-controlled/non-affiliate company investments | $5,277,008 | 203.5% | | Non-controlled/affiliate company investments | $105,956 | 4.0% | | Controlled affiliate company investments | $11,773 | 0.5% | | Total investments | $5,394,737 | 208.0% | - The total amortized cost of the investment portfolio was $5.44 billion as of March 31, 2024, compared to a fair value of $5.39 billion, indicating a net unrealized depreciation133 Notes to Consolidated Financial Statements Notes detail the pending GBDC 3 merger, a reduced management fee, debt composition, and subsequent events - On January 16, 2024, the Company entered into an Agreement and Plan of Merger with Golub Capital BDC 3, Inc, subject to stockholder approval and other closing conditions250425 - Effective July 1, 2023, the base management fee rate was reduced from 1.375% to 1.0% of average adjusted gross assets, and the Investment Adviser agreed to waive incentive fees in excess of 15% pending the GBDC 3 merger296308 - Subsequent to quarter-end, the Company redeemed all $500 million of its 3.375% Notes due 2024 and declared a quarterly distribution of $0.39 per share and a supplemental distribution of $0.06 per share430432 Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses performance, a $5.4 billion portfolio, strong credit quality, and the pending GBDC 3 merger Overview The company is an externally managed BDC investing in U.S. middle-market loans via the Golub Capital platform - 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 companies440 - The investment strategy relies on accessing the loan origination channels of Golub Capital, which managed over $65.0 billion in capital as of January 1, 2024440 Recent Developments Post-quarter end, the company redeemed $500.0 million in notes and declared quarterly and supplemental distributions - On April 8, 2024, the company redeemed all $500.0 million of its 2024 Notes459 - The Board declared a quarterly distribution of $0.39 per share and a supplemental distribution of $0.06 per share461 Consolidated Results of Operations Q2 2024 net investment income was $86.5 million, with net assets increasing by $93.6 million due to gains and a fee waiver Quarterly and Six-Month Operational Results | Metric (In thousands) | Q2 2024 | Q1 2024 | 6 Months Ended Mar 31, 2024 | 6 Months Ended Mar 31, 2023 | | :--- | :--- | :--- | :--- | :--- | | Total investment income | $164,230 | $164,770 | $329,000 | $283,830 | | Net expenses | $77,127 | $80,735 | $157,862 | $149,529 | | Net investment income after taxes | $86,533 | $83,535 | $170,068 | $131,869 | | Net gain (loss) on investments | $6,675 | $(7,736) | $(1,061) | $(48,076) | | Net increase in net assets | $93,558 | $75,776 | $169,334 | $84,084 | - The base management fee decreased year-over-year primarily due to the fee rate reduction to 1.0% from 1.375% effective July 1, 2023481 - The income incentive fee decreased quarter-over-quarter due to a $5.2 million waiver related to the pending GBDC 3 merger483 Liquidity and Capital Resources The company maintains strong liquidity with $292.8 million in cash and a debt-to-equity ratio of 1.28x - As of March 31, 2024, the company had $292.8 million in cash and cash equivalents and $1.49 billion available on its JPM Credit Facility500501 - The asset coverage ratio was 177.9%, and the GAAP debt-to-equity ratio was 1.28x515 - Outstanding commitments to fund investments totaled $144.1 million as of March 31, 2024517 Portfolio Composition, Investment Activity and Yield The $5.4 billion portfolio is concentrated in one stop loans with a 12.4% yield and high credit quality Portfolio Overview | Metric | March 31, 2024 | September 30, 2023 | | :--- | :--- | :--- | | Total Investments at Fair Value | $5.4 billion | $5.5 billion | | Number of Portfolio Companies | 366 | 342 | | One Stop Loans (% of Total) | 85.3% | 84.8% | | Non-Accrual (% of Debt at Fair Value) | 0.9% | 1.2% | Internal Performance Ratings | Internal Performance Rating | % of Total Investments (Fair Value) | | :--- | :--- | | 5 (Least Risk) | 2.3% | | 4 (Performing as Expected) | 84.9% | | 3 (Performing Below Expectations) | 12.3% | | 2 (Materially Below Expectations) | 0.5% | | 1 (Substantially Below Expectations) | 0.0% | Distributions The company makes quarterly distributions, has an "opt out" DRIP, and must distribute 90% of taxable income - The company has an "opt out" dividend reinvestment plan (DRIP), meaning cash distributions are automatically reinvested unless a stockholder elects to receive cash538 Related Party Transactions Agreements with GC Advisors and the pending GBDC 3 merger constitute key related party transactions - Key related parties include GC Advisors (Investment Adviser) and Golub Capital LLC (Administrator)539543 - GC Advisors has agreed to waive incentive fees in excess of 15% during the pendency of the GBDC 3 merger539 - Potential conflicts of interest exist as GC Advisors manages other similar funds (GBDC 3, GDLC, etc.), which are addressed through an allocation policy541 Critical Accounting Policies Policies focus on the Board's fair value determination for Level 3 assets using methods like enterprise value analysis - The Board of Directors is solely responsible for the good faith determination of fair value for investments without readily available market quotations (Level 3 assets)547 - The valuation process for Level 3 assets involves a multi-step quarterly review by GC Advisors, senior management, the audit committee, and at least one annual review by an independent valuation firm547553 - Primary valuation methods for Level 3 investments include enterprise value analysis (using EBITDA multiples) and market interest rate yield analysis554 Quantitative and Qualitative Disclosures about Market Risk The primary market risk is interest rates, with a 100 bps rate change impacting net investment income by ~$35.2 million Interest Rate Sensitivity Analysis | Change in Interest Rates | Annualized Net Increase (Decrease) in Net Investment Income (In thousands) | | :--- | :--- | | Down 200 basis points | $(70,338) | | Down 100 basis points | $(35,169) | | Up 100 basis points | $35,169 | | Up 200 basis points | $70,338 | Controls and Procedures Management concluded that disclosure controls and procedures were effective with no material changes to internal controls - Management concluded that disclosure controls and procedures were effective as of the end of the period covered by the report573 - No changes in internal controls over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, such controls574 Part II. Other Information Legal Proceedings The company is not currently subject to any material legal proceedings - The company, its adviser, and affiliates are not currently subject to any material legal proceedings576 Risk Factors No material changes to previously disclosed risk factors were reported for the quarter - No material changes to risk factors were reported for the three months ended March 31, 2024577 Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities were reported during the period - None578 Defaults Upon Senior Securities No defaults upon senior securities were reported during the period - None579 Mine Safety Disclosures This item is not applicable to the company - None580 Other Information No directors or officers adopted or terminated Rule 10b5-1 trading plans during the quarter - No directors or executive officers adopted or terminated any Rule 10b5-1 trading plans during the quarter581 Exhibits Filed exhibits include the GBDC 3 merger agreement, debt indentures, and officer certifications - Exhibits filed include the GBDC 3 Merger Agreement, a supplemental indenture for the 6.000% Notes due 2029, and officer certifications583