GOLUB CAPITAL BDC, INC. The information contained in this section should be read in conjunction with our consolidated financial statements and related notes thereto appearing elsewhere in this quarterly report on Form 10-Q. In this report, "we," "us," "our" and "Golub Capital BDC" refer toGolub Capital BDC, Inc. and its consolidated subsidiaries.
Forward-Looking Statements
Some of the statements in this quarterly report on Form 10-Q constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties, including statements as to:
• our future operating results;
• our business prospects and the prospects of our portfolio companies;
• the effect of investments that we expect to make and the competition for
those investments;
• our contractual arrangements and relationships with third parties;
• actual and potential conflicts of interest with
Advisors, and other affiliates of
• the dependence of our future success on the general economy and its effect
on the industries in which we invest;
• the ability of our portfolio companies to achieve their objectives;
• the use of borrowed money to finance a portion of our investments;
• the adequacy of our financing sources and working capital;
• the timing of cash flows, if any, from the operations of our portfolio
companies;
• general economic and political trends and other external factors;
• the ability of
monitor and administer our investments;
• the ability of
talented professionals;
• our ability to qualify and maintain our qualification as a regulated
investment company, or RIC, and as a business development company;
• general price and volume fluctuations in the stock markets;
• the impact on our business of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, or Dodd-Frank, and the rules and regulations
issued thereunder and any actions toward repeal thereof; and
• the effect of changes to tax legislation and our tax position.
Such forward-looking statements may include statements preceded by, followed by or that otherwise include the words "may," "might," "will," "intend," "should," "could," "can," "would," "expect," "believe," "estimate," "anticipate," "predict," "potential," "plan" or similar words. The forward looking statements contained in this quarterly report on Form 10-Q involve risks and uncertainties. Our actual results could differ materially from those implied or expressed in the forward-looking statements for any reason, including the factors set forth as "Risk Factors" in our annual report on Form 10-K for the year endedSeptember 30, 2019 . We have based the forward-looking statements included in this report on information available to us on the date of this report. Actual results could differ materially from those anticipated in our forward-looking statements and future results could differ materially from historical performance. You are advised to consult any additional disclosures that we make directly to you or through reports that we have filed or in the future file with theSecurities and Exchange Commission , or theSEC , including annual reports on Form 10-K, registration statements on Form N-2, quarterly reports on Form 10-Q and current reports on Form 8-K. This quarterly report on Form 10-Q contains statistics and other data that have been obtained from or compiled from information made available by third-party service providers. We have not independently verified such statistics or data. 109
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Overview
We are an externally managed, closed-end, non-diversified management investment company that has elected to be regulated as a business development company under the Investment Company Act of 1940, as amended, or the 1940 Act. In addition, forU.S. federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of the Internal Revenue Code of 1986, as amended, or the Code. As a business development company and a RIC, we are also subject to certain constraints, including limitations imposed by the 1940 Act and the Code.
Our shares are currently listed on The Nasdaq Global Select Market under the symbol "GBDC".
Our investment objective is to generate current income and capital appreciation by investing primarily in one stop (a loan that combines characteristics of traditional first lien senior secured loans and second lien or subordinated loans and that are often referred to by other middle-market lenders as unitranche loans) and other senior secured loans ofU.S. middle-market companies. We also selectively invest in second lien and subordinated loans of, and warrants and minority equity securities inU.S. middle-market companies. We intend to achieve our investment objective by (1) accessing the established loan origination channels developed byGolub Capital , a leading lender toU.S. middle-market companies with over$30.0 billion in capital under management as ofDecember 31, 2019 , (2) selecting investments within our core middle-market company focus, (3) partnering with experienced private equity firms, or sponsors, in many cases with whomGolub Capital has invested alongside in the past, (4) implementing the disciplined underwriting standards ofGolub Capital and (5) drawing upon the aggregate experience and resources ofGolub Capital .
Our investment activities are managed by
Under an investment advisory agreement, or the Investment Advisory Agreement, we have agreed to payGC Advisors an annual base management fee based on our average adjusted gross assets as well as an incentive fee based on our investment performance. The Investment Advisory Agreement was approved by our board of directors inJuly 2019 and by our stockholders inSeptember 2019 . The Investment Advisory Agreement was entered into effective as ofSeptember 16, 2019 and will continue for an initial two-year term. Prior toSeptember 16, 2019 , we were subject to an investment advisory agreement, or the Prior Investment Advisory Agreement. The changes to the Investment Advisory Agreement, as compared to the Prior Investment Advisory Agreement, consisted of revisions to (i) exclude the impact of purchase accounting resulting from a merger or acquisition, including our acquisition ofGolub Capital Investment Corporation , or GCIC, from the calculation of income subject to the income incentive fee payable and the calculation of the cumulative incentive fee cap under the Investment Advisory Agreement and (ii) convert the cumulative incentive fee cap into a per share calculation. Under an administration agreement, or the Administration Agreement, we are provided with certain administrative services by an administrator, or the Administrator, which is currentlyGolub Capital LLC . Under the Administration Agreement, we have agreed to reimburse the Administrator for our allocable portion (subject to the review and approval of our independent directors) of overhead and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement. We seek to create a portfolio that includes primarily one stop and other senior secured loans by primarily investing approximately$10.0 million to$75.0 million of capital, on average, in the securities ofU.S. middle-market companies. We also selectively invest more than$75.0 million in some of our portfolio companies and generally expect that the size of our individual investments will vary proportionately with the size of our capital base. We generally invest in securities that have been rated below investment grade by independent rating agencies or that would be rated below investment grade if they were rated. These securities, which are often referred to as "junk," have predominantly speculative characteristics with respect to the issuer's capacity to pay interest and repay principal. In addition, many of our debt investments have floating interest rates that reset on a periodic basis and typically do not fully pay down principal prior to maturity, which may increase our risk of losing part or all of our investment. 110
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As of
As of December 31, 2019 As of September 30, 2019
Investments at Percentage of Investments at Percentage of
Fair Value Total Fair Value Total
Investment Type (In thousands) Investments (In thousands) Investments
Senior secured $ 545,176 12.2 % $ 589,340 13.7 %
One stop 3,676,789 82.7 3,474,116 80.9
Second lien 19,781 0.4 19,473 0.5
Subordinated debt 510 0.0 * 369 0.0 *
LLC equity interests in SLF and
GCIC SLF(1) 119,078 2.7 123,644 2.9
Equity 86,982 2.0 85,990 2.0
Total $ 4,448,316 100.0 % $ 4,292,932 100.0 %
* Represents an amount less than 0.1%.
Proceeds from limited liability company, or LLC, equity interests invested
in
were utilized by SLF and GCIC SLF, or the Senior Loan Funds and each a
(1)
One stop loans include loans to technology companies undergoing strong growth due to new services, increased adoption and/or entry into new markets. We refer to loans to these companies as late stage lending loans. Other targeted characteristics of late stage lending businesses include strong customer revenue retention rates, a diversified customer base and backing from growth equity or venture capital firms. In some cases, the borrower's high revenue growth is supported by a high level of discretionary spending. As part of the underwriting of such loans and consistent with industry practice, we adjust our characterization of the earnings of such borrowers for a reduction or elimination of such discretionary expenses, if appropriate. As ofDecember 31, 2019 andSeptember 30, 2019 , one stop loans included$409.3 million and$414.7 million , respectively, of late stage lending loans at fair value.
As of
The following table shows the weighted average income yield and weighted average investment income yield of our earning portfolio company investments, which represented nearly 100% of our debt investments, as well as the total return based on our average net asset value, and the total return based on the change in the quoted market price of our stock and assuming distributions were reinvested in accordance with our dividend reinvestment plan, or DRIP, in each case for the three months endedDecember 31, 2019 and 2018: For the three months endedDecember 31, 2019 2018 Weighted average annualized income yield (1) 8.0%
8.6%
Weighted average annualized investment income yield (2) 8.4%
9.1%
Total return based on average net asset value (3)* 8.4%
7.5%
Total return based on market value (4) 0.5% (9.7)% * Annualized for periods of less than one year. (1) Represents income from interest and fees, excluding amortization of
capitalized fees, discounts and purchase premium (as described in Note 2 of
the consolidated financial statements), divided by the average fair value of
earning portfolio company investments, and does not represent a return to
any investor in us.
(2) Represents income from interest, fees and amortization of capitalized fees
and discounts, excluding amortization of purchase premium (as described in
Note 2 of the consolidated financial statements), divided by the average
fair value of earning portfolio investments, and does not represent a return
to any investor in us.
(3) Total return based on average net asset value is calculated as (a) the netincrease in net assets resulting from operations divided by (b) the daily
average of total net assets. Total return does not include sales load.
(4) Total return based on market value assumes distributions are reinvested in
accordance with the DRIP. Total return does not include sales load.
Revenues: We generate revenue in the form of interest and fee income on debt
investments and capital gains and distributions, if any, on portfolio company
investments that we originate or acquire. Our debt investments, whether in the
form of senior secured, one stop, second lien or subordinated loans, typically
have a term of three to seven
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years and bear interest at a fixed or floating rate. In some instances, we receive payments on our debt investments based on scheduled amortization of the outstanding balances. In addition, we receive repayments of some of our debt investments prior to their scheduled maturity date. The frequency or volume of these repayments fluctuates significantly from period to period. Our portfolio activity also reflects the proceeds of sales of securities. In some cases, our investments provide for deferred interest payments or payment-in-kind, or PIK, interest. The principal amount of loans and any accrued but unpaid interest generally become due at the maturity date. In addition, we generate revenue in the form of commitment, origination, amendment, structuring or due diligence fees, fees for providing managerial assistance and consulting fees. Loan origination fees, original issue discount and market discount or premium are capitalized, and we accrete or amortize such amounts as interest income. We record prepayment premiums on loans as fee income. For additional details on revenues, see "Critical Accounting Policies-Revenue Recognition." We recognize realized gains or losses on investments based on the difference between the net proceeds from the disposition and the amortized cost basis of the investment or derivative instrument, without regard to unrealized gains or losses previously recognized. We record current period changes in fair value of investments and derivative instruments that are measured at fair value as a component of the net change in unrealized appreciation (depreciation) on investment transactions in the Consolidated Statements of Operations.
Expenses: Our primary operating expenses include the payment of fees to
• calculating our net asset value, or NAV (including the cost and expenses
of any independent valuation firm);
• fees and expenses incurred by
including agents, consultants or other advisors, in monitoring financial
and legal affairs for us and in monitoring our investments and performing
due diligence on our prospective portfolio companies or otherwise relating
to, or associated with, evaluating and making investments, which fees and
expenses include, among other items, due diligence reports, appraisal
reports, any studies commissioned by
expenses;
• expenses related to unsuccessful portfolio acquisition efforts;
• offerings of our common stock and other securities;
• administration fees and expenses, if any, payable under the Administration
Agreement (including payments based upon our allocable portion of the
Administrator's overhead in performing its obligations under the
Administration Agreement, including rent and the allocable portion of the
cost of our chief compliance officer, chief financial officer and their
respective staffs);
• fees payable to third parties, including agents, consultants or other
advisors, relating to, or associated with, evaluating and making
investments in portfolio companies, including costs associated with
meeting financial sponsors;
• transfer agent, dividend agent and custodial fees and expenses;
•
• all costs of registration and listing our shares on any securities exchange;
•
• independent directors' fees and expenses;
• costs of preparing and filing reports or other documents required by the
• costs of any reports, proxy statements or other notices to stockholders,
including printing costs;
• costs associated with individual or group stockholders;
• costs associated with compliance under the Sarbanes-Oxley Act of 2002, as
amended, or the Sarbanes-Oxley Act;
• our allocable portion of any fidelity bond, directors and officers/errors
and omissions liability insurance, and any other insurance premiums;
• direct costs and expenses of administration, including printing, mailing,
long distance telephone, copying, secretarial and other staff, independent
auditors and outside legal costs;
• proxy voting expenses; and
• all other expenses incurred by us or the Administrator in connection with
administering our business.
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We expect our general and administrative expenses to be relatively stable or decline as a percentage of total assets during periods of asset growth and to increase during periods of asset declines.GC Advisors , as collateral manager forGolub Capital BDC 2014-LLC, or the 2014 Issuer, our wholly-owned subsidiary, under a collateral management agreement, or the 2014 Collateral Management Agreement, is entitled to receive an annual fee in an amount equal to 0.25% of the principal balance of the portfolio loans held by the 2014 Issuer at the beginning of the collection period relating to each payment date, which is payable in arrears on each payment date. Under the 2014 Collateral Management Agreement, the term ''collection period'' refers to a quarterly period running from the day after the end of the prior collection period to the tenth business day prior to the payment date.GC Advisors , as collateral manager forGolub Capital BDC CLO III LLC , or the 2018 Issuer our indirect, wholly-owned subsidiary, under a collateral management agreement, or the 2018 Collateral Management Agreement, is entitled to receive an annual fee in an amount equal to 0.25% of the principal balance of the portfolio loans held by the 2018 Issuer at the beginning of the collection period relating to each payment date, which is payable in arrears on each payment date. Under the 2018 Collateral Management Agreement, the term "collection period" refers to the period commencing on the third business day prior to the preceding payment date and ending on (but excluding) the third business day prior to such payment date.GC Advisors , as collateral manager forGolub Capital Investment Corporation CLO II LLC , or the GCIC 2018 Issuer, our indirect, wholly-owned subsidiary, under a collateral management agreement, or the GCIC 2018 Collateral Management Agreement, is entitled to receive an annual fee in an amount equal to 0.35% of the principal balance of the portfolio loans held by the GCIC 2018 Issuer at the beginning of the collection period relating to each payment date, which is payable in arrears on each payment date. Under the 2018 GCIC Collateral Management Agreement, the term "collection period" generally refers to a quarterly period commencing on the day after the end of the prior collection period to the tenth business day prior to the payment date. Collateral management fees are paid directly by the 2014 Issuer, 2018 Issuer, and GCIC 2018 Issuer toGC Advisors and are offset against the management fees payable under the Investment Advisory Agreement. In addition, the 2014 Issuer paidWells Fargo Securities, LLC structuring and placement fees for its services in connection with the initial structuring and subsequent amendments to the initial structuring of the$402.6 million term debt securitization, or the 2014 Debt Securitization. The 2018 Issuer paidMorgan Stanley & Co. LLC structuring and placement fees for its services in connection with the structuring of the$602.4 million term debt securitization, or the 2018 Debt Securitization. Before we acquired the GCIC 2018 Issuer as part of our acquisition of GCIC, the GCIC 2018 Issuer paidWells Fargo Securities, LLC structuring and placement fees for its services in connection with the initial structuring of the$908.2 million term debt securitization or the GCIC 2018 Debt Securitization. Term debt securitizations are also known as collateralized loan obligations, or CLOs, and are a form of secured financing incurred by us, which is consolidated by us and subject to our overall asset coverage requirement. The 2014 Issuer, the 2018 Issuer, and GCIC 2018 Issuer also agreed to pay ongoing administrative expenses to the trustee, collateral manager, independent accountants, legal counsel, rating agencies and independent managers in connection with developing and maintaining reports, and providing required services in connection with the administration of the 2014 Debt Securitization, the 2018 Debt Securitization and GCIC 2018 Debt Securitization, and collectively the Debt Securitizations, as applicable. We believe that these administrative expenses approximate the amount of ongoing fees and expenses that we would be required to pay in connection with a traditional secured credit facility. Our common stockholders indirectly bear all of these expenses. GCIC Acquisition OnSeptember 16, 2019 , we completed our acquisition of GCIC, pursuant to that certain Agreement and Plan of Merger, as amended, or the Merger Agreement, datedNovember 27, 2018 , by and among us, GCIC,Fifth Ave Subsidiary Inc. , our wholly owned subsidiary, or Merger Sub,GC Advisors , and, for certain limited purposes, the Administrator. Pursuant to the Merger Agreement, Merger Sub was first merged with and into GCIC, or the Initial Merger, with GCIC as the surviving company and immediately following the Initial Merger, GCIC was then merged with and into us, the Initial Merger and subsequent merger referred to as the Merger, with us as the surviving company. 113
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In accordance with the terms of the Merger Agreement, at the effective time of the Merger, each outstanding share of GCIC's common stock was converted into the right to receive 0.865 shares of our common stock (with GCIC's stockholders receiving cash in lieu of fractional shares of our common stock). As a result of the Merger, we issued an aggregate of 71,779,964 shares of our common stock to former stockholders of GCIC. Upon the consummation of the Merger, we entered into the Investment Advisory Agreement, withGC Advisors , which replaced the Prior Investment Advisory Agreement.
Recent Developments
OnJanuary 1, 2020 , we entered into a purchase agreement, or the Purchase Agreement, withRGA Reinsurance Company , or RGA,Aurora National Life Assurance Company , a wholly-owned subsidiary of RGA, or Aurora and together with RGA, the Transferors, SLF, and GCIC SLF. Prior to entering into the Purchase Agreement, the Transferors owned 12.5% of LLC equity interests in eachSenior Loan Fund , while we owned the remaining 87.5% of the LLC equity interests in eachSenior Loan Fund . Pursuant to the Purchase Agreement, RGA and Aurora agreed to sell their LLC equity interests in eachSenior Loan Fund , to us, effective as ofJanuary 1, 2020 . As consideration for the purchase of the LLC equity interests, on or beforeMarch 2, 2020 , we have agreed to pay each Transferor an amount, in cash, equal to the net asset value of such Transferor'sSenior Loan Fund LLC equity interests as ofDecember 31, 2019 (the "Net Asset Value") along with interest on such Net Asset Value accrued from the date of the Purchase Agreement through, but excluding, the payment date at a rate equal to the short-term applicable federal rate. As a result of the transactions, onJanuary 1, 2020 , SLF and GCIC SLF became wholly-owned subsidiaries of us. In addition, the capital commitments of the Transferors and us to the Senior Loan Funds were terminated. As wholly-owned subsidiaries, the assets, liabilities, income and expenses of the Senior Loan Funds will be consolidated into our financial statements and notes thereto for periods ending on or afterJanuary 1, 2020 , and will also be included for purposes of determining our asset coverage ratio. As ofJanuary 1, 2020 , the date of our acquisition of theSLF LLC equity interests formerly held by RGA pursuant to the Purchase Agreement, we assumed the senior secured revolving credit facility, or, as amended, the SLF Credit Facility, thatSenior Loan Fund II LLC , a wholly-owned subsidiary of SLF, or SLF II, entered into withWells Fargo Securities, LLC , as administrative agent, andWells Fargo Bank, N.A ., as lender, which, as ofDecember 31, 2019 allowed SLF II to borrow up to$52.3 million , subject to leverage and borrowing base restrictions, and which bore interest at one-month LIBOR plus 2.05% per annum. The reinvestment period of the SLF Credit Facility endedAugust 29, 2018 , and after such date, the maximum commitment is equal to advances outstanding. The stated maturity date of the SLF Credit Facility isAugust 30, 2022 . As ofJanuary 1, 2020 , the date of our acquisition of all of theGCIC SLF LLC equity interests formerly held by Aurora pursuant to the Purchase Agreement, we assumed a senior secured revolving credit facility, or as amended, the GCIC SLF Credit Facility, that GCIC Senior Loan Fund II, a wholly-owned subsidiary of GCIC SLF, or GCIC SLF II, entered into withWells Fargo Bank, N.A ., which, as ofDecember 31, 2019 , allowed GCIC SLF II to borrow up to$44.4 million at any one time outstanding, subject to leverage and borrowing base restrictions, and which bore interest at one-month LIBOR plus 2.05%. The reinvestment period of the GCIC SLF Credit Facility endedSeptember 29, 2018 , and after such date, the maximum commitment is equal to advances outstanding. The stated maturity date of GCIC SLF Credit Facility isSeptember 28, 2022 . OnFebruary 4, 2020 , our board of directors declared a quarterly distribution of$0.33 per share, which is payable onMarch 27, 2020 to holders of record as ofMarch 6, 2020 . 114
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