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, including
our and their ability to achieve our respective objectives as a result of the
coronavirus ("COVID-19") pandemic;
•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 and the
effect of the COVID-19 pandemic on the availability of equity and debt capital
and our use of borrowed funds 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, including the
COVID-19 pandemic;
•changes in political, economic or industry conditions, the interest rate
environment or conditions affecting the financial and capital markets that could
result in changes to the value of our assets, including changes from the impact
of the COVID-19 pandemic?
•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;
•the ability of GC Advisors to continue to effectively manage our business due
to the disruptions caused by the COVID-19 pandemic;
•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
106
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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.
107
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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 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 ofMarch 31, 2020 , (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 withGC Advisors , 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$75.0 million in some of our portfolio companies and generally expect that the size of our individual investments will vary proportionately with the size of our capital base. We generally invest in securities that have been rated below investment grade by independent rating agencies or that would be rated below investment grade if they were rated. These securities, which are often referred to as "junk," have predominantly speculative characteristics with respect to the issuer's capacity to pay interest and repay principal. In addition, many of our debt investments have floating interest rates that reset on a periodic basis and typically do not fully pay down principal prior to maturity, which may increase our risk of losing part or all of our investment. 108 -------------------------------------------------------------------------------- TABLE OF CONTENTS As ofMarch 31, 2020 andSeptember 30, 2019 , our portfolio at fair value was comprised of the following: As of March 31, 2020 As of September 30, 2019 Investments at Percentage of Investments at Percentage of Fair Value Total Fair Value Total Investment Type (In thousands) Investments (In thousands) Investments Senior secured$ 646,997 15.4 %$ 589,340 13.7 % One stop 3,470,782 82.4 3,474,116 80.9 Second lien 19,811 0.5 19,473 0.5 Subordinated debt 514 - * 369 - * LLC equity interests in SLF and GCIC SLF(1) - - 123,644 2.9 Equity 72,111 1.7 85,990 2.0 Total$ 4,210,215 100.0 %$ 4,292,932 100.0 %
* Represents an amount less than 0.1%. (1) Proceeds from limited liability company, or LLC, equity interests invested in Senior
an unconsolidated
Senior Loan Funds and each a
and liabilities of the Senior Loan Funds were consolidated into us. See"--SLF and GCIC
SLF Purchase Agreement" below.
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 ofMarch 31, 2020 andSeptember 30, 2019 , one stop loans included$413.7 million and$414.7 million , respectively, of late stage lending loans at fair value. As ofMarch 31, 2020 andSeptember 30, 2019 , we had debt and equity investments in 257 and 241 portfolio companies, respectively. In addition, as ofSeptember 30, 2019 , we had an investment in SLF and GCIC SLF. 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 and six months endedMarch 31, 2020 and 2019: For the three months ended March 31, For the six months ended March 31, 2020 2019 2020 2019 Weighted average annualized income yield (1) 7.8% 8.8% 7.9% 8.7% Weighted average annualized investment income yield (2) 8.2% 9.2% 8.3% 9.1% Total return based on average net asset value (3)* (31.2)% 7.5% (16.3)% 7.5% Total return based on market value (4) (30.1)% 10.5% (29.8)% (0.3)% * 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. 109 -------------------------------------------------------------------------------- TABLE OF CONTENTS (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 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 byGC 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 byGC 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 theSEC 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; 110 -------------------------------------------------------------------------------- TABLE OF CONTENTS •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. 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. 111 -------------------------------------------------------------------------------- TABLE OF CONTENTS 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. 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. SLF and GCIC SLF Purchase Agreement 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 the 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, we paid 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 , or 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. InFebruary 2020 , we paid an aggregate of$17.0 million to the Transferors to acquire their respective LLC interests in the Senior Loan Funds. As a result of the Purchase Agreement, onJanuary 1, 2020 , SLF and GCIC SLF became our wholly-owned subsidiaries. In addition, our capital commitments and those of the Transferors were terminated. As wholly-owned subsidiaries, the assets, liabilities, income and expenses of the Senior Loan Funds were consolidated into our financial statements and notes thereto for periods ending on or afterJanuary 1, 2020 , and are included for purposes of determining our asset coverage ratio. COVID-19 Pandemic The rapid spread of COVID-19, which has been identified as a global pandemic by theWorld Health Organization , resulted in governmental authorities imposing restrictions on travel and the temporary closure of many corporate offices, retail stores, restaurants, fitness clubs and manufacturing facilities and factories in affected jurisdictions. The pandemic and the resulting economic dislocations have had adverse consequences for the business operations of some of our portfolio companies and has adversely affected, and threatens to continue to adversely affect, our operations and the operations ofGC Advisors (including those relating to us).GC Advisors has been monitoring the COVID-19 pandemic and its impact on our business and the business of our portfolio companies and has been focused on proactively engaging with our portfolio companies in order to collaborate with the management teams of certain portfolio companies to assess and evaluate the steps each portfolio company can take in response to the impacts of COVID-19. We cannot predict the full impact of the coronavirus, including the duration of the closures and restrictions described above. As a result, we are unable to predict the duration of these business and supply-chain disruptions, the extent to which COVID-19 will negatively affect our portfolio companies' operating results or the impact that such disruptions may have on our results of operations and financial condition. Depending on the duration and extent of the disruption to the business operations of our portfolio companies, we expect some portfolio companies, particularly those in vulnerable industries such as retail and travel, to experience financial distress and possibly to default on their financial obligations to us and their other capital providers. In addition, if such portfolio companies are subjected to prolonged and severe financial distress, we expect some of them to substantially curtail their operations, defer capital expenditures and lay off workers. These developments would be likely to permanently impair their businesses and result in a reduction in the value of our investments in them. 112 -------------------------------------------------------------------------------- TABLE OF CONTENTS Business disruption and financial distress experienced by our portfolio companies is likely to reduce, over time, the amount of interest and dividend income that we receive from our investments and may require us to contribute additional capital to such companies in the form of follow on investments. We may need to restructure the capitalization of some portfolio companies, which could result in reduced interest payments or permanent impairments on our investments. Any such decrease in our net investment income would increase the percentage of our cash flows dedicated to debt service and distribution payments to stockholders. If these amounts become unsustainable, we may be required to reduce the amount of our future distributions to stockholders. We proactively and aggressively commenced on a number of actions to support and evaluate our portfolio companies when the COVID-19 pandemic began to impact theU.S. economy including gathering full information from a variety of sources including third-party experts, management teams of our borrowers, the private equity sponsor owners of our borrowers and other sources and immediate outreach to our private equity sponsor partners to establish candid, two-way, real-time communications. We believe these actions will lead to increased and better solutions for our borrowers and believe our long-term relationships with these sponsors will create appropriate incentives for them to collaborate with us to address such portfolio company needs. In addition,GC Advisors' underwriting team is segmenting our portfolio to highlight those borrowers with moderate or higher risk of material impacts to their business operations from COVID-19. By segmenting our portfolio we believe we can focus now on the borrowers which are more likely to require attention. We believe that early identification of vulnerable credits means more and better solutions to address potential problems. During the three months endedMarch 31, 2020 , we amended the terms of fifteen credit agreements for fifteen borrowers to defer theirMarch 31, 2020 principal payment and/or capitalize theirMarch 31, 2020 interest payment. As ofMarch 31, 2020 , subject to certain limited exceptions, we were allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, is at least 150% after such borrowing. Our revolving credit facilities, described in Note 7 in the notes to our consolidated financial statements, include customary covenants and events of default. Any failure on our part to make required payments under such facilities or to comply with such covenants could result in a default under the applicable credit facility or debt instrument. If we are unable to cure such default or obtain a waiver from the applicable lender or holder, we would experience an event of default, and the applicable lender or holder could accelerate the repayment of such indebtedness, which would negatively affect our business, financial condition, results of operations and cash flows. See "Item 1A.-Risk Factors-Risks Relating to our Business and Structure-We intend to finance our investments with borrowed money, which will accelerate and increase the potential for gain or loss on amounts invested and may increase the risk of investing in us" included in our most recent annual report on Form 10-K. We are also subject to financial risks, including changes in market interest rates. Many of the loans in our portfolio have floating interest rates, and we expect that our loans in the future will also have floating interest rates. The interest rates of such loans are based upon a floating interest rate index, typically LIBOR, together with a spread, or margin. They generally also feature interest rate reset provisions that adjust the interest rates under such loans to current market rates on a quarterly basis. As ofMarch 31, 2020 , andDecember 31, 2019 over 90% of our floating rate loans were subject to a minimum base rate, or floor, that we charge on our loans if the applicable interest rate index falls below such floor. Certain of the notes issued in each of the 2014 Debt Securitization, the 2018 Debt Securitization and the GCIC 2018 Debt Securitization have floating rate interest provisions. In addition, our revolving credit facilities also have floating rate interest provisions. As a result of the COVID-19 pandemic and the related decision of theU.S. Federal Reserve to reduce certain interest rates, LIBOR decreased inMarch 2020 . A prolonged reduction in interest rates will reduce our gross investment income and could result in a decrease in our net investment income if such decreases in LIBOR are not offset by a corresponding increase in the spread over LIBOR that we earn on such loans, a decrease in the income incentive fee as a result of our 8% hurdle rate or a decrease in the interest rate of our floating interest rate liabilities tied to LIBOR. See "Item 3. Quantitative and Qualitative Disclosures About Market Risk" for an analysis of the impact of hypothetical base rate changes in interest rates. We have completed an industry subsegment analysis as ofMarch 31, 2020 to determine the exposure of our portfolio companies to adverse effects on their business operations as a result of the COVID-19 pandemic. As of March, 31, 2020, more than 75% of our portfolio at fair value was comprised of investments in industry subsegments that we have identified as less exposed to negative impacts from the COVID-19 pandemic, less than 20% of our portfolio at fair value was comprised of investments in industry subsegments that we believe will experience significant financial distress as a result of the COVID-19 pandemic and less than 1% of our portfolio at fair value was comprised of investments in industry subsegments that were identified as most significantly exposed to adverse effects resulting from the COVID-19 pandemic. As ofMarch 31, 2020 , less than 1% of our portfolio at fair value represented second lien debt, mezzanine debt and other asset classes that we believe are particularly vulnerable due to the economic and market volatility and uncertainty resulting from the COVID-19 pandemic. Our 113 -------------------------------------------------------------------------------- TABLE OF CONTENTS portfolio by industry subsegments and our view of the exposure of our portfolio companies to the adverse effects of the COVID-19 pandemic as ofMarch 31, 2020 is as follows: Industry Subsegments1 Significantly exposed to
COVID-19 Most significantly exposed to
Less exposed to COVID-19 exposure COVID-19
(>75% of portfolio2) (<20% of portfolio2) (<1% of portfolio2)
Software & Technology Restaurants Airlines & Aircraft Finance
Business Services Dental Care Boating & Marine
Healthcare3 Eye Care Entertainment
Aerospace & Defense Fitness Franchises Gaming
Distribution Retail Hotels
Financial Services Metals & Mining
Food & Beverage Oil & Gas
Manufacturing Project Finance
Education Real Estate
Shipping
(1)Industry subsegments are based on GC Advisors' internal analysis and industry
classifications as of March 31, 2020 .
(2)At fair value as of March 31, 2020 .
(3)Excludes Dental Care and Eye Care subsegments.
The table below details the impact of the effects of the COVID-19 pandemic on
the weighted average price of our debt investments and the net change in
unrealized depreciation on investments held as of March 31, 2020 by Internal
Performance Rating (as defined in the "Portfolio Composition, Investment
Activity and Yield" section below). Additionally, the following table details
the primary drivers of reductions in weighted average price of our debt
investments by Internal Performance Rating category as of March 31, 2020 as
compared to December 31, 2019 .
Weighted Average Price1
Net Change in
Unrealized
Depreciation
on Investments
Held as of % of Net Change in
March31, 2020 Unrealized Depreciation
As of As of per Share on Investments Held as
Category December 31, 2019 March 31, 2020 (2)(3) of March 31, 2020 (2) Primary Driver
Internal Performance Ratings 4
and 5
(Performing At or Above
Expectations) $ 99.9 $ 96.2 $ (1.02) 49 % Spread widening
Internal Performance Rating 3 Spread widening,
(Performing Below Expectations) 96.0 90.0 (0.86) 42 % COVID-19 exposure
Internal Performance Ratings 1
and 2 Pre-existing
(Performing Materially Below credit challenges,
Expectations) 74.3 65.1 (0.18) 9 % COVID-19 exposure
Total $ 99.1 $ 94.0 $ (2.06) 100 %
(1)Includes debt investments only. "Total" row reflects weighted average price
of total fair value of debt investments.
(2)Net Change in Unrealized Depreciation on Investments Held as of March 31,
2020 includes the net change in unrealized depreciation for the three months
ended March 31, 2020 attributable to investments held as of March 31, 2020 .
(3)Based on weighted average shares outstanding for the three months ended March
31, 2020 .
We and GC Advisors continue to monitor the rapidly evolving situation relating
to the COVID-19 pandemic and guidance from U.S. and international authorities,
including federal, state and local public health authorities and future
recommendations from such authorities may further impact our business operations
and financial results. In such circumstances, there may be developments outside
our control requiring us to adjust our plan of operation. As such, given the
dynamic nature of this situation, we cannot reasonably estimate the impacts of
the COVID-19 pandemic on our financial condition, results of operations or cash
flows in future periods.
114-------------------------------------------------------------------------------- TABLE OF CONTENTS Recent Developments OnApril 8, 2020 , we issued transferable subscription rights to our stockholders of record, which allowed holders of the subscription rights to purchase up to an aggregate of 33,451,902 shares of our common stock. Stockholders received one right for each four outstanding shares of our common stock owned on the record date ofApril 8, 2020 . The rights entitled the holders to purchase one new share of common stock for every right held. In addition, stockholders who fully exercised their rights were entitled to subscribe, subject to limitations, for additional shares of our common stock that remained unsubscribed as a result of any unexercised rights. The rights offering expired onMay 6, 2020 . The exact number of shares of common stock subscribed for will be determined on or aroundMay 15, 2020 but in no event will we issue more than 33,451,902 shares pursuant to the subscriptions as set forth in the prospectus.
On
Subsequent toMarch 31, 2020 , the COVID-19 pandemic and the related effect on theU.S. and global economies has continued to have adverse consequences for the business operations of some of our portfolio companies and has adversely affected, and threatens to continue to adversely affect, our operations and the operations ofGC Advisors (including with respect to us). Given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our financial condition, results of operations or cash flows in the future. However, to the extent our portfolio companies are adversely impacted by the effects of the COVID-19 pandemic, it may have a material adverse impact on our future net investment income, the fair value of our portfolio investments, and the results of operations and financial condition of our portfolio companies. 115
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