Goldman Sachs BDC: Risks Are Growing (Rating Downgrade)

Earnings and Financial Performance - Goldman Sachs BDC reported a sharp correction in shares following its Q2 fiscal results, driven by a significant increase in non-accrual percentages [1] - The non-accrual percentage based on fair value increased to 3.4% in Q2'24, a more than 100% increase quarter-over-quarter [5] - Net investment income (NII) declined to $108.6M in Q2'24, down 3% year-over-year and quarter-over-quarter [5] - Interest from variable rate loans fell to $107.0M, a 4% year-over-year and 3% quarter-over-quarter decline [5] - Dividend coverage remained robust at 1.31X in Q2'24, up from 1.22X in the previous quarter [5] Portfolio and Investment Strategy - Goldman Sachs BDC primarily focuses on first lien investments, which represented 97% of its $3.5B investment portfolio as of June 2024 [4] - The company placed two portfolio companies on non-accrual in Q2'24, contributing to the sharp rise in non-accrual percentages [5] - Non-accrual percentages based on amortized cost increased to 7.6% in Q2'24, up from 3.3% in Q1'24 [5] Valuation and Market Sentiment - Goldman Sachs BDC's shares are valued at a P/NAV ratio of 1.04X, below the 3-year average of 1.07X [6] - The company's fair value is estimated at $13.67 per share, reflecting a 1.0X P/NAV ratio due to concerns over balance sheet quality and NII performance [6] - Market sentiment was negatively impacted by fears of lower federal fund rates and weak Q2 earnings [6] Industry and Competitive Landscape - Goldman Sachs BDC faces headwinds from the Federal Reserve's potential rate cuts, which could weaken NII growth for BDCs with variable rate loan investments [3][6] - Competitors like Ares Capital (ARCC) and Blue Owl Capital (OBDC) trade at P/NAV ratios of 1.07X and 0.98X, respectively [6] - Blue Owl Capital's recent merger announcement is seen as a potential revaluation catalyst [6] Dividend and Income Risks - Goldman Sachs BDC's dividend is currently supported by NII, but risks to future dividend coverage have increased due to rising non-accrual percentages [7][8] - The company's ability to maintain its dividend depends on recovering or restructuring non-accrual investments [8]