Good afternoon. Welcome to Golub Capital BDC Inc.'s September 30, 2012 Quarterly Earnings Conference Call. Before we begin, I would like to take a moment to remind our listeners that remarks made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical fact made during this call may constitute forward-looking statements, and they're not guaranteed of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statement as a result of a number of factors, including those described from time to time in Golub Capital BDC Inc.'s filings with Securities and Exchange Commission. For a slide presentation that we intend to refer to on the earnings conference call, please visit the Events and Presentation link on the homepage of our website, www.golubcapitalbdc.com, and click on the Investor Presentation link to find the September 30, 2012 Investor Presentation. Golub Capital BDC earnings release is also available on the company's website in the Investor Relations section. As a reminder, this call is being recorded for replay purpose. I will now turn the conference over to David Golub, Chief Executive Officer of Golub Capital BDC.

Thank you, officer, and good afternoon to everybody. Thanks for joining us today. I'm joined here in New York -- in our New York office by Ross Teune, our Chief Financial Officer. Earlier today, we issued our fourth quarter earnings press release and posted a supplemental earnings presentation on the website. As the operator mentioned, we'll refer to this presentation throughout the call today. I'm going to start by providing an overview of the September 30, 2012 quarterly financial results. Ross is then going to take us all through our quarterly financial results in more detail, and I'll come back and provide a summary of our common stock offering, the one that we completed in October, and I'll also update you on current portfolio activity and current market conditions. With that, let's get started. As highlighted on Slide 2 of the investor presentation, I'm pleased to report we had another strong quarter. For the 3 months ended September 30, 2012, we generated net income of $8.7 million or $0.34 a share, and that compares to $5.4 million or $0.21 a share for the quarter ended June 30, 2012. Net investment income for the quarter ended September 30 was $7.8 million or $0.30 a share, as compared to $6.7 million or $0.26 a share for the quarter ended June 30. As you know, we -- for the period of time when we had the total return swap outstanding, we've also proceeded to give you an adjusted figure, so adjusted to include net spread payments of $0.1 million, $100,000, from the swap. Net investment income was $0.31 per share for the quarter ended June 30, and that compared to $0.30 per share for the quarter ended June 30. This is our final statement with respect to the total return swap as we…

Great. Thanks, David. I'll begin on Page 4 of the investor presentation. As we communicated back in our call in August, we did experience an increase in originations for the quarter ended September 30, with total originations of $113.4 million. This was up from $52.4 million for the quarter ended June 30. On a year-to-date basis, total originations in fiscal 2012 were approximately $428 million, which compares to total originations of approximately $364 million in fiscal 2012. Exits from repayments and sales...

Fiscal '11.

Fiscal '11. I'm sorry. Thank you, David. Exits from repayments and sales for the quarter totaled $70.9 million. This was up from $34.1 million for the quarter ended June 30. Taking into account other variables such as net fundings or paydowns on revolvers, net change in unamortized fees and net change in unrealized gains or losses, overall, net quarterly funds growth for the quarter was $36.3 million. This represents a 5.7% increase from June 30 and is up 46% from September 30, 2011. As shown on the table at the bottom, our asset mix was relatively stable for the quarter. We had a slight increase in one-stop loans to 39% of the total portfolio, with a corresponding drop in subordinated debt investments. Moving to the balance sheet on the next slide. We ended the quarter with total assets of $734 million in total cash and restricted cash of $50.9 million. We had borrowings of $352.3 million, which includes $174 million in floating rate debt issued through our securitization, $123.5 million of fixed-rate SBA debentures and $54.8 million on our revolving credit facility. Our growth in total investments this quarter was largely financed through an increase in the borrowings on our revolving credit facility, as the balance of our debt issued via securitization and through the SBIC debentures was unchanged quarter-over-quarter. At September 30, 2012, net assets were $375 million. And our -- and as David mentioned, our net asset value per share was $14.60. From a GAAP perspective, our debt-to-equity ratio was 0.94x. Adjusted for the -- excluding the SBIC debentures, our regulatory debt-to-equity ratio was 0.61x. Flipping to the statement of operations on Slide 6. Total investment income for the quarter was $16.2 million. This is up $1.4 million from the prior quarter. The growth in total investment income…

Thanks, Ross. As Ross just summarized, although we had approximately $100 million of available capital as of September 30, we did decide to do a small common stock offering in mid-October. We did it because we were starting to see an increase in deal flow, the result of fiscal cliff discussions and anticipations of higher dividend and capital gains tax rates at the start of the year. So we raised approximately $44 million in new capital through the offering as we've done in previous offerings. A trust organized by Golub Capital, for the purpose of awarding incentive compensation to our employees, purchased an aggregate of $3 million worth of shares in the offering. We're very proud of the ownership of GBDC by Golub Capital employees and believe that this alignment is part of what lies at the core of our success, fostering the right incentives between our investment team on the one hand and our shareholders on the other hand. Raising the additional capital proved to be the right decision. We currently have a very strong pipeline of transactions that we anticipate will close before December 31, and we anticipate that we're going to have very strong net funds growth for the quarter ended December 31. We're not so positive about the outlook for new deals in the quarter ended March 31, 2013. We've seen this movie before back in 2010, and what we anticipate is going to happen is that we're going to see a strong push to close deals before anticipated tax increases on January 1, 2013, and this is going to cost a spate of deal closings in December and a relatively low-volume quarter in the first quarter of calendar 2013. Let me also talk about what's going on with spreads and leverage trends in the middle…

[Operator Instructions] And our first question comes from the line of Greg Mason with Stifel, Nicolaus.

I'm just curious about looking at your mix this quarter versus last quarter. Last quarter, you did 92% senior secured. This was more of a one-stop, yet we saw the average interest rate go from 8.2% last quarter to 8% flat this quarter. Can you talk about what you were seeing given that you did more one-stop this quarter? Was there an enhanced competition? Or what was driving that kind of spread compression?

So let's talk first about what's driving our mix and then talk about spreads. So in the first category, which is what's driving our mix, we are out in the marketplace right now, aggressively seeking to push our mix toward one-stops. We think this is an attractive market for one-stops, both from a sponsor perspective and from our perspective, and in an environment like we're seeing in calendar Q3 and calendar Q4 of 2012, where reliability and certainty of close is a very important criteria for our clients, one-stops are particularly attractive. So I'm not surprised by the September 30 level of one-stops in these numbers, and my expectation is that the December quarter is going to see a continuing high level of one-stops. Let me now shift and talk about the spread piece. There's definitely been a degree of spread compression in the marketplace, and it's hard to put a finger on exactly how to quantify that. But I would say if you were to look at 2012, from a calendar standpoint, 2012 as a whole, we're probably looking at, for middle-market senior debt and one-stops, we're probably looking at between 50 and 75 basis points of spread compression. And I think that's reflected in the chart on Page 9, where you see Q2 results at 8.9%, Q3 at 8.2% and Q4 at 8%. There is some variability on a deal-by-deal basis. Not all one-stops are the same price. Some have richer spreads than others. The same is through a traditional senior. The range on both of them probably is about 125 basis points from low-spread assets to high-spread assets within each of those categories. But I think the reality of our market right now is approximately a 50- to 75-basis-point spread compression from beginning of calendar 2012 to now.

And do you think that will change as we go into the, kind of, year-end rush of deals wanting to get done before December 31?

I do not see spread compression reversing. I think spread compression is going -- is more likely to continue than it is to reverse.

Great. And then, one additional question, kind of, on that one-stop. We've heard some other BDCs, namely Ares, talk about doing a one-stop and then essentially kind of back-leveraging it. Are you doing any of that, or have you thought about doing any of that to combat some of the spread compression that you're experiencing -- that the market is experiencing?

Great question. Yes, we have seen Ares in particular doing more what they call back leverage. Just to elaborate on that for others in the call who aren't familiar with this approach, what they're essentially doing is taking a one-stop loan that they've made and dividing it into 2 tranches, a first-out piece and a last-out piece, and they will then sell the first-out piece to, typically, a bank. And the spread that the first-out lender will get will be lower than the spread on the loan, and this augments the yield on the loan. The effect of this is really the same as using additional balance sheet leverage. You're just applying the leverage on a loan-by-loan basis as opposed to on a portfolio basis. We have found to date, Greg, that we can achieve a much more cost-efficient leverage on a balance sheet basis, e.g. at the portfolio level, rather than on a loan-by-loan level. So we have not been aggressively pursuing these back-leverage or first-out/last-out-type deals. I do think it's -- it can be an effective approach. This is not something I think is universally bad to use, but it's not something that we have been aggressively pursuing, principally because we find that we can achieve cheaper, more flexible leverage at the portfolio level.

Okay, great. And then one last thing, on Slide 8, you kind of showed that the total yield went from 10% flat to 10.5%, you said, because of some payoffs this quarter. Could you put some numbers around maybe what we should be thinking about as more of the one-time income this quarter from the prepayments that probably aren't part of a longer-term earnings run rate?

Yes. This is Ross. We'd have 9.3% to 9.5%. As David mentioned, we had a prepayment penalty on Strategic Partners. You kind of back into the math there. But, I mean, the prepayment on that deal was about $300,000. I mean, that is somewhat of a...

Unusual.

Unusual or nonrecurring. I mean, we will get those, obviously, from time to time. But that was kind of the magnitude of that prepayment penalty that caused that 20-basis-point increase.

[Operator Instructions] And our next question comes from the line of Jonathan Bock with Wells Fargo.

David, with an expected pickup in calendar 4Q deal activity, perhaps you could maybe give us a sense of portfolio velocity and perhaps maybe loans that might have a high probability of prepayment? If you could give us a sense of perhaps what net growth could be, not in specific terms or dollar amounts, but just a general sense of repayments might be relatively subdued or not.

Sure. So what we're seeing in the market right now is we're not seeing an unusual increase in the pace of repayments and prepayments. We are seeing an unusual level of recap activity. And there's some new deals from new M&A, in addition. That's continuing apace. The piece of it that has accelerated is recap activity. And the recap activity is, in our opinion, very largely a function of anticipated tax law changes. So if I were to prognosticate -- and it is just that. I don't have the ability to give anything other than some broad insights here. My expectation would be that we're not going to see a very large increase in prepayment or repayment activity in the 12/31 quarter, and we will see an unusually high level of originations.

Okay. And then getting to your point of recap, so oftentimes, investors might see the potential for a dividend recap as a higher-risk loan. And perhaps maybe you could give us some additional color, as PE firms choose to take money off the table, how you choose to mitigate the risk of allocating debt capital to a transaction where perhaps a private equity sponsor is going to be a little bit freer, now having capital taken off the table?

Sure. I think that lending in recapitalizations is more complicated. And maybe worth spending a minute on in terms of the Golub Capital philosophy here. You're absolutely correct that -- Jonathan, that, all things being equal, that lending to a company whose owner has just taken money off the table is disadvantageous relative to lending money to a company whose owner has just written a check. Having said that, our view is that there are also some very positive attributes about some recaps. Let me give you some. In many cases, the recaps that we're involved with are companies that we already know, already have been a lender to, know the management team, know the company, know the industry, have followed for, in many cases, years. In many cases, the recaps are with sponsors who we have a very long-standing relationship with, multiple obligors under their control, a long history of working with them, a long history of successfully seeing their companies repay loans. In addition, in an environment like the one that we're in, where there's a lot of demand for recap capital, we are, by dint of our origination platform, in a position to be highly selective, and we can choose the companies that are particularly strong and resilient. Finally, we can be selective about the structures that we finance. And one of the things we look for is making sure that there is still very significant equity value in the companies, where the sponsor may take some money off the table, but on a loan-to-value basis, there's still very substantial value left in the equity of the company. So there's ample incentive for the sponsor to stay engaged. All in, I actually think our recapitalization deals tend to be lower risk than our new investments. And I recognize there are some vectors that work in different directions when we're evaluating, when we're underwriting these 2 broad classes of deals, new LBOs on the one hand and recaps on the other. But I think our assessment is that the recaps that we do actually have significantly lower risk, not higher risk than average.

That's great color. And, David, with your focus on the middle market, in particular, specialization in lower-risk and higher-quality senior debt, maybe give us a sense of competition, in particular, relative to commercial banks and whether or not you're starting to see the effects of additional regulation come through the deal line to a point where you're seeing a smaller amount of perhaps commercial bank activity to the extent there was some in the first place?

We've seen relatively limited bank activity in our space since the financial crisis. The areas where we've seen meaningful bank activity tend to be areas we are not particularly active, e.g. asset-based lending and lending on a very low leverage level, generally to non-sponsored companies. Within our space, we have seen relatively limited bank involvement, and we continue to see relatively limited bank involvement. Bank of Montreal is perhaps the only bank, I would say, that's an exception to that rule. We do compete aggressively with BMO from time to time.

Okay. And then one last question as it relates to the liability side of the balance sheet. In the BDC landscape today, a number of BDCs have issued retail baby bonds or longer-dated maturity paper, obviously at a higher interest cost, yet, obviously, that's not the case here. And perhaps, you can elaborate on the reasoning of such a decision and the benefits as well as the risks of perhaps not participating in that market to date?

Sure. I was quoted, in case anyone is interested in seeing it, in a recent Wall Street Journal article on baby bonds, and I'll just elaborate on our negativity about baby bonds to date. There's nothing wrong with unsecured debt. There's nothing wrong with long-duration debt. There's nothing wrong with diversified sources of debt. Count me in favor of all 3 of those. There is something wrong with high-cost debt. So the typical baby bond, when you look through the economics, an account issuance cost has an average cost these days of about 6%. If we were to look at the typical BDC issuing a baby bond, and I'll pick on one that has a 2% management fee just for the sake of this illustration, you would look at that 6% debt cost plus a 2% management fee or an 8% cost of capital before there's any return whatsoever to shareholders. So if we assume that the BDC then turns around and invests the incremental dollar of baby bond proceeds in a new loan at 11% and we subtract the 8% in interest cost and management fee, that leaves you with 3%. We'd have a little bit of incremental expense at the BDC level. We'd have some credit losses that we'd have to account for, and we'd have carry to the -- or incentive fee to the BDC manager. So maybe, in a good case scenario, that leaves about 2% for shareholders. To our judgment, Golub Capital, that's not an adequate return for the risk for shareholders. We can see why it's very attractive to managers. In the example I just gave, the manager is actually earning more than the shareholders are on that incremental investment. The manager is earning the 2% incentive fee and, let's say, about an additional -- I'm sorry, 2% management fee and, let's say, an additional 0.5% to slightly more than that in incremental incentive fees. So the manager is earning between 2.5% and 3%, and the shareholders are earning less than 2%. So I can understand why it's good for the manager. We're very focused on producing very-high-quality, consistent, predictable returns for our shareholders. And it doesn't fit our model at that cost level.

I appreciate it and agree with the comments. It's nice to see people focused on net return to shareholders because, all too often, BDCs choose to run at a higher expense level and issue more equity than is actually needed.

[Operator Instructions] And it appears there are no further questions at this time. I'll now turn the call back to you. Please continue for presentation or closing remarks.

Thank you, operator. Again, I appreciate everyone taking the time to join us this afternoon. Thank you for your support of Golub Capital BDC. And as always, if you have further questions, please feel free to reach out to Ross or to me at any time.

Well, ladies and gentlemen, that does conclude today's conference call. We thank you for your participation and ask that you please disconnect your lines.