Golub Capital BDC, Inc. Q2 FY2025 earnings call

• GBDC's investment strategy focuses on providing first lien senior secured loans to healthy middle market companies backed by strong private equity sponsors. • The quarter was solid despite a challenging macro environment, with adjusted NII per share at $0.39 and adjusted net income per share at $0.30. • New investment activity was highly selective, closing just 2.3% of reviewed deals. • Credit performance was solid with nearly 90% of the portfolio in the highest rating categories, though there were unrealized losses on underperforming investments and realized losses on restructurings. • Focused on early detection and intervention, with underwriting teams reviewing the portfolio for tariff impact, identifying companies in a higher tariff risk bucket and engaging with sponsors and management teams. • Borrowing costs decreased due to lower base rates and debt stack initiatives, resulting in an investment income yield of 10.8% despite a sequential decline.

GBDC had an adjusted NII per share of $0.39, corresponding to an adjusted NII return on equity of 10.4%. Adjusted net income per share was $0.30 with an adjusted return on equity of 8%. Nearly 90% of GBDC's investment portfolio at fair value remained in the highest performing internal rating categories. Nonaccrual investments increased modestly to 70 basis points of total investments at fair value as of March 31, 2025. The portfolio had a weighted average rate on new investments of 9.7% and repaid investments at 10.4%. One-stop loans continued to represent around 87% of the portfolio at fair value.

• Macro predictions in recent years have consistently been wrong, so the focus is on resilient strategies, staying humble, and preparing for multiple scenarios. • Potential levers to boost earnings include the pricing reduction on the JPMorgan credit facility effective in the Q2 2025 quarter, the variable rate nature of 80% of the liability stack mitigating base rate reductions, considering increasing financial leverage within the target range, and a higher day count next quarter contributing to incremental adjusted NII. • The Board continuously evaluates dividend levels against expected steady state profitability and will revisit quarterly dividend levels if spread compression is substantial.

• Uncertainty surrounding tariff policy. • Unusual levels of market volatility. • Decreased consumer confidence. • Broad reports of slowing growth. • Potential impact of tariffs on some portfolio companies, identified through sectorial and name-by-name reviews.

Q: How should we think about the base payout going forward?

A: Matt Benton mentioned potential levers such as the pricing reduction on the JPMorgan credit facility effective in Q2, the variable rate liability stack mitigating base rate reductions, and considering increasing financial leverage with room to operate within the target leverage range.

Q: Are we seeing anything related to low overall activity and repayments?

A: David Golub stated they were cautious due to decelerated deal activity and spread compression, and are defending incumbencies with strong credits.

Q: Any themes in the 3 new closes this quarter?

A: David Golub said there was no thematic underpinning related to tariffs, and credit markets have seen an uptick in credit stress.

Q: How is the small subset of companies at risk for tariffs reflected?

A: David Golub said it will take more time to play out, with no economic impact visible in Q1 2025 results.

Q: Thoughts on the core middle market and smaller companies?

A: David Golub said they focus on the core middle market with an EBITDA range of $30 million to $70 million, seeing better risk-reward and competitive dynamics there.

Q: Thoughts on refinancing activity and market volatility?

A: David Golub said he is not concerned about significant spread tightening refinancing activity unless there is a significant shift in market conditions, and market volatility plays to their relationship strengths.