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MarketScreener Homepage  >  Equities  >  Nasdaq  >  Golub Capital BDC, Inc.    GBDC

GOLUB CAPITAL BDC, INC.

(GBDC)
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GOLUB CAPITAL BDC : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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02/10/2020 | 06:51am EDT
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 to Golub 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 GC Advisors LLC, or GC

Advisors, and other affiliates of Golub Capital LLC, or collectively,

Golub Capital;

• 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 GC Advisors to locate suitable investments for us and to

monitor and administer our investments;

• the ability of GC Advisors or its affiliates to attract and retain highly

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 ended September
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 the Securities and
Exchange Commission, or the SEC, 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.


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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,
for U.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 of U.S. middle-market
companies. We also selectively invest in second lien and subordinated loans of,
and warrants and minority equity securities in U.S. middle-market companies. We
intend to achieve our investment objective by (1) accessing the established loan
origination channels developed by Golub Capital, a leading lender to U.S.
middle-market companies with over $30.0 billion in capital under management as
of December 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 whom Golub Capital has invested alongside in the
past, (4) implementing the disciplined underwriting standards of Golub Capital
and (5) drawing upon the aggregate experience and resources of Golub Capital.

Our investment activities are managed by GC Advisors and supervised by our board of directors of which a majority of the members are independent of us, GC Advisors and its affiliates.


Under an investment advisory agreement, or the Investment Advisory Agreement, we
have agreed to pay GC 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 in July 2019 and by our stockholders in September 2019. The
Investment Advisory Agreement was entered into effective as of September 16,
2019 and will continue for an initial two-year term. Prior to September 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 of Golub 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 currently Golub 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 of U.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.


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As of December 31, 2019 and September 30, 2019, our portfolio at fair value was comprised of the following:

                                            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 Senior Loan Fund LLC, or SLF, and GCIC Senior Loan Fund LLC, or GCIC SLF,

were utilized by SLF and GCIC SLF, or the Senior Loan Funds and each a (1) Senior Loan Fund, to invest in senior secured loans.



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 of December 31,
2019 and September 30, 2019, one stop loans included $409.3 million and $414.7
million, respectively, of late stage lending loans at fair value.

As of December 31, 2019 and September 30, 2019, we had debt and equity investments in 250 and 241 portfolio companies, respectively, in addition to an investment in SLF and GCIC SLF as of each such date.


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 ended December 31, 2019 and 2018:
                                                             For the three months ended
                                                                    December 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 net

increase 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 GC Advisors under the Investment Advisory Agreement and interest expense on our outstanding debt. We bear all other out-of-pocket costs and expenses of our operations and transactions, including:

• calculating our net asset value, or NAV (including the cost and expenses

of any independent valuation firm);

• fees and expenses incurred by GC Advisors payable to third parties,

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 GC Advisors and travel and lodging

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;

U.S. federal and state registration and franchise fees;

• all costs of registration and listing our shares on any securities exchange;

U.S. federal, state and local taxes;

• independent directors' fees and expenses;

• costs of preparing and filing reports or other documents required by the

SEC or other regulators;

• 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 for Golub 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 for Golub 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 for Golub 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 to GC Advisors and are offset against the management fees
payable under the Investment Advisory Agreement. In addition, the 2014 Issuer
paid Wells 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 paid Morgan 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 paid Wells 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
On September 16, 2019, we completed our acquisition of GCIC, pursuant to that
certain Agreement and Plan of Merger, as amended, or the Merger Agreement, dated
November 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.

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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, with GC Advisors, which replaced the Prior Investment Advisory
Agreement.

Recent Developments


On January 1, 2020, we entered into a purchase agreement, or the Purchase
Agreement, with RGA 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 each Senior Loan Fund,
while we owned the remaining 87.5% of the LLC equity interests in each Senior
Loan Fund. Pursuant to the Purchase Agreement, RGA and Aurora agreed to sell
their LLC equity interests in each Senior Loan Fund, to us, effective as of
January 1, 2020. As consideration for the purchase of the LLC equity interests,
on or before March 2, 2020, we have agreed to pay each Transferor an amount, in
cash, equal to the net asset value of such Transferor's Senior Loan Fund LLC
equity interests as of December 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, on January 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 after January 1, 2020, and
will also be included for purposes of determining our asset coverage ratio.

As of January 1, 2020, the date of our acquisition of the SLF 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, that Senior Loan Fund II LLC, a wholly-owned subsidiary of SLF, or SLF
II, entered into with Wells Fargo Securities, LLC, as administrative agent, and
Wells Fargo Bank, N.A., as lender, which, as of December 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 ended August 29, 2018, and
after such date, the maximum commitment is equal to advances outstanding. The
stated maturity date of the SLF Credit Facility is August 30, 2022.

As of January 1, 2020, the date of our acquisition of all of the GCIC 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 with Wells Fargo Bank, N.A., which, as of
December 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 ended September 29, 2018, and after such date, the maximum
commitment is equal to advances outstanding. The stated maturity date of GCIC
SLF Credit Facility is September 28, 2022.

On February 4, 2020, our board of directors declared a quarterly distribution of
$0.33 per share, which is payable on March 27, 2020 to holders of record as of
March 6, 2020.


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