Golub Capital BDC, Inc. Q3 FY2025 earnings call

• Credit performance remained solid: Nearly 90% of the investment portfolio at fair value was in the highest performing internal rating categories; nonaccrual investments were very low at 60 basis points of the total investment portfolio at fair value. • Earnings were supported by historically high base rates, attractive spreads, lower borrowing costs due to repricing of the syndicated corporate revolver, and lower operating expenses. • Investment portfolio grew modestly by 4% to under $9 billion at fair value, with $557 million in new investment commitments, $411 million funded, and net of $306 million in repayments. • Total distributions paid in the quarter were $0.39 per share; NAV per share decreased by $0.04 sequentially. • Debt funding structure was diversified and flexible, with 82% of debt funding being floating rate or swapped to floating rate; liquidity position was strong with approximately $950 million of liquidity from unrestricted cash, undrawn commitments, etc.

GBDC reported adjusted NII per share of $0.39, corresponding to an adjusted NII return on equity of 10.4%. Adjusted net income per share was $0.34, with an adjusted return on equity of 9.1%. The investment portfolio at fair value was just under $9 billion, an increase of 4% quarter-over-quarter. One-stop loans continued to represent around 87% of the portfolio at fair value. Nonaccrual investments were very low at 60 basis points of the total investment portfolio at fair value.

• Anticipate a protracted credit cycle to become even more protracted with elevated credit defaults likely to continue. • Expect the M&A environment to improve slowly in the rest of 2025 and more quickly in 2026, though humility is emphasized regarding this prediction. • The playbook remains focused on being selective in new lending, early detection of borrower underperformance, and proactive work with sponsor friends to address problems.

• The credit cycle is expected to be more protracted, leading to potential elevated credit defaults. • The M&A environment still faces uncertainties including tariff issues and global macro factors.

Q: So a quick one on leverage. So this quarter, you guys ended with net leverage of 1.26, which is quite high by historical standards. So is it fair to say that you're expecting a significant wave of repayments to eventually lever down?

A: Yes and no. You're correct that we have some repayments in the pipeline and that we think the quarter end leverage was a little bit higher than if you were looking at it over time. And Matt alluded to this in his comments, he alluded to the fact that average leverage over the quarter was about 1.2. We've always thought about leverage as being appropriate in the context of a target range rather than being too religious on one specific point within the range and 1.25 is the high end of our range. So you indicated in your question, are we anticipating a deleveraging? No. But likewise, we're not anticipating further leveraging either.

Q: And a quick follow-up, maybe a more philosophical question, but spreads across the floating rate markets are quite tight right now, not just with BDCs, but with syndicated loan spreads as well, which tend to widen when rates go down. So with BDCs spreads having lagged these movements upwards of 6 months, do you think this lag time between liquid loan markets and BDCs is going to remain the same? Or is it more likely to respond more quickly going forward?

A: So you're saying that the syndicated loan market has seen more spread compression than we've seen in our reported spreads on our new loans? Yes. You're right. I think that is an appropriate description of the pattern that we've seen. We've seen quite significant spread compression in the broadly syndicated market. It's been a pattern for some time. So if you think back to the summer of 2022 when rates went up and the broadly syndicated market dislocated and we saw very significant spread widening since 2023, we've been on a trend toward a more borrower-friendly, tighter spread environment in both private credit and the broadly syndicated market. I do think you're right that private credit spreads are a little stickier, especially middle market private spreads. But we've seen a significant degree of spread compression in our markets as well. And I don't think we're immune to those trends. I think the right way to look at it is, especially in the core middle market as opposed to the larger market, the core middle market is insulated, but not immune from spread trends that are happening in the broadly syndicated market. The larger end of the private credit market is less insulated because BSL is a replacement. So we've seen a number of transactions. Finastra is a good example recently where credits that were in the private credit market are being refinanced at lower spreads in the broadly syndicated market. So because of that phenomenon, the larger end of the market tends to respond more quickly to changes in spreads than the core middle market.