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 ("COVID-19") pandemic;
•the effect of investments that we expect to make and the competition for those
investments;
•our contractual arrangements and relationships with third parties;
•actual and potential conflicts of interest with GC Advisors LLC , or GC
Advisors , and other affiliates of Golub Capital LLC , or collectively, Golub
Capital ;
•the dependence of our future success on the general economy and its effect on
the industries in which we invest;
•the ability of our portfolio companies to achieve their objectives;
•the use of borrowed money to finance a portion of our investments and the
effect of the COVID-19 pandemic on the availability of equity and debt capital
and our use of borrowed funds to finance a portion of our investments;
•the adequacy of our financing sources and working capital;
•the timing of cash flows, if any, from the operations of our portfolio
companies;
•general economic and political trends and other external factors, including the
COVID-19 pandemic;
•changes in political, economic or industry conditions, the interest rate
environment or conditions affecting the financial and capital markets that could
result in changes to the value of our assets, including changes from the impact
of the COVID-19 pandemic;
•the ability of GC Advisors to locate suitable investments for us and to monitor
and administer our investments;
•the ability of GC Advisors or its affiliates to attract and retain highly
talented professionals;
•the ability of GC Advisors to continue to effectively manage our business due
to the disruptions caused by the COVID-19 pandemic;
•our ability to qualify and maintain our qualification as a regulated investment
company, or RIC, and as a business development company;
•general price and volume fluctuations in the stock markets;
•the impact on our business of the Dodd-Frank Wall Street Reform and Consumer
Protection Act, or Dodd-Frank, and the rules and regulations issued thereunder
and any actions toward repeal thereof; and
•the effect of changes to tax legislation and our tax position.
Such forward-looking statements may include statements preceded by, followed by
or that otherwise include the words "may," "might," "will," "intend," "should,"
"could," "can," "would," "expect," "believe," "estimate," "anticipate,"
"predict," "potential," "plan" or similar words. The forward looking statements
contained in this quarterly report on Form 10-Q involve risks and uncertainties.
Our actual results could differ materially from those implied or expressed in
the forward-looking statements for any reason, including the factors set forth
as "Risk Factors" in our annual report on Form 10-K for the year ended September
30, 2020 .
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We have based the forward-looking statements included in this report on
information available to us on the date of this report. Actual results could
differ materially from those anticipated in our forward-looking statements and
future results could differ materially from historical performance. You are
advised to consult any additional disclosures that we make directly to you or
through reports that we have filed or in the future file with the Securities and
Exchange Commission , or the SEC , including annual reports on Form 10-K,
registration statements on Form N-2, quarterly reports on Form 10-Q and current
reports on Form 8-K. This quarterly report on Form 10-Q contains statistics and
other data that have been obtained from or compiled from information made
available by third-party service providers. We have not independently verified
such statistics or data.
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Overview
We are an externally managed, closed-end, non-diversified management investment
company that has elected to be regulated as a business development company under
the Investment Company Act of 1940, as amended, or the 1940 Act. In addition,
for U.S. federal income tax purposes, we have elected to be treated as a RIC
under Subchapter M of the Internal Revenue Code of 1986, as amended, or the
Code. As a business development company and a RIC, we are also subject to
certain constraints, including limitations imposed by the 1940 Act and the Code.
Our shares are currently listed on The Nasdaq Global Select Market under the symbol "GBDC".
Our investment objective is to generate current income and capital appreciation by investing primarily in one stop (a loan that combines characteristics of traditional first lien senior secured loans and second lien or subordinated loans and that are often referred to by other middle-market lenders as unitranche loans) and other senior secured loans 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$40.0 billion in capital under management as ofJune 30, 2021 , (2) selecting investments within our core middle-market company focus, (3) partnering with experienced private equity firms, or sponsors, in many cases with whomGolub Capital has invested alongside in the past, (4) implementing the disciplined underwriting standards ofGolub Capital and (5) drawing upon the aggregate experience and resources ofGolub Capital .
Our investment activities are managed by
Under an investment advisory agreement, or the Investment Advisory Agreement, we have agreed to payGC Advisors an annual base management fee based on our average adjusted gross assets as well as an incentive fee based on our investment performance. The Investment Advisory Agreement was approved by our board of directors inMay 2021 . Under an administration agreement, or the Administration Agreement, we are provided with certain administrative services by an administrator, or the Administrator, which is currentlyGolub Capital LLC . Under the Administration Agreement, we have agreed to reimburse the Administrator for our allocable portion (subject to the review and approval of our independent directors) of overhead and other expenses incurred by the Administrator in performing its obligations under the Administration Agreement. We seek to create a portfolio that includes primarily one stop and other senior secured loans by primarily investing approximately$10.0 million to$75.0 million of capital, on average, in the securities ofU.S. middle-market companies. We also selectively invest more than$75.0 million in some of our portfolio companies and generally expect that the size of our individual investments will vary proportionately with the size of our capital base. We generally invest in securities that have been rated below investment grade by independent rating agencies or that would be rated below investment grade if they were rated. These securities, which are often referred to as "junk," have predominantly speculative characteristics with respect to the issuer's capacity to pay interest and repay principal. In addition, many of our debt investments have floating interest rates that reset on a periodic basis and typically do not fully pay down principal prior to maturity, which may increase our risk of losing part or all of our investment. 135
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As of
As of June 30, 2021 As of September 30, 2020
Investments at Percentage of Investments at Percentage of
Fair Value Total Fair Value Total
Investment Type (In thousands) Investments (In thousands) Investments
Senior secured $ 687,622 15.5 % $ 640,213 15.1 %
One stop 3,563,521 80.3 3,485,585 82.2
Second lien 33,822 0.8 19,640 0.5
Subordinated debt 169 0.0 * 575 0.0 *
Equity 154,413 3.4 92,197 2.2
Total $ 4,439,547 100.0 % $ 4,238,210 100.0 %
* 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 of June 30, 2021
and September 30, 2020 , one stop loans included $576.6 million and $430.2
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 endedJune 30, 2021 , the three months endedMarch 31, 2021 and the nine months endedJune 30, 2021 and 2020: For the three months ended For the nine months ended June 30, 2021 March 31, 2021 June 30, 2021 June 30, 2020 Weighted average income yield (1)* 7.4% 7.5% 7.5% 7.7% Weighted average investment income yield (2)* 7.9% 8.0% 8.0% 8.1% Total return based on average net asset value (3)* 13.2% 15.1% 14.6% (2.4)% Total return based on market value (4) 11.8% 7.6% 14.9% (33.4)% * 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. 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 136 -------------------------------------------------------------------------------- TABLE OF CONTENTS years and bear interest at a fixed or floating rate. In some instances, we receive payments on our debt investments based on scheduled amortization of the outstanding balances. In addition, we receive repayments of some of our debt investments prior to their scheduled maturity date. The frequency or volume of these repayments fluctuates significantly from period to period. Our portfolio activity also reflects the proceeds of sales of securities. In some cases, our investments provide for deferred interest payments or payment-in-kind, or PIK, interest. The principal amount of loans and any accrued but unpaid interest generally become due at the maturity date. In addition, we generate revenue in the form of commitment, origination, amendment, structuring or due diligence fees, fees for providing managerial assistance and consulting fees. Loan origination fees, original issue discount and market discount or premium are capitalized, and we accrete or amortize such amounts as interest income. We record prepayment premiums on loans as fee income. For additional details on revenues, see "Critical Accounting Policies-Revenue Recognition." We recognize realized gains or losses on investments based on the difference between the net proceeds from the disposition and the amortized cost basis of the investment or derivative instrument, without regard to unrealized gains or losses previously recognized. We record current period changes in fair value of investments and derivative instruments that are measured at fair value as a component of the net change in unrealized appreciation (depreciation) on investment transactions in the Consolidated Statements of Operations.
Expenses: Our primary operating expenses include the payment of fees to
•calculating our net asset value, or NAV (including the cost and expenses of any independent valuation firm); •fees and expenses incurred byGC Advisors payable to third parties, including agents, consultants or other advisors, in monitoring financial and legal affairs for us and in monitoring our investments and performing due diligence on our prospective portfolio companies or otherwise relating to, or associated with, evaluating and making investments, which fees and expenses include, among other items, due diligence reports, appraisal reports, any studies commissioned byGC Advisors and travel and lodging expenses; •expenses related to unsuccessful portfolio acquisition efforts; •offerings of our common stock and other securities; •administration fees and expenses, if any, payable under the Administration Agreement (including payments based upon our allocable portion of the Administrator's overhead in performing its obligations under the Administration Agreement, including rent and the allocable portion of the cost of our chief compliance officer, chief financial officer and their respective staffs); •fees payable to third parties, including agents, consultants or other advisors, relating to, or associated with, evaluating and making investments in portfolio companies, including costs associated with meeting financial sponsors; •transfer agent, dividend agent and custodial fees and expenses; •U.S. federal and state registration and franchise fees; •all costs of registration and listing our shares on any securities exchange; •U.S. federal, state and local taxes; •independent directors' fees and expenses; •costs of preparing and filing reports or other documents required by theSEC or other regulators; •costs of any reports, proxy statements or other notices to stockholders, including printing costs; •costs associated with individual or group stockholders; •costs associated with compliance under the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act; •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. 137
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We expect our general and administrative expenses to be relatively stable or decline as a percentage of total assets during periods of asset growth and to increase during periods of asset declines. Prior to the redemption of the 2014 Notes (as defined in Note 7 of our consolidated financial statements) and termination of the documents governing the 2014 Debt Securitization (as defined in Note 7 of our consolidated financial statements) onAugust 26, 2020 ,GC Advisors served as collateral manager forGolub Capital BDC 2014-LLC, or the 2014 Issuer, our wholly-owned subsidiary, under a collateral management agreement, or the 2014 Collateral Management Agreement, and was entitled to receive an annual fee in an amount equal to 0.25% of the principal balance of the portfolio loans held by the 2014 Issuer at the beginning of the collection period relating to each payment date, which was payable in arrears on each payment date. Under the 2014 Collateral Management Agreement, the term ''collection period'' referred to a quarterly period running from the day after the end of the prior collection period to the tenth business day prior to the payment date.GC Advisors , as collateral manager forGolub Capital BDC CLO III LLC , or the 2018 Issuer, 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.GC Advisors , 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, 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 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 refers to a quarterly period commencing on the day after the end of the prior collection period to the tenth business day prior to the payment date. Collateral management fees were paid directly by the 2014 Issuer and are paid directly by the 2018 Issuer, GCIC 2018 Issuer and 2020 Issuer toGC Advisors and are offset against the management fees payable under the Investment Advisory Agreement. In addition, the 2014 Issuer paidWells Fargo Securities, LLC structuring and placement fees for its services in connection with the initial structuring and subsequent amendments to the initial structuring of the 2014 Debt Securitization. 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, GCIC 2018 Issuer and 2020 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, GCIC 2018 Debt Securitization and 2020 Debt Securitization, and collectively the Debt Securitizations, as applicable. 138 -------------------------------------------------------------------------------- TABLE OF CONTENTS We believe that these administrative expenses approximate the amount of ongoing fees and expenses that we would be required to pay in connection with a traditional secured credit facility. Our common stockholders indirectly bear all of these expenses. GCIC Acquisition OnSeptember 16, 2019 , we completed our acquisition 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. Pursuant to the Merger Agreement, Merger Sub was first merged with and into GCIC, or the Initial Merger, with GCIC as the surviving company and immediately following the Initial Merger, GCIC was then merged with and into us, the Initial Merger and subsequent merger referred to as the Merger, with us as the surviving company. In accordance with the terms of the Merger Agreement, at the effective time of the Merger, each outstanding share of GCIC's common stock was converted into the right to receive 0.865 shares of our common stock (with GCIC's stockholders receiving cash in lieu of fractional shares of our common stock). As a result of the Merger, we issued an aggregate of 71,779,964 shares of our common stock to former stockholders of GCIC.
SLF and GCIC SLF Purchase Agreement
OnJanuary 1, 2020 , we entered into a purchase agreement, or the Purchase Agreement, withRGA Reinsurance Company , or RGA,Aurora National Life Assurance Company , a wholly-owned subsidiary of RGA, or Aurora and, together with RGA, the Transferors,Senior Loan Fund LLC , or SLF, andGCIC Senior Loan Fund LLC , or GCIC SLF and, together with SLF, the Senior Loan Funds. Prior to entering into the Purchase Agreement, the Transferors owned 12.5% of the limited liability company, or LLC, equity interests in eachSenior Loan Fund , while we owned the remaining 87.5% of the LLC equity interests in eachSenior Loan Fund . Pursuant to the Purchase Agreement, RGA and Aurora agreed to sell their LLC equity interests in eachSenior Loan Fund to us, effective as ofJanuary 1, 2020 . As consideration for the purchase of the LLC equity interests, we paid each Transferor an amount, in cash, equal to the net asset value of such Transferor'sSenior Loan Fund LLC equity interests as ofDecember 31, 2019 , or the Net Asset Value, along with interest on such Net Asset Value accrued from the date of the Purchase Agreement through, but excluding, the payment date at a rate equal to the short-term applicable federal rate. InFebruary 2020 , we paid an aggregate of$17.0 million to the Transferors to acquire their respective LLC interests in the Senior Loan Funds. As a result of the Purchase Agreement, onJanuary 1, 2020 , SLF and GCIC SLF became our wholly-owned subsidiaries. In addition, our capital commitments and those of the Transferors were terminated. As wholly-owned subsidiaries, the assets, liabilities, income and expenses of the Senior Loan Funds were consolidated into our financial statements and notes thereto for periods ending on or afterJanuary 1, 2020 , and are included for purposes of determining our asset coverage ratio. Rights Offering OnMay 15, 2020 , we completed a transferable rights offering, or the Rights Offering. We issued to stockholders of record onApril 8, 2020 one transferable right for each four shares of our common stock held on the record date. Each holder of rights was entitled to subscribe for one share of common stock for every right held at a subscription price of$9.17 per share. OnMay 15, 2020 , we issued a total of 33,451,902 shares. Net proceeds after deducting the dealer manager fees and other offering expenses were approximately$300.4 million . 3,191,448 shares were purchased in the rights offering by affiliates ofGC Advisors .
COVID-19 Pandemic
The rapid 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 several countries, as well as certain states inthe United States , have lifted or reduced certain travel restrictions, business closures and other quarantine measures and recurring COVID-19 outbreaks have led to the re-introduction of such restrictions in certain states inthe United States and globally and 139 -------------------------------------------------------------------------------- TABLE OF CONTENTS could continue to lead to the re-introduction of such restrictions elsewhere. In early 2021, COVID-19 vaccines started to be administered to high-risk adults and essential workers acrossthe United States and eligibility to receive the vaccine has since expanded to all adults in most states. Although we believe the number of vaccinated adults inthe United States is promising for continued reductions of travel restrictions and other quarantine measures, 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 continue to experience reversal of the unrealized depreciation recognized during the three months endedMarch 31, 2020 as portfolio companies generally performed better than expected, especially those in COVID-impacted sub-sectors, and private equity sponsors have generally stepped up to support their portfolio companies.We and GC Advisors continue to monitor the rapidly evolving situation relating to 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 the resurgence 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, but the positive trends identified above contributed to strong financial results for the three months endedJune 30, 2021 . Recent Developments OnJuly 16, 2021 , the 2020 Issuer provided a notice of redemption to the holders of the 2020 Notes (as defined in Note 7 of our consolidated financial statements). The redemption of the 2020 Notes is expected to occur onAugust 26, 2021 pursuant to the terms of the indenture governing such 2020 Notes. See Note 7 for a description of the outstanding 2020 Notes, including the interest rates and maturity dates of such notes. OnAugust 3, 2021 , we issued$350.0 million of unsecured notes, which bear a fixed interest rate of 2.050% and mature onFebruary 15, 2027 . We intend to use the net proceeds of this offering to redeem all of the outstanding indebtedness under the 2020 Debt Securitization and repay a portion of amounts outstanding under our revolving credit facilities. OnAugust 6, 2021 , our board of directors declared a quarterly distribution of$0.29 per share, which is payable onSeptember 29, 2021 to holders of record as ofSeptember 8, 2021 . 140
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