GOLUB CAPITAL BDC, INC. The information contained in this section should be read in conjunction with our consolidated financial statements and related notes thereto appearing elsewhere in this annual report on Form 10-K. 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 annual report on Form 10-K constitute forward-looking statements, which relate to future events or our future performance or financial condition. The forward-looking statements contained in this annual report on Form 10-K 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 due to disruptions, including those caused by global health pandemics, such as the COVID-19 pandemic, or other large scale events;
•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;
•elevating levels of inflation, and its impact on us, on our portfolio companies and on the industries in which we invest;
•the ability of
•the ability of
•the ability ofGC Advisors to continue to effectively manage our business due to disruptions disruptions, including those caused by global health pandemics, such as the COVID-19 pandemic, or other large scale events; •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 RIC and as a business development company;
•the impact of information technology systems and systems failures, including data security breaches, data privacy compliance, network disruptions, and cybersecurity attacks;
•general price and volume fluctuations in the stock markets;
•the impact on our business of 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 annual report on Form 10-K involve risks and uncertainties.
Our actual results could differ materially from those implied or
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TABLE OF CONTENTS expressed in the forward-looking statements for any reason, including the factors set forth as "Risk Factors" in this annual report on Form 10-K.
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 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 annual report on Form 10-K 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. 91 -------------------------------------------------------------------------------- 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 1940 Act. In addition, forU.S. federal income tax purposes, we have elected to be treated as a RIC under Subchapter M of 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$55 billion in capital under management as ofJuly 1, 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 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 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$75.0 million in some of our portfolio companies and generally expect that the size of our individual investments will vary proportionately with the size of our capital base. We generally invest in securities that have been rated below investment grade by independent rating agencies or that would be rated below investment grade if they were rated. These securities, which are often referred to as "junk," have predominantly speculative characteristics with respect to the issuer's capacity to pay interest and repay principal. In addition, many of our debt investments have floating interest rates that reset on a periodic basis and typically do not fully pay down principal prior to maturity, which may increase our risk of losing part or all of our investment. As ofSeptember 30, 2022 andSeptember 30, 2021 , our portfolio at fair value was comprised of the following: As of September 30, 2022 As of September 30, 2021 Investments at Percentage of Investments at Percentage of Fair Value Total Fair Value Total Investment Type (In thousands) Investments (In thousands) Investments Senior secured$ 472,873 8.7 %$ 784,805 16.0 % One stop 4,668,609 85.7 3,882,314 79.3 Second lien 23,240 0.4 41,857 0.9 Subordinated debt 3,815 0.1 172 0.0 * Equity 277,819 5.1 185,738 3.8 Total$ 5,446,356 100.0 %$ 4,894,886 100.0 % * Represents an amount less than 0.1%. 92 -------------------------------------------------------------------------------- TABLE OF CONTENTS 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 recurring revenue loans.1 Other targeted characteristics of recurring revenue 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 ofSeptember 30, 2022 andSeptember 30, 2021 , one stop loans included$659.1 million and$527.8 million , respectively, of recurring revenue loans at fair value.
1 As of
Equity investments include investments in preferred equity of portfolio companies structured to have all or a majority of their expected return from contractual rates of return payable based on the original investment. We refer to these investments as yield oriented preferred equity investments. As ofSeptember 30, 2022 , we had yield oriented preferred equity investments with a total cost basis of$142.5 million with a weighted average contractual rate of approximately 11%, or the Yield Oriented Preferred Return. The Yield Oriented Preferred Return is included in net change in unrealized appreciation (depreciation) on investments in the Consolidated Statements of Operations.
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 years endedSeptember 30, 2022 and 2021:
Year ended
September 30, 2022 September 30, 2021
Weighted average income yield (1)(2) 7.4% 7.4%
Weighted average investment income yield (3) 8.0% 7.9%
Total return based on average net asset value (4) 5.9% 13.7%
Total return based on market value (5) (14.8)% 28.9%
(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)The income yield presented for the year ended September 30, 2022 excludes the
one-time recognition of $2.0 million of previously deferred interest income
resulting from the repayment and refinancing of former non-accrual loans, which
are included in the calculation of the investment income yield for the year
ended September 30, 2022 . The income yield was 7.5% for the year ended September
30, 2022 when including the $2.0 million of interest income
(3)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.
(4)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.
(5)Total return based on market value assumes distributions are reinvested in accordance with the DRIP. Total return does not include sales load.
Revenues: We generate revenue in the form of interest and fee income on debt
investments and capital gains and distributions, if any, on portfolio company
investments that we originate or acquire. Our debt investments, whether in the
form of senior secured, one stop, second lien or subordinated loans, typically
have a term of three to seven years and bear interest at a fixed or floating
rate. In some instances, we receive payments on our debt investments based on
scheduled amortization of the outstanding balances. In addition, we receive
repayments of some of our debt investments prior to their scheduled maturity
date. The frequency or volume of these repayments fluctuates significantly from
period to period. Our portfolio activity also reflects the proceeds of sales of
securities. In some
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cases, our investments provide for deferred interest payments 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, administrative agent fees 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 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;
•our allocable portion of any fidelity bond, directors and officers/errors and omissions liability insurance, and any other insurance premiums;
•direct costs and expenses of administration, including printing, mailing, long distance telephone, copying, secretarial and other staff, independent auditors and outside legal costs;
•proxy voting expenses; and
•all other expenses incurred by us or the Administrator in connection with administering our business.
We expect our general and administrative expenses to be relatively stable or
decline as a percentage of total assets during periods of asset growth and to
increase during periods of asset declines.
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GC Advisors , as collateral manager for 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 for Golub 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 on August 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 to GC Advisors and are offset
against the management fees payable under the Investment Advisory Agreement. The
2018 Issuer paid Morgan Stanley & Co. LLC structuring and placement fees for its
services in connection with the structuring of the 2018 Debt Securitization.
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 paid
Wells Fargo Securities, LLC structuring and placement fees for its services in
connection with the initial structuring of the GCIC 2018 Debt Securitization.
The 2020 Issuer paid Wells Fargo Securities, LLC structuring and placement fees
for its services in connection with the structuring of the 2020 Debt
Securitization. Term debt securitizations are also known as 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.
GCIC Acquisition
On September 16, 2019 , we completed our acquisition of GCIC pursuant to the
Merger Agreement. 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 95 -------------------------------------------------------------------------------- TABLE OF CONTENTS 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
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. 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. 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. In anticipation of the discontinuation of LIBOR, we have assessed our current debt facilities for our exposure to LIBOR. EffectiveSeptember 2, 2022 , the JPM Credit Facility was amended to replace LIBOR with SOFR as an interest rate benchmark. The notes offered in the 2018 Debt Securitization and GCIC 2018 Debt Securitization 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 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
OnNovember 18, 2022 , our board of directors declared a quarterly distribution of$0.33 per share, which is payable onDecember 29, 2022 to holders of record as ofDecember 9, 2022 . OnNovember 18, 2022 , our board of directors approved amended and restated bylaws that revise Section 2.8 of the bylaws regarding the preparation of voting lists in advance of stockholder meetings to conform to recent amendments to the Delaware General Corporation Law regarding preparation of such lists. 96 -------------------------------------------------------------------------------- TABLE OF CONTENTS Consolidated Results of Operations
The comparison of the fiscal years ended
Consolidated operating results for the years endedSeptember 30, 2022 and 2021 are as follows: Year ended Variances September 30, September 30, 2022 vs. 2021 2022 2021 (In thousands) Interest income$ 373,829 $ 309,832 $ 63,997 Accretion of discounts and amortization of premiums 24,679 21,399 3,280 GCIC acquisition purchase premium amortization (15,632) (30,793) 15,161 Dividend income 684 1,713 (1,029) Fee income 4,242 4,974 (732) Total investment income 387,802 307,125 80,677 Total net expenses 191,611 139,453 52,158 Net investment income before taxes 196,191 167,672 28,519 Income tax 72 - 72 Net investment income after taxes 196,119 167,672 28,447 Net realized gain (loss) on investment transactions 20,642 8,297 12,345 excluding purchase premium Net realized gain (loss) on investment transactions due to (266) (392) 126 purchase premium Net change in unrealized appreciation (depreciation) on (77,796) 134,061 (211,857)
investment transactions excluding purchase premium Net change in unrealized appreciation (depreciation) on
15,898 31,185 (15,287)
investment transactions due to purchase premium
Net gain (loss) on investment transactions (41,522) 173,151 (214,673)
(Provision) benefit for taxes on realized gain on (302) - (302)
investments
(Provision) benefit for taxes on unrealized appreciation on (855) (543) (312)
investments
Net increase (decrease) in net assets resulting from$ 153,440 $ 340,280 $ (186,840)
operations
Average earning debt investments, at fair value$ 5,061,410 $ 4,236,042 $ 825,368
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 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: 97 -------------------------------------------------------------------------------- TABLE OF CONTENTS •"Adjusted Net Investment Income" - excludes the amortization of the purchase price premium from net investment income calculated in accordance with GAAP;
•"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" - calculates net income and earnings per share based on
Adjusted Net Investment Income and Adjusted Net Realized and Unrealized
Gain/(Loss).
Year ended
September 30, September 30,
2022 2021
(In thousands)
Net investment income after taxes $ 196,119 $ 167,672
Add: GCIC acquisition purchase premium amortization 15,632 30,793
Adjusted Net Investment Income $ 211,751 $ 198,465
Net gain (loss) on investment transactions $ (41,522) $ 173,151
Add: Realized loss on investment transactions due to purchase 266 392
premium
Less: Net change in unrealized appreciation on investment (15,898) (31,185) transactions due to purchase premium Adjusted Net Realized and Unrealized Gain/(Loss)$ (57,154) $ 142,358 Net increase (decrease) in net assets resulting from$ 153,440 $ 340,280
operations
Add: GCIC acquisition purchase premium amortization 15,632 30,793 Add: Realized loss on investment transactions due to purchase 266 392
premium
Less: Net change in unrealized appreciation on investment (15,898) (31,185) transactions due to purchase premium Adjusted Net Income$ 153,440 $ 340,280 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. 98 -------------------------------------------------------------------------------- TABLE OF CONTENTS Investment Income Investment income increased from the year endedSeptember 30, 2021 to the year endedSeptember 30, 2022 by$80.7 million primarily due to an increase in the average earning debt investments balance of$825.4 million and a decrease of the GCIC acquisition purchase price premium amortization.
The annualized income yield by debt security type for the years ended
Year ended
September 30, 2022 September 30, 2021
Senior secured 6.4% 6.1%
One stop 7.5% 7.7%
Second lien 9.0% 11.5%
Subordinated debt 12.1% 12.0%
Income yields on senior secured loans increased for the year ended September 30,
2022 as compared to the year ended September 30, 2021 , primarily due to rising
LIBOR and SOFR rates during the second half of the 2022 fiscal year. Income
yields on one stop loans decreased for the year ended September 30, 2022 as
compared to the year ended September 30, 2021 , primarily due to lower fee income
and the general trend of interest rate compression on new investments during the
first three quarters of the 2022 fiscal year. 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 of September
30, 2022 and September 30, 2021 , the weighted average base rate floor of our
loans was 0.83% 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 of September 30, 2022 , we have second lien investments in three 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 years ended September 30,
2022 and 2021:
Year ended Variances
September 30, September 30, 2022 vs. 2021
2022 2021
(In thousands)
Interest and other debt financing expenses $ 82,041 $ 55,536 $ 26,505
Amortization of debt issuance costs 7,337 10,203
(2,866)
Base management fee, net of waiver 71,962 57,858 14,104 Income incentive fee 17,756 3,214 14,542 Capital gain incentive fee - - - Professional fees 3,607 3,992 (385) Administrative service fee 7,188 7,227 (39) General and administrative expenses 1,720 1,423 297 Net expenses$ 191,611 $ 139,453 $ 52,158 Average debt outstanding$ 2,935,846 $ 2,184,010 $ 751,836 Interest Expense Interest and other debt financing expenses, including amortization of debt issuance costs, increased from the year endedSeptember 30, 2021 to the year endedSeptember 30, 2022 by$23.6 million , primarily due to an increase in average debt outstanding of$751.8 million as well as rising LIBOR and SOFR rates on borrowings from our floating rate debt facilities. For more information about our outstanding borrowings for the years endedSeptember 30, 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 years endedSeptember 30, 2022 and 2021, the effective 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 3.0% and 3.0%, respectively. The effective annualized average interest rate stayed consistent for the year endedSeptember 30, 2022 compared to the year endedSeptember 30, 2021 primarily due to the issuance of the additional 2026 Notes and the additional 2024 Notes inOctober 2021 at a price resulting in a yield to maturity of 2.667% and 1.809%, respectively, that was offset by rising interest rates on our borrowings from floating rate debt facilities.
Management Fee
The base management fee, net of waiver, increased from the year endedSeptember 30, 2021 to the year endedSeptember 30, 2022 due to an increase in average adjusted gross assets from 2021 to 2022, partially offset by the management fee waiver described below. 100
-------------------------------------------------------------------------------- TABLE OF CONTENTS 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 Incentive Fee and (2) the Capital Gain Incentive Fee. The Income Incentive Fee increased by$14.5 million from the year endedSeptember 30, 2021 to the year endedSeptember 30, 2022 primarily as a result of an increase in Pre-Incentive Fee Net Investment Income and a greater rate of return on the value of our net assets driven by net funds growth and the impact of rising LIBOR and SOFR rates during the fourth quarter of fiscal year 2022. As we remained in the "catch-up" provision of the calculation of the Income Incentive Fee for the year endedSeptember 30, 2021 and for the first three quarters of the year endedSeptember 30, 2022 , an increase in Pre-Incentive Fee Net Investment Income caused a corresponding increase in the Income Incentive fee. During the quarter endedSeptember 30, 2022 , we were fully through the catch up and the Income Incentive Fee was equal to 20% of Pre-Incentive Fee Net Investment Income.
The Income Incentive Fee as a percentage of Pre-Incentive Fee Net Investment
Income was 8.3% and 1.9% for the year ended
As of bothSeptember 30, 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 ofSeptember 30, 2022 andSeptember 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.
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$0.1 million from the year endedSeptember 30, 2021 to the year endedSeptember 30, 2022 primarily due to a decrease in professional fees. In general, we expect certain of our operating expenses, including professional fees, the administrative service fee, and other general and administrative expenses to decline as a percentage of our total assets during periods of growth and increase as a percentage of our total assets during periods of asset declines. The Administrator pays for certain expenses incurred by us. These expenses are subsequently reimbursed in cash. Total expenses reimbursed to the Administrator during the years endedSeptember 30, 2022 and 2021 were$6.2 million and$7.0 million , respectively.
As of
*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. 101 -------------------------------------------------------------------------------- TABLE OF CONTENTS Net Realized and Unrealized Gains and Losses
The following table summarizes our net realized and unrealized gains (losses)
for the years ended
Year ended Variances
September 30, September 30, 2022 vs. 2021
2022 2021
(In thousands)
Net realized gain (loss) on investments $ 19,549 $ 13,324 $ 6,225
Foreign currency transactions (253) (5,419) 5,166
Forward currency contracts 1,080 - 1,080
Net realized gain (loss) on investment transactions $ 20,376 $ 7,905 $ 12,471
Unrealized appreciation on investments 53,327 183,514
(130,187)
Unrealized (depreciation) on investments (110,133) (23,339)
(86,794)
Unrealized appreciation (depreciation) on translation of (37,335) 3,917
(41,252)
assets and liabilities in foreign currencies Unrealized appreciation (depreciation) on forward currency 32,243 1,154
31,089
contracts
Net change in unrealized appreciation (depreciation) on$ (61,898) $ 165,246 $ (227,144) investment transactions During the year endedSeptember 30, 2022 , we had a net realized gain of$20.4 million primarily attributable to recognized realized gains on the sale of equity investments in multiple portfolio companies and the gain on the settlement of a forward currency contract, partially offset by recognized realized losses on the restructure, sale, or write-off on multiple portfolio companies and net realized losses recognized due to the repayment of non-U.S. dollar dominated debt. During the year endedSeptember 30, 2021 , we had a net realized gain of$7.9 million , primarily attributable to net realized gains from the sale of equity investments in multiple portfolio companies, that was partially offset by recognized realized losses on the restructure, sale, or write-off on multiple portfolio companies and net realized losses recognized due to the repayment of non-U.S. dollar dominated debt. For the year endedSeptember 30, 2022 , we had$53.3 million in unrealized appreciation on 159 portfolio company investments, which was offset by$110.1 million in unrealized depreciation on 234 portfolio company investments. Unrealized appreciation for the year endedSeptember 30, 2022 primarily resulted from better than expected performance of our portfolio companies. Unrealized depreciation for the year endedSeptember 30, 2022 primarily resulted from decreases in the fair value in the majority of our portfolio company investments due to wider credit spreads in the market during the last two quarters of the 2022 fiscal year and the reversal of unrealized appreciation recognized in connection with realized gains on the sale of portfolio company investments. For the year endedSeptember 30, 2022 , we had net unrealized depreciation of$37.3 million on the translation of assets and liabilities in foreign currencies that were partially offset by$32.2 million of unrealized appreciation on forward currency contracts, which resulted from theU.S. dollar appreciation primarily compared to theU.K. pound sterling and Euro. For the year endedSeptember 30, 2021 , we had$183.5 million in unrealized appreciation on 272 portfolio company investments, which was offset by$23.3 million in unrealized depreciation on 79 portfolio company investments. Unrealized appreciation for the year endedSeptember 30, 2021 primarily resulted from better than expected performance of our portfolio companies and continued reversal of depreciation recognized due to the COVID-19 pandemic. Unrealized depreciation for the year endedSeptember 30, 2021 primarily resulted from the 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. 102 -------------------------------------------------------------------------------- TABLE OF CONTENTS Liquidity and Capital Resources For the year endedSeptember 30, 2022 , we experienced a net decrease in cash and cash equivalents, foreign currencies, restricted cash and cash equivalents and restricted foreign currencies of$63.3 million . During the period, cash used in operating activities was$416.5 million , primarily driven by fundings of portfolio investments of$1.88 billion , offset by proceeds from principal payments and sales of portfolio investments of$1.26 billion and net investment income of$196.1 million . Lastly, cash provided by financing activities was$353.1 million , primarily driven by borrowings on debt of$1.29 billion , offset by repayments of debt of$741.2 million and distributions paid of$155.2 million and purchases of common stock under the DRIP of$36.4 million . For the year endedSeptember 30, 2021 , we experienced a net increase in cash, cash equivalents, foreign currencies, restricted cash and cash equivalents and restricted foreign currencies of$60.8 million . During the period, cash used in operating activities was$306.0 million , primarily driven by fundings of portfolio investments of$2.08 billion , offset by proceeds from principal payments and sales of portfolio investments of$1.59 billion and net investment income of$167.7 million . Lastly, cash provided by financing activities was$366.9 million , primarily driven by borrowings on debt of$3.36 billion , offset by repayments of debt of$2.82 billion , distributions paid of$139.1 million , and purchases of common stock under the DRIP of$14.7 million . As ofSeptember 30, 2022 andSeptember 30, 2021 , we had cash and cash equivalents of$117.3 million and$175.6 million , respectively. In addition, we had foreign currencies of$6.8 million and$5.5 million as ofSeptember 30, 2022 andSeptember 30, 2021 , respectively, restricted cash and cash equivalents of$56.4 million and$61.8 million as ofSeptember 30, 2022 andSeptember 30, 2021 , respectively, and restricted foreign currencies of$0.0 million and$1.4 million as ofSeptember 30, 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
JPM Credit Facility - On
Adviser Revolver - OnJune 22, 2016 , we entered into the Adviser Revolver, which, as amended, permitted us to borrow up to$100.0 million at any one time outstanding as ofSeptember 30, 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 bothSeptember 30, 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 theSeptember 30, 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 bothSeptember 30, 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 theSeptember 30, 2022 andSeptember 30, 2021 Consolidated Statements of Financial Condition as our debt, and the Class B-2, Class C and ClassD GCIC 2018 Notes and the Subordinated GCIC 2018 Notes were eliminated in consolidation. As of bothSeptember 30, 2022 andSeptember 30, 2021 , we had outstanding debt under the GCIC 2018 Debt Securitization of$546.0 million . 103
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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 ofSeptember 30, 2022 andSeptember 30, 2021 , we had$500.0 million and$400.0 million , respectively, of outstanding aggregate principal amount of the 2024 Notes, respectively.
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 ofSeptember 30, 2022 andSeptember 30, 2021 , we had$600.0 million and$400.0 million , respectively, of outstanding aggregate principal amount of the 2026 Notes, respectively.
2027 Notes
OnJuly 27, 2021 , we issued$350.0 million in aggregate principal amount of the 2027 Notes, all of which remained outstanding as our debt as of bothSeptember 30, 2022 andSeptember 30, 2021 .
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 of bothSeptember 30, 2022 andSeptember 30, 2021 , 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 ofSeptember 30, 2022 , in accordance with the 1940 Act, with certain limited exceptions, we were allowed to borrow amounts such that our asset coverage, as defined in the 1940 Act, is at least 150% after such borrowing. Prior toFebruary 6, 2019 , in accordance with the 1940 Act, with certain limited exceptions, we were allowed to borrow 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 ofSeptember 30, 2022 , our asset coverage for borrowed amounts and GAAP debt-to-equity ratio was 181.7% and 1.22x, respectively. InAugust 2022 , 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 years endedSeptember 30, 2022 and 2021. As ofSeptember 30, 2022 andSeptember 30, 2021 , we had outstanding commitments to fund investments totaling$224.6 million and$340.7 million , respectively. As ofSeptember 30, 2022 , total commitments of$224.6 million included$35.6 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 ofSeptember 30, 2022 is included in Note 7 of our consolidated financial statements. We did not have any other material contractual payment obligations as ofSeptember 30, 2022 . As ofSeptember 30, 2022 , we believe that we had sufficient assets and liquidity to adequately cover future obligations under our unfunded commitments based on historical rates of 104 -------------------------------------------------------------------------------- TABLE OF CONTENTS drawings upon unfunded commitments, cash and restricted cash balances that we maintain, availability under the Adviser Revolver and JPM Credit Facility, 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 ofSeptember 30, 2022 andSeptember 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 underGC Advisors' allocation policy and have, in the past, received such smaller allocations under similar circumstances. 105 -------------------------------------------------------------------------------- TABLE OF CONTENTS Portfolio Composition, Investment Activity and Yield As ofSeptember 30, 2022 andSeptember 30, 2021 , we had investments in 331 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 years ended
Year ended
September 30, 2022 September 30, 2021
(In thousands) Percentage (In thousands) Percentage
Senior secured $ 64,645 3.6 % $ 398,734 17.0 %
One stop 1,642,741 90.4 1,850,769 78.8
Second lien 640 0.0 * 29,899 1.3
Subordinated debt 988 0.0 * 377 0.0 *
Equity 108,200 6.0 67,901 2.9
Total new investment commitments $ 1,817,214 100.0 % $ 2,347,680 100.0 %
* Represents an amount less than 0.1%.
For the year ended
For the year 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 September 30, 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 $ 479,354 $ 496,870 $ 461,935 $ 796,269 $ 793,707 $ 781,962
Non-accrual(3) 39,834 21,346 10,938 20,047 9,813 2,843
One stop:
Performing 4,706,125 4,710,508 4,614,422 3,876,907 3,860,525 3,839,053
Non-accrual(3) 95,475 75,610 54,187 59,699 52,806 43,261
Second lien:
Performing 25,801 29,337 23,240 42,571 41,946 41,857
Non-accrual(3) - - - - - -
Subordinated debt:
Performing 3,869 3,814 3,815 172 171 172
Non-accrual(3) - - - - - -
Equity N/A 232,119 277,819 N/A 136,429 185,738
Total $ 5,350,458 $ 5,569,604 $ 5,446,356 $ 4,795,665 $ 4,895,397 $ 4,894,886
(1)As of September 30, 2022 , $587.7 million and $533.0 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.
(2)As of September 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 of September 30, 2022 , we had loans in eight portfolio companies on
non-accrual status, and non-accrual
investments as a percentage of total debt investments at cost and fair value
were 1.8% and 1.3%, respectively. As of September 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 years endedSeptember 30, 2022 and 2021: Year ended September 30, 2022 September 30, 2021 Weighted average rate of new investment fundings 7.1% 6.7%
Weighted average spread over the applicable base rate of new floating rate investment fundings
5.9% 5.8%
Weighted average fees of new investment fundings 1.2% 1.2%
Weighted average rate of sales and payoffs of portfolio
investments 6.6% 6.9%
As of September 30, 2022 , 97.9% and 98.1% 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 September 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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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 September 30, 2022 and
September 30, 2021 :
As of September 30, 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 $ 252,572 4.6% $ 499,241 10.2%
4 4,725,988 86.8 3,951,870 80.7
3 398,625 7.3 395,208 8.1
2 69,171 1.3 47,836 1.0
1 - - 731 0.0*
Total $ 5,446,356 100.0% $ 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 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. 109 -------------------------------------------------------------------------------- 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 third calendar quarter of 2022, theGolub Capital Employee Grant Program Rabbi Trust, or the Trust, purchased approximately$17.2 million , or 1,271,865 shares of our common stock, for the purpose of awarding incentive compensation to employees ofGolub Capital . Through the first three calendar quarters of 2022, the Trust purchased approximately$40.4 million , or 2,898,170 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 . •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 to GBDC 3, GDLC, GDLCU and GBDC 4, all of which are 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 for GBDC 3, GDLC, GDLCU and GBDC 4. IfGC Advisors and its affiliates determine that an investment is appropriate for us, GBDC 3, GDLC, GDLCU and GBDC 4, 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 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
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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 year endedSeptember 30, 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. 111 -------------------------------------------------------------------------------- TABLE OF CONTENTS 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 ofSeptember 30, 2022 with the exception of money market funds included in cash, cash equivalents and restricted cash and cash equivalents (Level 1 investments) and forward currency contracts (Level 2 investments), were valued using Level 3 inputs. All investments as ofSeptember 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. Pursuant to Rule 2a-5 under the 1940 Act, as recently amended, the board of directors of a registered investment company or BDC is permitted to delegate to a valuation designee, which could be its investment adviser, the responsibility to determine fair value of investments in good faith subject to the oversight of the board. Our board of directors has determined to continue its determination of fair value of our investments for which market quotations are not readily available in accordance with our valuation policies and procedures and has not designatedGC Advisors or any other entity as a valuation designee. 112 -------------------------------------------------------------------------------- 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, administrative agent fees, consulting fees and prepayment premiums on loans and record these fees as fee income when earned. 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 investment transactions in our Consolidated Statements of Operations and fluctuations arising from the translation of foreign exchange rates on investments in unrealized appreciation (depreciation) on translation of assets and liabilities in foreign currencies on the 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$65.1 million and$46.1 million as ofSeptember 30, 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 113 -------------------------------------------------------------------------------- TABLE OF CONTENTS 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 distributions, we accrue excise tax, if any, on estimated excess taxable income as taxable income is earned. For the years endedSeptember 30, 2022 , 2021 and 2020, 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 year endedSeptember 30, 2022 , we recorded a net tax expense of$1.2 million for taxable subsidiaries. For the year endedSeptember 30, 2021 , we recorded a net tax expense$0.5 million for taxable subsidiaries. For the year endedSeptember 30, 2020 , we did not record a net tax expense for taxable subsidiaries. As ofSeptember 30, 2022 , we recorded a net deferred tax liability, reported within accounts payable and other liabilities on the Consolidated Statement of Financial Condition, of$1.4 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. 114
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