Golub Capital(US:GBDC)2022-11-23 22:28Financial Data and Key Metrics Changes - Adjusted net investment income (NII) per share increased by 6% to $0.33 from $0.31 per share in the previous quarter [12][50] - NAV per share declined by 1.7% from $15.14 to $14.89 due to unrealized losses primarily from spread widening [13][51] - The company announced a 10% increase in the quarterly base dividend from $0.30 to $0.33 per share, equating to an 8.9% dividend yield [16][19] Business Line Data and Key Metrics Changes - GBDC's portfolio is almost entirely composed of floating rate loans, which are generating more interest income due to higher base rates [17][56] - The weighted average rate on new investments increased by 120 basis points, with weighted average spreads on new investments rising from 5.8% to 6.2% [54][60] - Over 90% of investments had an internal performance rating of 4 or higher, indicating strong credit quality [22][71] Market Data and Key Metrics Changes - The overall deal activity in the market is down, but the origination environment is considered highly attractive due to wider spreads and tighter documentation terms [48][49] - The company has a robust access to opportunities through its existing relationships, with a significant increase in origination from repeat borrowers [45][47] Company Strategy and Development Direction - GBDC focuses on providing first lien senior secured loans to resilient middle market companies backed by strong private equity sponsors [7][24] - The company is positioned to navigate uncertainties and is well-suited to capitalize on attractive new origination opportunities [23][25] - GBDC's funding structure is flexible and low-cost, providing a competitive advantage in the current market [74] Management's Comments on Operating Environment and Future Outlook - The macroeconomic environment is characterized by muddling growth, with companies generally maintaining revenues despite margin pressures [27][31] - Management anticipates challenges ahead, including rising rates and potential credit stress, but believes the company is well-prepared [84][92] - The company expects to see further increases in NII due to rising base rates and the lag effect of loan resets [62][66] Other Important Information - GBDC's credit quality remains strong, with low realized losses and a low percentage of investments on non-accrual [21][70] - The company has significant liquidity, with almost $800 million available from unrestricted cash and undrawn commitments [73] Q&A Session Summary Question: Impact of rising rates on interest coverage of borrowers - Management noted that average interest coverage ratios are not very informative and emphasized a granular review of loans to identify vulnerabilities [78][80] Question: Increase in amendment requests - Management has not yet seen an increase in amendment requests but anticipates that challenges for borrowers will lead to more amendments in the future [84] Question: Margin pressure and end demand - The majority of companies are sustaining revenues, with margin shortfalls primarily due to wage and raw material price increases [91] Question: Lender-friendly environment shifts - Management indicated that spreads are wider, OID and closing fees are improving, and documentation terms are tightening [93] Question: Elasticity of demand among borrowers - Management highlighted that some companies can raise prices without significant demand impact, while others face challenges [100] Question: China supply chain exposure - Supply chain issues have improved but remain a concern, and management is working with borrowers on contingency plans [102] Question: Software ARR lending component - Management clarified that they lend to mission-critical B2B software companies, which have more stable demand compared to consumer-driven tech companies [106][108]