GOLUB CAPITAL BDC, INC. The information contained in this section should be read in conjunction with our interim and unaudited 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, or 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
•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, 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;
•the ability of
•the ability of
•the ability of
•turmoil inUkraine andRussia , including sanctions related to such turmoil, and the potential for volatility in energy prices and other supply chain issues and any impact on the industries in which we invest;
•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, 2021 . 136 -------------------------------------------------------------------------------- TABLE OF CONTENTS 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. 137 -------------------------------------------------------------------------------- TABLE OF CONTENTS 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$45.0 billion in capital under management as ofMarch 31, 2022 , (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 most recently approved by our board of directors inMay 2022 . Under an administration agreement, or the Administration Agreement, we are provided with certain administrative services by 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$75.0 million in some of our portfolio companies and generally expect that the size of our individual investments will vary proportionately with the size of our capital base. We generally invest in securities that have been rated below investment grade by independent rating agencies or that would be rated below investment grade if they were rated. These securities, which are often referred to as "junk," have predominantly speculative characteristics with respect to the issuer's capacity to pay interest and repay principal. In addition, many of our debt investments have floating interest rates that reset on a periodic basis and typically do not fully pay down principal prior to maturity, which may increase our risk of losing part or all of our investment. 138 -------------------------------------------------------------------------------- TABLE OF CONTENTS As ofMarch 31, 2022 andSeptember 30, 2021 , our portfolio at fair value was comprised of the following: As of March 31, 2022 As of September 30, 2021 Investments at Percentage of Investments at Percentage of Fair Value Total Fair Value Total Investment Type (In thousands) Investments (In thousands) Investments Senior secured$ 605,007 11.1 %$ 784,805 16.0 % One stop 4,508,470 83.1 3,882,314 79.3 Second lien 42,796 0.8 41,857 0.9 Subordinated debt 3,560 0.1 172 0.0 * Equity 266,326 4.9 185,738 3.8 Total$ 5,426,159 100.0 %$ 4,894,886 100.0 % * Represents an amount less than 0.1%. 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 or recurring revenue 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, 2022 andSeptember 30, 2021 , one stop loans included$691.8 million and$527.8 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 endedMarch 31, 2022 andDecember 31, 2021 and the six months endedMarch 31, 2022 andMarch 31, 2021 : For the three months ended For the six months ended March 31, 2022 December 31, 2021 March 31, 2022 March 31, 2021 Weighted average income yield (1)* 6.9% 7.1% 7.0%
7.5%
Weighted average investment income yield (2)* 7.3% 7.7% 7.5%
8.0%
Total return based on average net asset value (3)* 10.4% 9.7% 10.0%
15.3%
Total return based on market value (4) 0.4% (0.4)% 0.0% (5) 14.9%
*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/(decrease) 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.
(5)Represents an amount less than 0.1%
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
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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 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
140-------------------------------------------------------------------------------- TABLE OF CONTENTS •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 CLO III LLC , or the 2018 Issuer, 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, 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. Prior to the redemption of the 2020 Notes and the termination of the documents governing the 2020 Debt Securitization (as defined in Note 7 of our consolidated financial statements) onAugust 26, 2021 ,GC Advisors served as collateral manager for Golub Capital BDC CLO 4 LLC, or the 2020 Issuer, under a collateral management agreement, or the 2020 Collateral Management Agreement, and was entitled to receive an annual fee in an amount equal to 0.35% of the principal balance of the portfolio loans held by the 2020 Issuer at the beginning of the collection period relating to each payment date, which is payable in arrears on each payment date. Under the 2020 Collateral Management Agreement, the term "collection period" generally referred 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 were paid directly by the 2020 Issuer and are paid directly by the 2018 Issuer and GCIC 2018 Issuer toGC Advisors and are offset against the management fees payable under the Investment Advisory Agreement. The 2018 Issuer paidMorgan Stanley & Co. LLC structuring and placement fees for its services in connection with the structuring of the 2018 Debt Securitization (as defined in Note 7 of our consolidated financial statements). Before we acquired the GCIC 2018 Issuer as part of our acquisition of GCIC (as defined in the "GCIC Acquisition" section below), the GCIC 2018 Issuer paidWells Fargo Securities, LLC structuring and placement fees for its services in connection with the initial structuring of the GCIC 2018 Debt Securitization (as defined in Note 7 of our consolidated financial statements). The 2020 Issuer paidWells Fargo Securities, LLC structuring and placement fees for its services in connection with the structuring of the 2020 Debt Securitization (as defined in Note 7 of our consolidated financial statements). Term debt securitizations are also known as collateralized loan obligations, or CLOs, and are a form of secured financing incurred by us, which are consolidated by us and subject to our overall asset coverage requirement. 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 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. 141 -------------------------------------------------------------------------------- TABLE OF CONTENTS GCIC Acquisition OnSeptember 16, 2019 , we completed our acquisition ofGolub Capital Investment Corporation , or 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. 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.
COVID-19 Pandemic
The spread of COVID-19, which was identified as a global pandemic by theWorld Health Organization in 2020, resulted in governmental authorities imposing restrictions on travel and the temporary closure of many corporate offices, retail stores, restaurants, healthcare facilities, fitness clubs and manufacturing facilities and factories in affected jurisdictions. While restrictions, business closures and other quarantine measures have been lifted in certain states inthe United States and other countries, COVID-19 outbreaks have led and could lead to the re-introduction of such restrictions. As a result, we are unable to predict the duration of business and supply chain disruptions, the extent to which COVID-19 will continue to affect our portfolio companies' operating results or the impact COVID-19 may have on our results of operations and financial condition.We and GC Advisors continue to monitor the COVID-19 pandemic and guidance fromU.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. Due to certain resurgences of COVID-19 and the threat of new variants of COVID-19, we remain cautious and concerned about the on-going impacts to theU.S. economy from COVID-19.
LIBOR Transition
In
At the end ofJanuary 2021 , LIBOR's administrator, theICE Benchmark Administration Limited , or the IBA, concluded a consultation on its intention to cease the publication of the one-week and two-monthU.S. dollar LIBOR settings immediately following the LIBOR publication onDecember 31, 2021 , and the remainingU.S. dollar LIBOR settings, including one-month LIBOR, immediately following the LIBOR publication onJune 30, 2023 . OnMarch 5, 2021 , theFCA released an announcement confirming that such LIBOR settings would cease to be provided by any administrator or no longer be representative as of the dates specified in the IBA proposal, and confirmed that theFCA does not expect any LIBOR settings will become unrepresentative before such dates. Concurrent with the IBA's proposal, theFederal Reserve Board , theOffice of the Comptroller of the Currency , and theFederal Deposit Insurance Corporation released a statement that (i) encouraged banks to cease entering into new contracts that useU.S. dollar LIBOR as a reference rate as soon as practicable and in any event byDecember 31, 2021 , (ii) indicated that new contracts entered into beforeDecember 31, 2021 should either utilize a reference rate other thanU.S. dollar LIBOR or have robust fallback language that includes a clearly defined alternative reference rate afterU.S. dollar LIBOR's discontinuation and (iii) explained that extending the publication of certainU.S. dollar LIBOR tenors untilJune 30, 2023 would allow most legacyU.S. dollar LIBOR contracts to mature before LIBOR experiences disruptions. OnMarch 8, 2021 , the Alternative Reference Rates Committee confirmed that in its opinion theMarch 5, 2021 announcements by the IBA and theFCA on the future cessation and loss of the representativeness of the LIBOR benchmark rates constitutes a "benchmark transition event" with respect to allU.S. dollar LIBOR settings. A "benchmark transition event" may cause, or allow for, certain contracts to replace LIBOR with an alternative reference rate and such replacement could have a material and adverse impact on the debt financing securitization (CLO) market, the leveraged loan market and/or us. InApril 2018 , theNew York Federal Reserve Bank began publishing its alternative rate, the Secured Overnight Financing Rate, or SOFR. TheBank of England followed suit inApril 2018 by publishing its proposed alternative rate, the Sterling Overnight Index Average, or SONIA. 142 -------------------------------------------------------------------------------- TABLE OF CONTENTS Each of SOFR and SONIA significantly differ from LIBOR, both in the actual rate and how it is calculated, and therefore it is unclear whether and when markets will adopt either of these rates as a widely accepted replacement for LIBOR. As such, when LIBOR is discontinued, if a replacement rate is not widely agreed upon or if a replacement rate is significantly different from LIBOR, it could cause a disruption in the credit markets generally. Such a disruption could also negatively impact the market value and/or transferability of our portfolio company investments. Furthermore, disruptions related to loans and/or other debt financing securitizations (CLOs) in the marketplace could have a material adverse effect on the ability ofGC Advisors or its affiliates to enter into loans in the future in accordance with our investment strategy and have a material adverse effect on us. We could also be materially and adversely impacted to the extentGC Advisors or its affiliates are unable to successfully implement an acceptable replacement rate in leverage utilized by us or if there is a prolonged period of mismatch on the interest rates payable on our leverage and our portfolio investments as a result of the discontinued publication of LIBOR results in a decrease in our net investment income and distributions we are able to pay to our stockholders. As ofJanuary 1, 2022 , USD LIBOR is available in five settings (overnight, one-month, three-month, six-month and 12-month). The IBA has stated that it will cease to publish all remaining USD LIBOR settings immediately following their publication onJune 30, 2023 . As ofJanuary 1, 2022 , all non-USD LIBOR reference rates in all settings ceased to be published. As ofDecember 31, 2021 ,Golub Capital amended all credit agreements to effectuate the transition to alternate reference rates for portfolio company debt investments priced via reference to non-USD LIBOR. In addition,Golub Capital is amending credit agreements to include fallback language to transition the reference rate of portfolio company debt investments priced via reference to USD LIBOR to an alternate reference rate, such as forward-looking term SOFR, based on prevailing market practices. In anticipation of the discontinuation of LIBOR, we have assessed our current debt facilities for our exposure to LIBOR. The JPM Credit Facility (as defined in Note 7 of our consolidated financial statements) and MS Credit Facility II (as defined in Note 7 of our consolidated financial statements) have been amended to include fall-back language to incorporate SOFR as an alternative reference rate, as well as foreign alternative reference rates for foreign borrowings. The notes offered in the 2018 Debt Securitization and GCIC 2018 Debt Securitization (as defined in Note 7 of our consolidated financial statements) currently utilize a reference rate to three-month USD LIBOR. We may seek to amend or refinance the Debt Securitizations prior toJune 30, 2023 , the cessation date for three-month USD LIBOR. The 2024 Notes, 2026 Notes and 2027 Notes (as defined in Note 7 of our consolidated financial statements) accrue fixed-rate interest and will not be affected by any discontinuation of LIBOR. We expect any new debt facilities will reference a benchmark interest rate other than LIBOR, such as SOFR. Recent Developments
On
Consolidated Results of Operations
In addition to our analysis of the year-to-date reporting period compared to the year-to-date prior period, we are presenting our analysis for the reporting quarter compared to the immediately preceding quarter as we believe this comparison will provide a more meaningful analysis of our business as our results are largely driven by market changes, not seasonal business activity.
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Consolidated operating results for the three months ended March 31, 2022 and
December 31, 2021 and the six months ended March 31, 2022 and March 31, 2021 are
as follows:
Three months ended Variances Six months ended Variances
December 31, March 31, 2022
March 31, 2022 2021 vs December 31, March 31, 2022 March 31, 2021 2022 vs. 2021
2021
(In thousands)
Interest income $ 84,631 $ 84,601 $ 30 $ 169,232 $ 155,811 $ 13,421
Accretion of discounts and amortization 4,048 7,735 (3,687) 11,783 10,126 1,657
of premiums
GCIC acquisition purchase premium (2,940) (7,095) 4,155 (10,035) (17,952) 7,917
amortization
Dividend income 3 317 (314) 320 195 125
Fee income 219 1,009 (790) 1,228 2,067 (839)
Total investment income 85,961 86,567 (606) 172,528 150,247 22,281
Total net expenses 42,521 41,777 744 84,298 70,932 13,366
Net investment income 43,440 44,790 (1,350) 88,230 79,315 8,915
Net realized gain (loss) on investment 372 14,776 (14,404) 15,148 (2,239) 17,387
transactions excluding purchase premium
Net realized gain (loss) on investment - (228) 228 (228) (99) (129)
transactions due to purchase premium
Net change in unrealized appreciation
(depreciation) on investment 20,218 (3,088) 23,306 17,130 90,726 (73,596)
transactions excluding purchase premium
Net change in unrealized appreciation
(depreciation) on investment 2,940 7,323 (4,383) 10,263 18,051 (7,788)
transactions due to purchase premium
Net gain (loss) on investment 23,530 18,783 4,747 42,313 106,439 (64,126)
transactions
(Provision) benefit for taxes on (97) (495) 398 (592) - (592)
unrealized appreciation on investments
Net increase (decrease) in net assets
$ 3,795 $ 129,951 $ 185,754 $ (55,803) resulting from operations Average earning debt investments, at$ 4,970,924 $ 4,784,517 $ 186,407 $ 4,872,253 $ 4,231,369 $ 640,884 fair value
Net income can vary substantially from period to period for various reasons, including the recognition of realized gains and losses and unrealized appreciation and depreciation. As a result, quarterly and year-to-date comparisons of net income may not be meaningful.
OnSeptember 16, 2019 , we completed our acquisition of GCIC. The acquisition was accounted for under the asset acquisition method of accounting in accordance with Accounting Standards Codification, or ASC, 805-50, Business Combinations - Related Issues. Under asset acquisition accounting, where the consideration paid to GCIC's stockholders exceeded the relative fair values of the assets acquired and liabilities assumed, the premium paid by us was allocated to the cost of the GCIC assets acquired by us pro-rata based on their relative fair value. Immediately following the acquisition of GCIC, we recorded its assets at their respective fair values and, as a result, the purchase premium allocated to the cost basis of the GCIC assets acquired was immediately recognized as unrealized depreciation on our Consolidated Statement of Operations. The purchase premium allocated to investments in loan securities will amortize over the life of the loans through interest income with a corresponding reversal of the unrealized depreciation on such loans acquired through their ultimate disposition. The purchase premium allocated to investments in equity securities will not amortize over the life of the equity securities through interest income and, assuming no subsequent change to the fair value of the equity securities acquired from GCIC and disposition of such equity securities at fair value, we will recognize a realized loss with a corresponding reversal of the unrealized depreciation upon disposition of the equity securities acquired. As a supplement to our GAAP financial measures, we have provided the following non-GAAP financial measures that we believe are useful for the reasons described below:
•"Adjusted Net Investment Income" - excludes the amortization of the purchase price premium from net investment income calculated in accordance with GAAP;
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•"Adjusted Net Investment Income Before Accrual for Capital Gain Incentive Fee"
- Adjusted Net Investment Income excluding the accrual or reversal for the
capital gain incentive fee under GAAP;
•"Adjusted Net Realized and Unrealized Gain/(Loss)" - excludes the unrealized
loss resulting from the purchase premium write-down and the corresponding
reversal of the unrealized loss resulting from the amortization of the premium
on loans or from the sale of equity investments from the determination of
realized and unrealized gain/(loss) determined in accordance with GAAP; and
•"Adjusted Net Income/(Loss)" - calculates net income and earnings per share
based on Adjusted Net Investment Income and Adjusted Net Realized and Unrealized
Gain/(Loss).
We believe that excluding the financial impact of the purchase premium in the
above non-GAAP financial measures is useful for investors as this is a non-cash
expense/loss and is one method we use to measure our results of operations. In
addition, we believe that providing the Adjusted Net Investment Income Before
Accrual for Capital Gain Incentive Fee is a useful non-GAAP financial measure as
such accrual is not contractually payable under the terms of the Investment
Advisory Agreement.
Although these non-GAAP financial measures are intended to enhance investors'
understanding of our business and performance, these non-GAAP financial measures
should not be considered an alternative to GAAP.
Three months ended Six months ended
March 31, 2022 December 31, March 31, 2022 March 31, 2021
2021
(In thousands)
Net investment income $ 43,440 $ 44,790 $ 88,230 $ 79,315
Add: GCIC acquisition purchase premium 2,940 7,095 10,035 17,952
amortization
Adjusted Net Investment Income$ 46,380 $ 51,885 $ 98,265 $ 97,267 Add: Accrual (reversal) for capital gain incentive 4,362 452 4,814 - fee under GAAP Adjusted Net Investment Income Before Accrual for$ 50,742 $ 52,337 $ 103,079 $ 97,267
Capital Gain Incentive Fee
Net gain (loss) on investment transactions$ 23,530 $ 18,783 $ 42,313 $ 106,439 Add: Realized loss on investment transactions due - 228 228 99 to purchase premium Less: Net change in unrealized appreciation on (2,940) (7,323) (10,263) (18,051) investment transactions due to purchase premium Adjusted Net Realized and Unrealized Gain$ 20,590 $ 11,688 $ 32,278 $ 88,487
Net increase (decrease) in net assets resulting
$ 63,078 $ 129,951 $ 185,754 from operations Add: GCIC acquisition purchase premium 2,940 7,095 10,035 17,952
amortization
Add: Realized loss on investment transactions due - 228 228 99 to purchase premium Less: Net change in unrealized appreciation on (2,940) (7,323) (10,263) (18,051) investment transactions due to purchase premium Adjusted Net Income$ 66,873 $ 63,078 $ 129,951 $ 185,754 Investment Income Investment income decreased from the three months endedDecember 31, 2021 to the three months endedMarch 31, 2022 by$0.6 million primarily due to a decrease in accretion income resulting from reduced payoffs of portfolio company investments and a decrease in dividend and fee income, partially offset by a decrease in GCIC premium amortization. Investment income increased from the six months endedMarch 31, 2021 to the six months endedMarch 31, 2022 by$22.3 million primarily due to an increase in the average earning debt investments balance of$640.9 million and a decrease of the GCIC acquisition purchase price premium amortization. 145
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The annualized income yield by debt security type for the three months endedMarch 31, 2022 andDecember 31, 2021 and the six months endedMarch 31, 2022 andMarch 31, 2021 are as follows: Three months ended Six months ended March 31, 2022 December 31, 2021 March 31, 2022 March 31, 2021 Senior secured 5.4% 5.6% 5.6% 6.3% One stop 7.1% 7.3% 7.2% 7.7% Second lien 8.8% 9.1% 9.0% 10.9% Subordinated debt 11.6% 12.3% 11.8% 10.6% Income yields on one stop and senior secured loans decreased for the three months endedMarch 31, 2022 as compared to the three months endedDecember 31, 2021 and for the six months endedMarch 31, 2022 as compared to the six months endedMarch 31, 2021 , primarily due to the general trend of interest rate compression on new investments. Our loan portfolio is partially insulated from a drop in floating interest rates, as over 98.0% of the loan portfolio at fair value is subject to an interest rate floor. As ofMarch 31, 2022 andSeptember 30, 2021 , the weighted average base rate floor of our loans was 0.86% and 0.90%, respectively. The decrease in our portfolio's weighted average base rate floor is primarily due to the majority of our new portfolio company investments originating with base rate floors ranging between 0.00% and 0.75%. As ofMarch 31, 2022 , we have second lien investments in six portfolio companies and subordinated debt investments in two portfolio companies as shown in the Consolidated Schedule of Investments. Due to the limited number of second lien and subordinated debt investments, income yields on second lien and subordinated debt investments can be significantly impacted by the addition, subtraction or refinancing of one investment.
For additional details on investment yields and asset mix, refer to the "Liquidity and Capital Resources - Portfolio Composition, Investment Activity and Yield" section below.
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Expenses
The following table summarizes our expenses for the three months ended March 31,
2022 and December 31, 2021 and the six months ended March 31, 2022 and March 31,
2021 :
Three months ended Variances Six months ended Variances
December 31, March 31, 2022
March 31, 2022 2021 vs December 31 , March 31, 2022 March 31, 2021 2022 vs. 2021
2021
(In thousands)
Interest and other debt financing
expenses $ 17,499 $ 16,169 $ 1,330 $
33,668
1,776 1,667 109 3,443 3,340 103
Base management fee, net of waiver 16,115 17,501 (1,386) 33,616 30,306 3,310
Income incentive fee - 2,929 (2,929) 2,929 2,946 (17)
Capital gain incentive fee 4,362 452 3,910 4,814 - 4,814
Professional fees 729 899 (170) 1,628 2,038 (410)
Administrative service fee 1,640 1,818 (178) 3,458 3,602 (144)
General and administrative expenses 400 342 58 742 769 (27)
Net expenses $ 42,521 $ 41,777 $ 744 $
84,298
$ 2,825,135 $ 2,657,628 $ 167,507 $ 2,740,594 $ 2,140,263 $ 600,331 Interest Expense Interest and other debt financing expenses, including amortization of debt issuance costs, increased by$1.4 million from the three months endedDecember 31, 2021 to the three months endedMarch 31, 2022 primarily due to increased borrowings on the JPM Credit Facility (as defined in Note 7 of our consolidated financial statements) to fund investments. Interest and other debt financing expenses, including amortization of debt issuance costs, increased from the six months endedMarch 31, 2021 to the six months endedMarch 31, 2022 by$5.8 million , primarily due to an increase in average debt outstanding of$600.3 million . For more information about our outstanding borrowings for the three and six months endedMarch 31, 2022 , and 2021, including the terms thereof, see Note 7. Borrowings in the notes to our consolidated financial statements and the "Liquidity and Capital Resources" section below. For the three months endedMarch 31, 2022 andDecember 31, 2021 , the effective annualized average interest rate, which includes amortization of debt financing costs, amortization of discounts on notes issued and non-usage facility fees, on our total debt was 2.8% and 2.7%, respectively. For the six months endedMarch 31, 2022 andMarch 31, 2021 , the effective annualized average interest rate, which includes amortization of debt financing costs, amortization of discounts on notes issued and non-usage facility fees, on our total debt was 2.7% and 2.9%, respectively.
The increase in the effective annualized average interest rate from the three
months ended
The decrease in the effective annualized average interest rate in the six months endedMarch 31, 2022 compared to the six months endedMarch 31, 2021 was primarily due to the issuance of the 2026 Notes (as defined in Note 7 of our consolidated financial statements) and the 2027 Notes (as defined in Note 7 of our consolidated financial statements) issued inFebruary 2021 andAugust 2021 , respectively, that bear interest at a fixed rate of 2.500% and 2.050%, respectively, as well as the issuance of the additional 2026 Notes (as defined in Note 7 of our consolidated financial statements) and the additional 2024 Notes (as defined in Note 7 of our consolidated financial statements) inOctober 2021 at a price resulting in a yield to maturity of 2.667% and 1.809%, respectively. 147 -------------------------------------------------------------------------------- TABLE OF CONTENTS Management Fee The base management fee, net of waiver, decreased from the three months endedDecember 31, 2021 to the three months endedMarch 31, 2022 primarily due to the base management fee waiver described below.
The base management fee, net of waiver, increased from the six months ended
EffectiveApril 1, 2022 ,GC Advisors changed its practice of retaining administrative agent fees earned in respect of co-investment transactions in which we participate. In connection with this change, for the three months endedMarch 31, 2022 ,GC Advisors voluntarily and irrevocably waived$1.9 million * of base management fees related to certain administrative agent fees received byGC Advisors prior to this change. The waiver had the net economic effect of providing us an amount equal to our pro rata portion of administrative agent fees earned byGC Advisors from our borrowers.
Incentive Fees
The incentive fee payable under the Investment Advisory Agreement consists of two parts: (1) the income component, or the Income Incentive Fee, and (2) the capital gains component, or the Capital Gain Incentive Fee. No Income Incentive Fee was payable for the three months endedMarch 31, 2022 due to our returns on equity not exceeding the quarterly hurdle rate of 2.0%, which compared to an Income Incentive Fee of$2.9 million for the three months endedDecember 31, 2021 . The Income Incentive Fee was consistent from the six months endedMarch 31, 2021 to the six months endedMarch 31, 2022 . As we remained in the "catch-up" provision of the calculation of the Income Incentive Fee for the relevant periods, an increase in Pre-Incentive Fee Net Investment Income (as defined in Note 3 of our consolidated financial statements) causes a corresponding increase in the Income Incentive fee until we are fully through the catch up. The Income Incentive Fee as a percentage of Pre-Incentive Fee Net Investment Income was 6.1%, 3.1% and 3.6% for the three months endedDecember 31, 2021 , the six months endedMarch 31, 2022 and the six months endedMarch 31, 2021 , respectively. There was no Income Incentive Fee for the three months endedMarch 31, 2022 . As of bothMarch 31, 2022 andSeptember 30, 2021 , there was no Capital Gain Incentive Fee payable as calculated under the Investment Advisory Agreement. In accordance with GAAP, we are required to include the aggregate unrealized capital appreciation on investments in the calculation and accrue a capital gain incentive fee as if such unrealized capital appreciation were realized, even though such unrealized capital appreciation is not permitted to be considered in calculating the fee actually payable under the Investment Advisory Agreement. As ofMarch 31, 2022 , there was a capital gain incentive fee accrual of$4.8 million calculated in accordance with GAAP. We recorded an accrual for a capital gain incentive fee under GAAP of$4.4 million and$4.8 million for the three and six months endedMarch 31, 2022 , respectively, which was primarily the result of an increase in unrealized appreciation on debt and equity investments. As ofSeptember 30, 2021 , there was no capital gain incentive fee accrual calculated in accordance with GAAP. Any payment due under the terms of the Investment Advisory Agreement is calculated in arrears at the end of each calendar year. No Capital Gain Incentive Fees as calculated under the Investment Advisory Agreement or any prior investment advisory agreements, as applicable, have been payable sinceDecember 31, 2018 .
For additional details on unrealized appreciation and depreciation of investments, refer to the "Net Realized and Unrealized Gains and Losses" section below.
*The net economic effect represents$6.5 million of GBDC's pro rata portion of administrative agent fees retained byGC Advisors since the exemptive relief issued to GBDC and its affiliates onFebruary 27, 2017 , reduced by$4.6 million of the additional incentive feesGC Advisors would have earned on the pro rata portion of administrative agent fees. 148 -------------------------------------------------------------------------------- TABLE OF CONTENTS Professional Fees, Administrative Service Fee, and General and Administrative Expenses In total, professional fees, the administrative service fee, and general and administrative expenses decreased by$0.3 million from the three months endedDecember 31, 2021 to the three months endedMarch 31, 2022 primarily due to lower professional fees and administrative expenses. In total, professional fees, the administrative service fee, and general and administrative expenses decreased from the six months endedMarch 31, 2021 to the six months endedMarch 31, 2022 by$0.6 million primarily due to a decrease in professional fees. The Administrator pays for certain expenses incurred by us. These expenses are subsequently reimbursed in cash. Total expenses reimbursed to the Administrator during the three months endedMarch 31, 2022 andDecember 31, 2021 , were$1.9 million and$2.5 million , respectively. Total expenses reimbursed to the Administrator during the six months endedMarch 31, 2022 and 2021, were$4.4 million and$3.1 million , respectively. As ofMarch 31, 2022 andSeptember 30, 2021 , included in accounts payable and other liabilities were$0.9 million and$2.5 million , respectively, for expenses paid on behalf of us by the Administrator.
Net Realized and Unrealized Gains and Losses
The following table summarizes our net realized and unrealized gains (losses)
for the three months ended
Three months ended Variances Six months ended Variances
December 31, March 31, 2022 March 31,
March 31, 2022 2021 vs December 31, 2022 March 31, 2021 2022 vs. 2021
2021
(In thousands) (In thousands)
Net realized gain (loss) on investments $ 321 $ 14,573 $ (14,252) $ 14,894 $ (443) $ 15,337
Foreign currency transactions 51 (25) 76 26 (1,895) 1,921
Net realized gain (loss) on investment $ 372 $ 14,548 $ (14,176) $ 14,920 $ (2,338) $ 17,258
transactions
Unrealized appreciation on investments 40,626 36,805 3,821 65,821 124,403 (58,582)
Unrealized (depreciation) on investments (22,661) (33,119) 10,458 (44,170) (12,853) (31,317)
Unrealized appreciation (depreciation)
on translation of assets and liabilities 3,337 268 3,069 3,605 (2) 3,607
in foreign currencies
Unrealized appreciation (depreciation) 1,856 281 1,575 2,137 (2,771) 4,908
on forward currency contracts
Net change in unrealized appreciation
(depreciation) on investment $ 23,158 $ 4,235 $ 18,923 $ 27,393 $ 108,777 $ (81,384)
transactions
During the three months ended March 31, 2022 and the three months ended December
31, 2021 , we had a net realized gain of $0.4 million and $14.5 million ,
respectively, both primarily attributable to recognized realized gains on the
sale of equity investments in multiple portfolio companies.
During the six months ended March 31, 2022 , we had a net realized gain of $14.9
million primarily attributable to recognized realized gains on the sale of
equity investments in multiple portfolio companies. During the six months ended
March 31, 2021 , we had a net realized loss of $2.3 million primarily
attributable to recognized realized losses on the restructure, sale, or
write-off of multiple portfolio companies, partially offset by net realized
gains from the sale of equity investments in multiple portfolio companies.
For the three months ended March 31, 2022 , we had $40.6 million in unrealized
appreciation on 199 portfolio company investments, which was offset by $22.7
million in unrealized depreciation on 147 portfolio company investments. For the
three months December 31, 2021 , we had $36.8 million in unrealized appreciation
on 176 portfolio company investments, which was offset by $33.1 million in
unrealized depreciation on 151 portfolio company investments. Unrealized
appreciation for both the three months ended March 31, 2022 and the three months
ended December 31, 2021 primarily resulted from better than expected performance
of our portfolio companies. Unrealized depreciation for both the three months
ended March 31, 2022 and the three months ended December 31, 2021 primarily
resulted from amortization of discounts, negative credit related adjustments
that caused a reduction in fair value and the reversal of the net unrealized
appreciation associated with the sale of portfolio company investments.
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For the six months ended March 31, 2022 , we had $65.8 million in unrealized
appreciation on 213 portfolio company investments, which was offset by $44.2
million in unrealized depreciation on 133 portfolio company investments. For the
six months ended March 31, 2021 , we had $124.4 million in unrealized
appreciation on 222 portfolio company investments, which was offset by $12.9
million in unrealized depreciation on 58 portfolio company investments.
Unrealized appreciation for both the six months ended March 31, 2022 and March
31, 2021 primarily resulted from better than expected performance of our
portfolio companies and credit market conditions beginning to recover from the
COVID-19 pandemic. Unrealized depreciation for the six months ended March 31,
2022 primarily resulted from amortization of discounts, negative credit related
adjustments that caused a reduction in fair value and the reversal of the net
unrealized appreciation associated with the sale of portfolio company
investments. Unrealized depreciation for the six months ended March 31, 2021
primarily resulted from decreases in the fair value in the majority of our
portfolio company investments due to the adverse economic effects of the
COVID-19 pandemic, the continuing uncertainty surrounding its long-term impact
and increases in the spread between the yields realized on risk-free and higher
risk securities.
Liquidity and Capital Resources
For the six months endedMarch 31, 2022 , we experienced a net decrease in cash and cash equivalents, foreign currencies, restricted cash and cash equivalents and restricted foreign currencies of$70.0 million . During the period, cash used in operating activities was$389.0 million , primarily driven by fundings of portfolio investments of$1,267.3 million , offset by proceeds from principal payments and sales of portfolio investments of$784.0 million and net investment income of$88.2 million . Lastly, cash provided by financing activities was$319.0 million , primarily driven by borrowings on debt of$916.8 million , offset by repayments of debt of$502.3 million and distributions paid of$75.6 million . For the six months endedMarch 31, 2021 , we experienced a net decrease in cash, cash equivalents, foreign currencies, restricted cash and cash equivalents and restricted foreign currencies of$0.5 million . During the period, cash provided by operating activities was$38.7 million , primarily as a result of proceeds from principal payments and sales of portfolio investments of$626.2 million and net investment income of$79.3 million , offset by fundings of portfolio investments of$678.5 million . Lastly, cash used in financing activities was$39.2 million , primarily driven by repayments of debt of$2,224.5 million , distributions paid of$68.2 million , and purchases of common stock under the DRIP of$14.7 million , partially offset by borrowings on debt of$2,284.0 million . As ofMarch 31, 2022 andSeptember 30, 2021 , we had cash and cash equivalents of$130.5 million and$175.6 million , respectively. In addition, we had foreign currencies of$5.7 million and$5.5 million as ofMarch 31, 2022 andSeptember 30, 2021 , respectively, restricted cash and cash equivalents of$35.7 million and$61.8 million as ofMarch 31, 2022 andSeptember 30, 2021 , respectively, and restricted foreign currencies of$2.4 million and$1.4 million as ofMarch 31, 2022 andSeptember 30, 2021 , respectively. Cash and cash equivalents and foreign currencies are available to fund new investments, pay operating expenses and pay distributions. Restricted cash and cash equivalents and restricted foreign currencies can be used to pay principal and interest on borrowings and to fund new investments that meet the guidelines under our debt securitizations or credit facilities, as applicable.
Revolving Debt Facilities
MS Credit Facility II - As of bothMarch 31, 2022 andSeptember 30, 2021 , we had no amounts outstanding on the MS Credit Facility II (as defined in Note 7 of our consolidated financial statements). As ofMarch 31, 2022 , the MS Credit Facility II allowedGolub Capital BDC Funding II LLC , or Funding II, as amended, to borrow up to$75.0 million at any one time outstanding, subject to leverage and borrowing base restrictions. As of bothMarch 31, 2022 andSeptember 30, 2021 , subject to leverage and borrowing base restrictions, we had approximately$75.0 million of remaining commitments and$75.0 million of availability on the MS Credit Facility II. JPM Credit Facility - OnFebruary 11, 2021 , we entered into the JPM Credit Facility (as defined in Note 7 of our consolidated financial statements), which, as ofMarch 31, 2022 , allowed us to borrow up to$1,187.5 million at any one time outstanding, subject to leverage and borrowing base restrictions. As ofMarch 31, 2022 andSeptember 30, 2021 , we had outstanding debt under the JPM Credit Facility of$580.8 million and$472.1 million , respectively. As ofMarch 31, 2022 andSeptember 30, 2021 , subject to leverage and borrowing base restrictions, we had$606.7 million and$2.9 million , respectively, of remaining commitments and$606.7 million and$2.9 million of availability, respectively, on the JPM Credit Facility. 150 -------------------------------------------------------------------------------- TABLE OF CONTENTS Adviser Revolver - OnJune 22, 2016 , we entered into the Adviser Revolver (as defined in Note 7 of our consolidated financial statements), which, as amended, permitted us to borrow up to$100.0 million at any one time outstanding as ofMarch 31, 2022 . We entered into the Adviser Revolver in order to have the ability to borrow funds on a short-term basis and have in the past repaid, and generally intend in the future to repay, borrowings under the Adviser Revolver within 30 to 45 days from which they are drawn. As of each ofMarch 31, 2022 andSeptember 30, 2021 , we had no amounts outstanding on the Adviser Revolver.
Debt Securitizations
2018 Debt Securitization - OnNovember 16, 2018 , we completed the 2018 Debt Securitization. The Class A, Class B and Class C-1 2018 Notes are included in theMarch 31, 2022 andSeptember 30, 2021 Consolidated Statements of Financial Condition as our debt and the Class C-2, Class D and Subordinated 2018 Notes were eliminated in consolidation. As of bothMarch 31, 2022 andSeptember 30, 2021 , we had outstanding debt under the 2018 Debt Securitization of$408.2 million . GCIC 2018 Debt Securitization - EffectiveSeptember 16, 2019 , we assumed as a result of the Merger, the GCIC 2018 Debt Securitization. The Class A-1, Class A-2 (Class A-2-R GCIC 2018 Notes after refinancing onDecember 21, 2020 ) and Class B-1 GCIC 2018 Notes are included in theMarch 31, 2022 andSeptember 30, 2021 Consolidated Statements of Financial Condition as our debt. As ofMarch 31, 2022 andSeptember 30, 2021 the Class B-2, Class C and ClassD GCIC 2018 Notes and the Subordinated GCIC 2018 Notes were eliminated in consolidation. As ofMarch 31, 2022 andSeptember 30, 2021 , we had outstanding debt under the GCIC 2018 Debt Securitization of$545.1 million and$544.2 million , respectively. Due to the interplay of the 1940 Act restrictions on principal and joint transactions and theU.S. risk retention rules adopted pursuant to Section 941 of Dodd-Frank, as a business development company, we sought and received no action relief from theSEC to ensure we could engage in CLO financings in which assets are transferred throughGC Advisors .
2024 Notes
OnOctober 2, 2020 , we issued$400.0 million in aggregate principal amount of the 2024 Notes. OnOctober 15, 2021 , we issued an additional$100.0 million in aggregate principal of the 2024 Notes. As ofMarch 31, 2022 , we had$500.0 million of outstanding aggregate principal amount of the 2024 Notes.
2026 Notes
OnFebruary 24, 2021 , we issued$400.0 million in aggregate principal amount of the 2026 Notes. OnOctober 13, 2021 , we issued an additional$200.0 million in aggregate principal of the 2026 Notes. As ofMarch 31, 2022 , we had$600.0 million of outstanding aggregate principal amount of the 2026 Notes.
2027 Notes
On
Equity Distribution Agreement
OnMay 28, 2021 , we entered into an equity distribution agreement, or the Equity Distribution Agreement, in connection with the launch of an at the market program to sell up to$250.0 million of shares of our common stock. An at the market offering is a registered offering by a publicly traded issuer of its listed equity securities that allows the issuer to sell shares directly into the market at market prices. As ofMarch 31, 2022 , there have been no common stock issuances under the Equity Distribution Agreement.
Asset Coverage, Contractual Obligations, Off-Balance Sheet Arrangements and Other Liquidity Considerations
As of
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amounts such that our asset coverage, as defined in the 1940 Act, was at least
200% after such borrowing. We currently intend to continue to target a GAAP
debt-to-equity ratio between 0.85x to 1.25x. As of March 31, 2022 , our asset
coverage for borrowed amounts and GAAP debt-to-equity ratio was 187.6% and
1.14x, respectively.
In August 2021 , our board of directors reapproved a share repurchase program, or
the Program, which allows us
to repurchase up to $150.0 million of our outstanding common stock on the open
market at prices below the NAV per share as reported in our then most recently
published consolidated financial statements. The Program is implemented at the
discretion of management with shares to be purchased from time to time at
prevailing market
prices, through open market transactions, including block transactions. We did
not make any repurchases of our common stock during the six months ended March
31, 2022 and 2021.
As of March 31, 2022 and September 30, 2021 , we had outstanding commitments to
fund investments totaling $243.8 million and $340.7 million , respectively. As of
March 31, 2022 , total commitments of $243.8 million included $40.6 million of
unfunded commitments on revolvers. There is no guarantee that these amounts will
be funded to the borrowing party now or in the future. The unfunded commitments
relate to loans with various maturity dates, but the entire amount was eligible
for funding to the borrowers, subject to the terms of each loan's respective
credit agreement. A summary of maturity requirements for our principal
borrowings as of March 31, 2022 is included in Note 7 of our consolidated
financial statements. We did not have any other material contractual payment
obligations as of March 31, 2022 . As of March 31, 2022 , we believe that we had
sufficient assets and liquidity to adequately cover future obligations under our
unfunded commitments based on historical rates of drawings upon unfunded
commitments, cash and restricted cash balances that we maintain, availability
under the Adviser Revolver, JPM Credit Facility and MS Credit Facility II, as
well as ongoing principal repayments on debt investments. In addition, we
generally hold some syndicated loans in larger portfolio companies that are
saleable over a relatively short period to generate cash.
In addition, we have entered and, in the future, may again enter into derivative
instruments that contain elements of off-balance sheet market and credit risk.
Refer to Note 5 of our consolidated financial statements for outstanding forward
currency contracts as of March 31, 2022 and September 30, 2021 . Derivative
instruments can be affected by market conditions, such as interest rate
volatility, which could impact the fair value of the derivative instruments. If
market conditions move against us, we may not achieve the anticipated benefits
of the derivative instruments and may realize a loss. We minimize market risk
through monitoring its investments and borrowings.
Although we expect to fund the growth of our investment portfolio through the
net proceeds from future securities offerings and future borrowings, to the
extent permitted by the 1940 Act, we cannot assure you that our efforts to raise
capital will be successful. In addition, from time to time, we can amend or
refinance our leverage facilities and securitization financings, to the extent
permitted by applicable law. In addition to capital not being available, it also
may not be available on favorable terms. To the extent we are not able to raise
capital on what we believe are favorable terms, we will focus on optimizing
returns by investing capital generated from repayments into new investments we
believe are attractive from a risk/reward perspective. Furthermore, to the
extent we are not able to raise capital and are at or near our targeted leverage
ratios, we expect to receive smaller allocations, if any, on new investment
opportunities under GC Advisors' allocation policy and have, in the past,
received such smaller allocations under similar circumstances.
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Portfolio Composition, Investment Activity and Yield
As of March 31, 2022 and September 30, 2021 , we had investments in 310 and 296
portfolio companies, respectively, with a total fair value of $5.4 billion and
$4.9 billion , respectively.
The following table shows the asset mix of our new investment commitments for
the three months ended March 31, 2022 and December 31, 2021 and the six months
ended March 31, 2022 and March 31, 2021 :
Three months ended Six months ended
March 31, 2022 December 31, 2021 March 31, 2022 March 31, 2021
(In thousands) Percentage (In Percentage (In thousands) Percentage (In thousands) Percentage
thousands)
Senior secured $ 5,940 1.8 % $ 37,039 4.3 % $ 42,979 3.6 % $ 173,775 22.8 %
One stop 304,844 94.4 761,442 87.7 1,066,286 89.5 572,624 75.2
Second lien - - 640 0.1 640 0.1 8,013 1.1
Subordinated debt - 0.0 988 0.1 988 0.1 - -
Equity 12,399 3.8 67,613 7.8 80,012 6.7 7,131 0.9
Total new investment $ 323,183 100.0 % $ 867,722 100.0 % $ 1,190,905 100.0 % $ 761,543 100.0 %
commitments
For the six months ended
For the six months ended
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The following table shows the principal, amortized cost and fair value of our
portfolio of investments by asset class:
As of March 31, 2022(1) As of September 30, 2021(2)
Amortized Fair Amortized Fair
Principal Cost Value Principal Cost Value
(In thousands) (In thousands)
Senior secured:
Performing $ 604,174 $ 599,867 $ 593,897 $ 796,269 $ 793,707 $ 781,962
Non-accrual(3) 38,597 23,291 11,110 20,047 9,813 2,843
One stop:
Performing 4,503,084 4,473,875 4,463,709 3,876,907 3,860,525 3,839,053
Non-accrual(3) 60,008 52,993 44,761 59,699 52,806 43,261
Second lien:
Performing 43,614 43,067 42,796 42,571 41,946 41,857
Non-accrual(3) - - - - - -
Subordinated debt:
Performing 3,560 3,512 3,560 172 171 172
Non-accrual(3) - - - - - -
Equity N/A 208,414 266,326 N/A 136,429 185,738
Total $ 5,253,037 $ 5,405,019 $ 5,426,159 $ 4,795,665 $ 4,895,397 $ 4,894,886 (1)As of
(2)As ofSeptember 30, 2021 ,$502.1 million and$476.1 million of our loans at amortized cost and fair value, respectively, included a feature permitting a portion of the interest due on such loan to be PIK interest. (3)We refer to a loan as non-accrual when we cease recognizing interest income on the loan because we have stopped pursuing repayment of the loan or, in certain circumstances, it is past due 90 days or more on principal and interest or our management has reasonable doubt that principal or interest will be collected. See "- Critical Accounting Policies - Revenue Recognition." As ofMarch 31, 2022 , we had loans in seven portfolio companies on non-accrual status, and non-accrual investments as a percentage of total debt investments at cost and fair value were 1.5% and 1.1%, respectively. As ofSeptember 30, 2021 , we had loans in six portfolio companies on non-accrual status, and non-accrual investments as a percentage of total investments at cost and fair value were 1.3% and 1.0%, respectively.
As of
The following table shows the weighted average rate, spread over the applicable base rate of floating rate and fees of investments originated and the weighted average rate of sales and payoffs of portfolio companies during the three months ended the three months endedMarch 31, 2022 andDecember 31, 2021 and the six months endedMarch 31, 2022 andMarch 31, 2021 : For the three months ended For the six months ended March 31, 2022 December 31, 2021 March 31, 2022 March 31, 2021 Weighted average rate of new investment fundings 6.7% 6.7% 6.7% 7.0% Weighted average spread over the applicable base rate of new floating rate investment fundings 5.8% 5.9% 5.8% 5.9% Weighted average fees of new investment fundings 1.1% 1.2% 1.1% 1.3% Weighted average rate of sales and payoffs of portfolio investments 6.0% 6.3% 6.2% 6.8% As ofMarch 31, 2022 , 98.4% and 98.6% of our debt portfolio at amortized cost and at fair value, respectively, had interest rate floors that limit the minimum applicable interest rates on such loans. As ofSeptember 30, 2021 , 92.4% and 92.4% of our debt portfolio at amortized cost and at fair value, respectively, had interest rate floors that limit the minimum applicable interest rates on such loans.
As of
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TABLE OF CONTENTS portfolio median EBITDA is based on the most recently reported trailing twelve-month EBITDA received from the portfolio company.
As part of the monitoring process,GC Advisors regularly assesses the risk profile of each of our investments and rates each of them based on an internal system developed byGolub Capital and its affiliates. This system is not generally accepted in our industry or used by our competitors. It is based on the following categories, which we refer to asGC Advisors' internal performance ratings: Internal Performance Ratings Rating Definition 5 Involves the least amount of risk in our
portfolio. The borrower is performing
above expectations, and the trends and risk factors are generally favorable.
Involves an acceptable level of risk that is similar to the risk at the time of
4 origination. The borrower is generally performing as expected, and the risk
factors are neutral to favorable.
Involves a borrower performing below expectations and indicates that the loan's
3 risk has increased somewhat since origination. The borrower could be out of
compliance with debt covenants; however, loan payments are generally not past
due.
Involves a borrower performing materially below expectations and indicates that
2 the loan's risk has increased materially sinceorigination. In addition to the
borrower being generally out of compliance with debt covenants, loan payments
could be past due (but generally not more than 180 days past due).
Involves a borrower performing substantially below expectations and indicates
that the loan's risk has substantially increased since origination. Most or all
1 of the debt covenants are out of compliance andpayments are substantially
delinquent. Loans rated 1 are not anticipated to be repaid in full and we will
reduce the fair market value of the loan to the amount we anticipate will be
recovered.
Our internal performance ratings do not constitute any rating of investments by
a nationally recognized statistical rating organization or represent or reflect
any third-party assessment of any of our investments.
For any investment rated 1, 2 or 3, GC Advisors will increase its monitoring
intensity and prepare regular updates for the investment committee, summarizing
current operating results and material impending events and suggesting
recommended actions.
GC Advisors monitors and, when appropriate, changes the internal performance
ratings assigned to each investment in our portfolio. In connection with our
valuation process, GC Advisors and our board of directors review these internal
performance ratings on a quarterly basis.
The following table shows the distribution of our investments on the 1 to 5
internal performance rating scale at fair value as of
As of March 31, 2022 As of September 30, 2021
Internal Investments Percentage of Investments Percentage of
Performance at Fair Value
Total at Fair Value Total
Rating (In thousands) Investments (In thousands) Investments
5 $ 337,368 6.2% $ 499,241 10.2%
4 4,670,103 86.1 3,951,870 80.7
3 367,590 6.8 395,208 8.1
2 50,810 0.9 47,836 1.0
1 288 0.0* 731 0.0*
Total $ 5,426,159 100.0% $ 4,894,886 100.0%
* Represents an amount less than 0.1%.
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Distributions
We intend to make quarterly distributions to our stockholders as determined by
our board of directors. For additional details on distributions, see "Income
taxes" in Note 2 to our consolidated financial statements.
We may not be able to achieve operating results that will allow us to make
distributions at a specific level or to increase the amount of our distributions
from time to time. In addition, the asset coverage requirements applicable to us
as a business development company under the 1940 Act could limit our ability to
make distributions. If we do not distribute a certain percentage of our income
annually, we will suffer adverse U.S. federal income tax consequences, including
the possible loss of our ability to be subject to tax as a RIC. We cannot assure
stockholders that they will receive any distributions.
Because federal income tax regulations differ from GAAP, distributions in
accordance with tax regulations can differ from net investment income and
realized gains recognized for financial reporting purposes. Differences are
permanent or temporary. Permanent differences are reclassified within capital
accounts in the financial statements to reflect their tax character. For
example, permanent differences in classification result from the treatment of
distributions paid from short-term gains as ordinary income dividends for tax
purposes. Temporary differences arise when certain items of income, expense,
gain or loss are recognized at some time in the future.
To the extent our taxable earnings fall below the total amount of our
distributions for any tax year, a portion of those distributions could be deemed
a return of capital to our stockholders for U.S. federal income tax purposes.
Thus, the source of a distribution to our stockholders could be the original
capital invested by the stockholder rather than our income or gains.
Stockholders should read any written disclosure accompanying a distribution
payment carefully and should not assume that the source of any distribution is
our ordinary income or gains.
We have adopted an "opt out" dividend reinvestment plan for our common
stockholders. As a result, if we declare a distribution, our stockholders' cash
distributions will be automatically reinvested in additional shares of our
common stock unless a stockholder specifically "opts out" of our dividend
reinvestment plan. If a stockholder opts out, that stockholder will receive cash
distributions. Although distributions paid in the form of additional shares of
our common stock will generally be subject to U.S. federal, state and local
taxes in the same manner as cash distributions, stockholders participating in
our dividend reinvestment plan will not receive any corresponding cash
distributions with which to pay any such applicable taxes.
Related Party Transactions
We have entered into a number of business relationships with affiliated or related parties, including the following:
•We entered into the Investment Advisory Agreement withGC Advisors . Mr.Lawrence Golub , our chairman, is a manager ofGC Advisors , and Mr.David Golub , our chief executive officer, is a manager ofGC Advisors , and each of Messrs.Lawrence Golub andDavid Golub owns an indirect pecuniary interest inGC Advisors .
•Golub Capital LLC provides, and other affiliates of
•We have entered into a license agreement withGolub Capital LLC , pursuant to whichGolub Capital LLC has granted us a non-exclusive, royalty-free license to use the name "Golub Capital ." •Under a staffing agreement, or the Staffing Agreement,Golub Capital LLC has agreed to provideGC Advisors with the resources necessary to fulfill its obligations under the Investment Advisory Agreement. The Staffing Agreement provides thatGolub Capital LLC will make available toGC Advisors experienced investment professionals and provide access to the senior investment personnel ofGolub Capital LLC for purposes of evaluating, negotiating, structuring, closing and monitoring our investments. The Staffing Agreement also includes a commitment that the members ofGC Advisors' investment committee will serve in such capacity. Services under the Staffing Agreement are provided on a direct cost reimbursement basis. We are not a party to the Staffing Agreement. 156 -------------------------------------------------------------------------------- TABLE OF CONTENTS •GC Advisors served as collateral manager to the 2020 Issuer under the 2020 Collateral Management Agreement and serves as collateral manager to the 2018 Issuer and the GCIC 2018 Issuer under the 2018 Collateral Management Agreement and the GCIC 2018 Collateral Management Agreement, respectively. Fees payable toGC Advisors for providing these services offset against the base management fee payable by us under the Investment Advisory Agreement.
•We have entered into the Adviser Revolver with
•During the first calendar quarter of 2022, theGolub Capital Employee Grant Program Rabbi Trust, or the Trust, purchased approximately$11.7 million , or 789,200 shares of our common stock, for the purpose of awarding incentive compensation to employees ofGolub Capital . During calendar year 2021, the Trust purchased approximately$14.3 million , or 925,040 shares of our common stock for the purpose of awarding incentive compensation to employees ofGolub Capital .
•On
•OnOctober 2, 2020 , an affiliate ofGC Advisors purchased$40.0 million of the 2024 Unsecured Notes. OnOctober 8, 2020 , the affiliate sold$15.0 million of the 2024 Unsecured Notes to an unaffiliated party. OnMay 21, 2021 , the affiliate sold$25.0 million of the 2024 Unsecured Notes to an unaffiliated party which closed its position.GC Advisors also sponsors or manages, and expects in the future to sponsor or manage, other investment funds, accounts or investment vehicles (together referred to as "accounts") that have investment mandates that are similar, in whole and in part, with ours. For example,GC Advisors presently serves as the investment adviser toGolub Capital BDC 3, Inc. andGolub Capital Direct Lending Corporation , both unlisted business development companies that primarily focus on investing in one stop and other senior secured loans. In addition, our officers and directors serve in similar capacity forGolub Capital BDC 3, Inc. andGolub Capital Direct Lending Corporation . IfGC Advisors and its affiliates determine that an investment is appropriate for us,Golub Capital BDC 3, Inc.,Golub Capital Direct Lending Corporation and other accounts, depending on the availability of such investment and other appropriate factors, and pursuant toGC Advisors' allocation policy,GC Advisors or its affiliates could determine that we should invest side-by-side with one or more other accounts. We do not intend to make any investments if they are not permitted by applicable law and interpretive positions of theSEC and its staff, or if they are inconsistent withGC Advisors' allocation procedures. In addition, we have adopted a formal code of ethics that governs the conduct of our andGC Advisors' officers, directors and employees. Our officers and directors also remain subject to the duties imposed by both the 1940 Act and the General Corporation Law of theState of Delaware .
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the periods reported. Actual results could materially differ from those estimates. We have identified the following items as critical accounting policies.
Fair Value Measurements
We value investments for which market quotations are readily available at their
market quotations. However, a readily available market value is not expected to
exist for many of the investments in our portfolio, and we value these portfolio
investments at fair value as determined in good faith by our board of directors
under our valuation policy and process.
Valuation methods include comparisons of the portfolio companies to peer
companies that are public, determination of the enterprise value of a portfolio
company, discounted cash flow analysis and a market interest rate approach. The
factors that are taken into account in fair value pricing investments include:
available current market data, including relevant and applicable market trading
and transaction comparables; applicable market yields and
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multiples; security covenants; call protection provisions; information rights;
the nature and realizable value of any collateral; the portfolio company's
ability to make payments, its earnings and discounted cash flows and the markets
in which it does business; comparisons of financial ratios of peer companies
that are public; comparable merger and acquisition transactions; and the
principal market and enterprise values. When an external event such as a
purchase transaction, public offering or subsequent equity sale occurs, we will
consider the pricing indicated by the external event to corroborate the private
equity valuation. Due to the inherent uncertainty of determining the fair value
of investments that do not have a readily available market value, the fair value
of the investments can differ significantly from the values that would have been
used had a readily available market value existed for such investments and
differ materially from values that are ultimately received or settled.
Our board of directors is ultimately and solely responsible for determining, in
good faith, the fair value of investments that are not publicly traded, whose
market prices are not readily available on a quarterly basis or any other
situation where portfolio investments require a fair value determination.
With respect to investments for which market quotations are not readily available, our board of directors undertakes a multi-step valuation process each quarter, as described below:
Our quarterly valuation process begins with each portfolio company investment being initially valued by the investment professionals ofGC Advisors responsible for credit monitoring. Preliminary valuation conclusions are then documented and discussed with our senior management andGC Advisors . The audit committee of our board of directors reviews these preliminary valuations. At least once annually the valuation for each portfolio investment, subject to a de minimis threshold, is reviewed by an independent valuation firm. The board of directors discusses valuations and determines the fair value of each investment in our portfolio in good faith. Determination of fair values involves subjective judgments and estimates. Under current accounting standards, the notes to our consolidated financial statements refer to the uncertainty with respect to the possible effect of such valuations, and any change in such valuations, on our consolidated financial statements. We follow ASC Topic 820 for measuring fair value. Fair value is the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Where available, fair value is based on observable market prices or parameters, or derived from such prices or parameters. Where observable prices or inputs are not available, valuation models are applied. These valuation models involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the assets or liabilities or market and the assets' or liabilities' complexity. Our fair value analysis includes an analysis of the value of any unfunded loan commitments. Assets and liabilities are categorized for disclosure purposes based upon the level of judgment associated with the inputs used to measure their value. The valuation hierarchical levels are based upon the transparency of the inputs to the valuation of the asset or liability as of the measurement date. The three levels are defined as follows:
Level 1: Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date.
Level 2: Inputs include quoted prices for similar assets or liabilities in active markets and inputs that are observable for the assets or liabilities, either directly or indirectly, for substantially the full term of the assets or liabilities.
Level 3: Inputs include significant unobservable inputs for the assets or liabilities and include situations where there is little, if any, market activity for the assets or liabilities. The inputs into the determination of fair value are based upon the best information available and may require significant management judgment or estimation.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an asset's or a liability's categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and we consider factors specific to the asset or liability. We assess the levels of assets and liabilities at each measurement date, and transfers between levels are recognized on the actual date of the event or change in circumstances that caused the transfers. There were no transfers among Level 1, 2 and 3 of the fair value hierarchy for assets and liabilities during the three and six months endedMarch 31, 2022 and 2021. The following section describes the valuation techniques used by us to measure different assets and liabilities at fair value and includes the level within the fair value hierarchy in which the assets and liabilities are categorized. 158
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Valuation of Investments
Level 1 investments are valued using quoted market prices. Level 2 investments are valued using market consensus prices that are corroborated by observable market data and quoted market prices for similar assets and liabilities. Level 3 investments are valued at fair value as determined in good faith by our board of directors, based on input of management, the audit committee and independent valuation firms that have been engaged at the direction of our board of directors to assist in the valuation of each portfolio investment without a readily available market quotation at least once during a trailing twelve-month period under a valuation policy and a consistently applied valuation process. This valuation process is conducted at the end of each fiscal quarter, with approximately 25% (based on the number of portfolio companies) of our valuations of debt and equity investments without readily available market quotations subject to review by an independent valuation firm. All investments as ofMarch 31, 2022 andSeptember 30, 2021 , with the exception of money market funds included in cash, cash equivalents and restricted cash and cash equivalents and one portfolio company equity investment (Level 1 investments) and forward currency contracts (Level 2 investments), were valued using Level 3 inputs. When determining fair value of Level 3 debt and equity investments, we may take into account the following factors, where relevant: the enterprise value of a portfolio company, the nature and realizable value of any collateral, the portfolio company's ability to make payments and its earnings and discounted cash flows, the markets in which the portfolio company does business, comparisons to publicly traded securities, and changes in the interest rate environment and the credit markets generally that may affect the price at which similar investments may be made and other relevant factors. The primary method for determining enterprise value uses a multiple analysis whereby appropriate multiples are applied to the portfolio company's EBITDA. A portfolio company's EBITDA may include pro-forma adjustments for items such as acquisitions, divestitures, or expense reductions. The enterprise value analysis is performed to determine the value of equity investments and to determine if debt investments are credit impaired. If debt investments are credit impaired, we will use the enterprise value analysis or a liquidation basis analysis to determine fair value. For debt investments that are not determined to be credit impaired, we use a market interest rate yield analysis to determine fair value. In addition, for certain debt investments, we may base our valuation on indicative bid and ask prices provided by an independent third party pricing service. Bid prices reflect the highest price that we and others may be willing to pay. Ask prices represent the lowest price that we and others may be willing to accept. We generally use the midpoint of the bid/ask range as our best estimate of fair value of such investment. Due to the inherent uncertainty of determining the fair value of Level 3 investments that do not have a readily available market value, the fair value of the investments may differ significantly from the values that would have been used had a market existed for such investments and may differ materially from the values that may ultimately be received or settled. Further, such investments are generally subject to legal and other restrictions or otherwise are less liquid than publicly traded instruments. If we were required to liquidate a portfolio investment in a forced or liquidation sale, we may realize significantly less than the value at which such investment had previously been recorded. Our investments are subject to market risk. Market risk is the potential for changes in the value due to market changes. Market risk is directly impacted by the volatility and liquidity in the markets in which the investments are traded. 159 -------------------------------------------------------------------------------- TABLE OF CONTENTS Valuation of Other Financial Assets and Liabilities The fair value of the 2024 Notes, 2026 Notes and 2027 Notes is based on vendor pricing received by the Company, which is considered a Level 2 input. The fair value of our remaining debt is estimated using Level 3 inputs by discounting remaining payments using comparable market rates or market quotes for similar instruments at the measurement date, if available.
Revenue Recognition:
Our revenue recognition policies are as follows:
Investments and Related Investment Income: Interest income is accrued based upon the outstanding principal amount and contractual interest terms of debt investments. Premiums, discounts, and origination fees are amortized or accreted into interest income over the life of the respective debt investment. For investments with contractual PIK interest, which represents contractual interest accrued and added to the principal balance that generally becomes due at maturity, we do not accrue PIK interest if the portfolio company valuation indicates that the PIK interest is not likely to be collectible. In addition, we may generate revenue in the form of amendment, structuring or due diligence fees, fees for providing managerial assistance, consulting fees and prepayment premiums on loans and record these fees as fee income when received. 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. Dividend income on preferred equity securities is recorded as dividend income on an accrual basis to the extent that such amounts are payable by the portfolio company and are expected to be collected. Dividend income on common equity securities is recorded on the record date for private portfolio companies or on the ex-dividend date for publicly traded portfolio companies. Distributions received from limited liability company, or LLC, and limited partnership, or LP, investments are evaluated to determine if the distribution should be recorded as dividend income or a return of capital. Generally, we will not record distributions from equity investments in LLCs and LPs as dividend income unless there are sufficient accumulated tax-basis earnings and profits in the LLC or LP prior to the distribution. Distributions that are classified as a return of capital are recorded as a reduction in the cost basis of the investment. We account for investment transactions on a trade-date basis. Realized gains or losses on investments are measured by the difference between the net proceeds from the disposition and the cost basis of investment, without regard to unrealized gains or losses previously recognized. We report changes in fair value of investments from the prior period that is measured at fair value as a component of the net change in unrealized appreciation (depreciation) on investments in our Consolidated Statements of Operations. Non-accrual: Loans may be left on accrual status during the period we are pursuing repayment of the loan. Management reviews all loans that become past due 90 days or more on principal and interest or when there is reasonable doubt that principal or interest will be collected for possible placement on non-accrual status. We generally reverse accrued interest when a loan is placed on non-accrual. Additionally, any original issue discount and market discount are no longer accreted to interest income as of the date the loan is placed on non-accrual status. Interest payments received on non-accrual loans may be recognized as income or applied to principal depending upon management's judgment. We restore non-accrual loans to accrual status when past due principal and interest is paid and, in our management's judgment, are likely to remain current. The total fair value of our non-accrual loans was$55.9 million and$46.1 million as ofMarch 31, 2022 andSeptember 30, 2021 , respectively. Income taxes: We have elected to be treated as a RIC under Subchapter M of the Code and operate in a manner so as to qualify for the tax treatment applicable to RICs. In order to be subject to tax as a RIC, we are required to meet certain source of income and asset diversification requirements, as well as timely distribute to our stockholders dividends forU.S. federal income tax purposes of an amount generally at least equal to 90% of investment company taxable income, as defined by the Code and determined without regard to any deduction for dividends paid, for each tax year. We have made and intend to continue to make the requisite distributions to our stockholders, which will generally relieve us fromU.S. federal income taxes. Depending on the level of taxable income earned in a tax year, we may choose to retain taxable income in excess of current year dividend distributions and would distribute such taxable income in the next tax year. We may then be required to incur a 4% excise tax on such income. To the extent that we determine that our estimated current year annual taxable income, determined on a calendar year basis, could exceed estimated current calendar year dividend 160 -------------------------------------------------------------------------------- TABLE OF CONTENTS distributions, we accrue excise tax, if any, on estimated excess taxable income as taxable income is earned. For each of the three and six months endedMarch 31, 2022 and 2021, we did not incur anyU.S federal excise tax. We have consolidated subsidiaries that are subject toU.S. federal and state corporate-level income taxes. For the six months endedMarch 31, 2022 , we recorded a net tax expense of$0.6 million for taxable subsidiaries. For the six months endedMarch 31, 2021 , we did not record a net tax expense for taxable subsidiaries. As ofMarch 31, 2022 , we recorded a net deferred tax liability, reported within accounts payable and other liabilities on the Consolidated Statement of Financial Condition, of$1.1 million for taxable subsidiaries, primarily due to unrealized appreciation on the investments held at the taxable subsidiaries. As ofSeptember 30, 2021 , we recorded a net deferred tax liability, reported within accounts payable and other liabilities on the Consolidated Statement of Financial Condition, of$0.5 million for taxable subsidiaries, primarily due to unrealized appreciation on the investments held at the taxable subsidiaries. Because federal income tax regulations differ from GAAP, distributions in accordance with tax regulations may differ from net investment income and realized gains recognized for financial reporting purposes. Differences may be permanent or temporary. Permanent differences are reclassified within capital accounts in the financial statements to reflect their tax character. For example, permanent differences in classification may result from the treatment of distributions paid from short-term gains as ordinary income dividends for tax purposes. Temporary differences arise when certain items of income, expense, gain or loss are recognized at some time in the future. 161
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