Welcome to the Golub Capital BDC, Inc.’s September 30, 2017 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 the statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in Golub Capital’s BDC, Inc.’s filings with the Securities and Exchange Commission. For a slide presentation that the company intends to refer to on today’s earnings conference, please visit the Investor Resource tab on the homepage of the company’s website, www.golubcapitalbdc.com, and click on the Events/Presentations link to find the September 30, 2017 Investor’s presentation. Golub Capital BDC’s earnings releases is also available on the company’s website in the Investor Resources section. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to David Golub, Chief Executive Officer of the Golub Capital BDC.

Thanks, Priscilla. Happy Thanksgiving, everyone, and thanks for joining us today. I’m joined by Ross Teune, our Chief Financial Officer; and Gregory Robbins, Managing Director. Yesterday we issued our earnings press release for the quarter ended September 30, and we posted an earnings presentation on the website. We’re going to be referring to this presentation throughout today’s call. The quarter ended September 30 was another solid quarter for GBDC. It posted out a very good fiscal year. For those of you who are new to GBDC, our investment strategy is, and since inception, has been to focus on providing first-lien senior secured loans to healthy resilient middle-market companies backed by strong partnership-oriented private equity sponsors. I’m going to start today by providing an overview of GBDC’s results for the 2017 fiscal year and the fourth fiscal quarter. Ross is then going to take you through the results in more detail and I’ll come back at the end for some closing remarks and some questions. Let me start by setting some context. For about the last 18 months, we’ve been dealing with a increasingly challenging and increasingly borrower-friendly lending market. We’ve seen spreads tighten, leverage increase and documentation terms loosen. Across the Golub Capital platform, we’ve responded to this challenging environment by maintaining high credit standards by staying very selective on new investments and by focusing on deals where we believe we have competitive advantages. Advantages like our ability to provide large, scalable one-stop solutions and our ability to execute add-on transactions for existing borrowers that are performing well. I want to point out a few highlights of GBDC’s performance during this challenging environment period. First, we generated stable and consistent net income in excess of our dividend. Each quarter, we paid out our dividend of $0.32 per share, that’s $1.28…

Great. Thanks, David. Turning on Slide 5. This slide highlights our quarterly origination and net fund decline that David already discussed. Flipping to Slide 6. The slide shows that our overall portfolio mix by investment type has remained very consistent quarter-over-quarter, with one-stop loans continuing to represent our largest investment category at 79%. Turning to Slide 7. This slide illustrates the fact that our portfolio continues to remain well-diversified, with an average investment size of $8.6 million. Our debt investment portfolio remains predominantly invested in floating rate loans, and there have been no significant changes in the industry classifications over the past year. Turning to Slide 8, the weighted average rates of 7.3% new investments this quarter was consistent with the previous quarter and is also consistent with the interest rate and investments that paid off. As a reminder, the weighted average interest rate of new investments is based on the contractual interest rate at the time of funding. For variable rate loans, the contractual rate would be calculated using current LIBOR, the spread over LIBOR and the impact of any LIBOR floor. Shifting to the graph on the right-hand side, this graph summarizes investment portfolio spreads for the quarter. Focusing first on the light blue line, this line represents the income yield or the actual amount earned on the investments, including interest and fee income, but excluding the amortization of discounts and upfront origination fees. The income yield decreased slightly to 7.8% for the quarter, primarily due to lower prepayment fees. The investment income yield, or the dark blue line, this includes the amortization of fees and discounts. This decreased to 8.5% during the quarter, as we had a decline in OID fee and amortization. The weighted average cost of debt or the green line, this increased to 3.8%…

Thanks, Ross. So to summarize, I’m very proud of what our team accomplished this quarter and in fiscal 2017. GBDC had another solid quarter and fiscal year despite a very challenging lending environment. I want to close by trying to answer the question I’m most frequently asked these days, which is, how much longer will this borrower-friendly set of conditions continue? The argument for not very long, hinges on the fact that we’re on the eighth inning – we’re in the eighth year of an economic expansion. By historical standards, this credit cycle’s well into extra innings. But there are a number of signs that a credit downturn is not imminent, and our view is that the conditions that we’re facing right now, the borrower-friendly conditions that we’re facing right now, are likely to persist for a while. What are the signs that the stock market continues to reach new highs? Spreads are tight across the credit spectrum, the yield curve is not inverted, reported unemployment’s at a 17-year low, consumer confidence is at a 17-year high, our loan dollar capital middle-market report suggests that U.S. middle-market companies are growing at a healthy cliff, and we’re seeing investor capital continue to flow into our pace at a – flow into our space at a record-setting pace. These all, in my mind, point toward a continuation of borrower-friendly conditions. So what are the implications of this? I want to discuss three. First, we’re likely to see continued pressure on pricing leverage in terms and new transactions. The new capital flows into our space, combined with a tepid middle-market M&A environment is a combination that’s likely to result in more credit market inflation. We think it’s as important as ever to be very selective about where and how to compete. Second implication,…

Certainly, thank you. [Operator Instructions] And our first question comes from the line of Christopher Testa from National Securities. Please proceed with your question.

Hi, good morning. Thanks for taking my question. Obviously, David, the prepayments were really heavy for you guys this quarter. And you guys tend to obviously make much safer loans with lower yields on them obviously. Do you think that there is starting to be a differentiation in market participants for looking to refi-only the higher quality deals as opposed to some of your peers with spreads that are much higher than yours?

Right. I think there’s – short answer is yes. I don’t think that’s new. I think there’s been a very marked difference in strategy amongst BDCs for some time. And we’ve been, as you quite correctly put it, we’ve been at one side of the spectrum. We’ve been at this side that’s been focused on high-quality credits and first-lien senior secured. So if you look at some of the other strategies that other BDCs have decided to follow, they range at the extreme to a focus on junior debt strategies where the junior debt is in companies that are involved in turnarounds or involved in some transition. That’s where the highest spreads and the highest risk lie. And then there are a bunch of folks who are in between. Our judgment for about the last three years has been that the more junior debt-oriented strategies had gotten unattractive. And we have a history at Golub Capital of being very involved in junior debt. We’ve made billions of dollars of junior debt investments over the course of our history, but almost none in the last three years. And that’s been a decision on our part based on what we perceive to be the risk reward in the marketplace. If anything over the course of the three years since we’ve pulled back from junior debt, the risk reward in the junior debt side of the spectrum’s, in our judgment, gotten worse. Does that answer the question?

Yes, I would agree with that. And with – the broadly-syndicated market pushing, in some case, 6.5 turns of leverage or so. Just curious, your thoughts and how much of this is starting to creep into more of the upper middle-market, and how many more deals you’re passing on for structure today compared to, say, a couple of quarters ago or so?

Well, let’s look at the art. So if we look at the last, approximately 18, 19 months, we’ve seen a steady shift from a lender-friendly environment to a borrower-friendly environment. And that shift has involved pricing leverage and terms. You’re quite correct. One of the elements is leverage, and we’ve seen a creeping up of leverage across the size spectrum. In the broadly-syndicated market, we’ve seen leverage go up, perhaps as much as 1 turn to 1.5 turns. In middle-market transactions, a bit less than that, but not enormously less than that. We find ourselves today often passing on the basis of leverage and terms. And I think have to put those two together. You can’t look at them in isolation. We recently did an analysis of our approval rate as a percentage of what we see. And it’s at an unusually low level in the last six months. And I don’t think that’s surprising given what we’re seeing in the marketplace. At the end of the day, for our strategy, we believe we need to present sponsors and obligors with compelling financing solutions. So we can’t be meaningfully off market in the solutions that we’re offering where only the folks who can’t get good executions are going to pick our solutions. That’s a recipe for adverse selection. So we need to be competitive. And so our answer to challenging market conditions is to increase selectivity.

Got it. That’s great color. And just one last for me if I may. Retail is roughly 8% of your book. Just curious if you could talk about kind of the trends for your portfolio of companies in that segment and whether you’re looking to pare back on those originations.

I’m going to answer in reverse order. Are we looking to pare back? No. We’ve been focused on what I’d call winners in retail for a long time. The challenges that retail is facing right now as a consequence of too many stores and competition from the web, these are not new trends. These are old trends. We’ve been focused on these trends for a long time. What we like about what’s going on in retail right now is that many of our competitive brethren have taken the view that they want to bring down their percentage portfolio exposure to the sector. And consequently, we’re seeing a sort of broad brush being applied to all companies in the space. And as you can probably appreciate there are many restaurants and retail concepts that can compete very well in this environment, and there are others that are facing very significant headwinds. So we are looking at it at a very granular basis. We’re very much still an active lender in the sector. We have a very skeptical eyes, we have for years, towards companies that are vulnerable to competition from the Internet or competition from there being just too much square footage. We think there’s lots and lots of great companies in this sector.

Okay, great. That’s all for me. Thanks for taking my questions and congrats on a nice year.

Thank you.

Our next question comes from the line of Jonathan Bock from Wells Fargo. Please proceed with your question. Fin O’Shea: Hi, good morning guys. This is Fin O’Shea in for Jonathan Bock this morning. Thanks for taking our question. Can you touch upon the situation in regards to securitization financing? You have consistent language in the press release that suggests you’ll continue to utilize that, but sort of more measured language in the filing that suggests the SEC hasn’t resolved the issue. Just some background there and then how you – how things might look, balance sheet-wise, going forward if they don’t resolve this in a short order.

Sure. Just to set context for those of you are not experts in the combination of the Investment Company Act of 1940 and the risk retention rules covering securitizations. I suspect the vast majority of those fall in the category of not being experts in the combination. But the way that the risk retention rules were written, unfortunately, for externally-managed BDCs, it is currently impossible to abide by a combination of the Investment Company Act rules and the risk retention rules. So we’ve been engaged in that dialogue with the SEC for some time seeking no action relief to permit externally managed BDCs to continue to use securitization as a form of financing. That dialogue continues. It’s not yet resolved. I can’t tell you when it will be resolved. But I am optimistic that it will be resolved. In the meantime, we are precluded from doing new securitizations. There are a lot of other financing options that we do have, including continuing to use our bank facilities, our SBIC facilities and other forms of loan facilities or bond or no facilities. We’re particular fans of securitizations. As I think most people who are familiar with GBDC know, we think that securitizations provide a – or can provide a very low-cost, highly-flexible, mass-funded answer for BDCs that use our kind of investment strategy. And consequently, that’s why we’re investing the resources in trying to get clarity from the SEC that the unintended effects of the risk retention rules can be corrected. Fin O’Shea: Very well. Thank you for the colors, much appreciate it. Then just a smaller question. I’m not sure if you’ve touched upon it. I apologize if so. Was the special out of spillover from capital gains or NII? And were you able to use this quarter’s gains to offset realized losses earlier this year?

Yes, Fin. It’s Ross. We did have a spillover kind of disclosed in our tax, but notice again, that the spillover there under the RIC requirement is a slightly different requirement than the excise tax rules. But again, we’ve had very strong realized gains from our equity portfolio, so most of the spillover in the results is equity gains, if that kind of answers your question. Fin O’Shea: Yes. That’s help and thank you guys for taking our questions.

Our next question comes from the line of Robert Dodd from Raymond James. Please proceed with your question.

Hi, guys. Congratulations on the quarter and the year. A couple of questions about the SLF, if I can. Can you give us – first of all, a comment on what you think of the even more highly competitive environment and how that’s going to impact the ability of the SLF to deploy capital given you’re conservative on investing. And then secondly, just on the financials. I mean, obviously, again, $2.7 million in total income in the quarter, but it looks like only dividend is up $800,000 to GBDC. So is there any color you can give us on what your strategy is there? Obviously, anything that doesn’t divi up accrues to equity, the SLF and unrealized appreciation in the BDC as well. So it’s an NAV accretion versus an NII income question, rather than anything else. But can you give us any color on what you view there is about how you would be using the SLF financials and how we should expect those to flow-through BDC as income or unrealized appreciation?

Sure. So let me address the two questions in order. And it may be useful if you turn to Slide 14 of the presentation that is a page on SLF. So the first part of your question, Robert, was what do we perceive to be the market opportunity today and how does that – how is that likely to impact growth? Well, I think if you look at our deeds as opposed to just my words, you can see that since March, there’s been about a $50 million reduction in the size of SLF from a total investments at fair value. I think it would be reasonable for anybody looking at this to say that, that reflects our assessment of the environment. So we’re having difficulty finding attractive traditional first-lien senior secured investments in a quantum enough to enable us to grow this vehicle right now. We’re continuing to find some. It’s not that we’re putting this in liquidation. But we are being cautious and selective in the new traditional first-lien senior secured middle market debt that we’re buying. And we’re recognizing that if that means, the portfolio shrinks, for now, that’s okay. Second part of your question had to do with distributions. We, for a long time, had a very steady distribution coming from SLF. Our strategy has been to have – SLF have a steady distribution over time. We had a meaningful loss in the portfolio, and the loss put us in a position where our cumulative distributions were exceeding our cumulative income. And we thought it was appropriate in the context of that to reduce distributions for a period of time to kind of catch up. Recognizing that, the only impact of this is quite as you say, is geography. So but the geography has an interesting impact. If we had – if the SLF had paid a larger distribution, be it the Golub Capital, the manager, would’ve gotten paid more in an incentive fee. And so the geography actually matters. We thought that it was appropriate not to have the larger dividend from SLF and not to have the larger incentive fee paid to the manager in the context of the prior period realized loss at SLF.

I appreciate that, and I think your shareholders do, too, because obviously, to your point, if you had dividend deduct rather than NAV accretion, it does change the management fees. In terms of when I look back, and I mean, obviously, if I look back a year ago, net increase in equity at the SLF was only $600,000, but it paid $4 million of dividends that year. So to your point, there had been a mismatch in the past. Where are you, if I can, in terms of – where are you in terms of catching up about your assessment of – I mean, obviously, I can do the math, but I’ll just ask you – catching up about where do you think you stand currently about total earnings for the vehicle over time and total dividends for the vehicle versus these lower distributions in the near-term?

We believe that at the end of the September 30 quarter, we were about caught up.

Okay, got it. Thank you.

[Operator Instructions] Our next question comes from the line of Ryan Lynch from KBW. Please proceed with your question.

Good morning. Thank you for taking my questions. I only have one today. You’re talking about the competitive environment, creating increased, spread tightening, increased leverage, looser documentation almost was obviously bad for deploying new debt capital. One of the benefits of that though is that we are seeing some frothy valuations for some equity investments, and so you guys have done a good job of having some net gains resulting in special dividends. But you guys had about $6 million of net gains, realized gains in 2016, $9 million in 2017. I just wondered if you can comment on what is your outlook for continually – continuing to realize some of these equity coinvestment gains as we go into fiscal year 2018?

So again, just to go back a step and provide some context. GBDC makes equity coinvestments typically alongside private equity sponsors at the time that we’re financing a new leverage buyout. And consequently, it’s fair to think about the GBDC equity coinvestments as small minority stakes that are alongside a private equity sponsor. In that context, we don’t typically determine our own exit timing. We typically are in the transaction for the period that the private equity sponsors in the transaction and exit with the private equity sponsor. So this can cause and has caused a degree of lumpiness in the realization activity of our equity portfolio. I anticipate there will continue to be some lumpiness in realizations from our equity portfolio. To your point, Ryan, the portfolio has performed quite well. I think that’s a reflection of the kinds of companies that we finance. We do a good job of picking companies that are solidly positioned with good growth prospects. And they and their private equity sponsors execute well, stands to reason we’re going to do pretty well on our equity coinvestments. And I think that’s been what’s been happening. As to where equity coinvestment returns are going to go in the future, I don’t really know. I will tell you that we’re seeing more and more of our sponsored clients factor into their investment case a potential reduction in exit multiple. So they’re buying at 12 times or 13 times EBITDA. They’re not projecting that they’re going to exit at 12 times or 13 times EBITDA. They’re projecting that it’s going to be lower than that. We like to see that kind of conservatism as we’re looking at new transactions because it means there are multiple ways we, as equity holders, can win. We can win if the company performs well and grows its EBITDA. And we can win if the exit turns out to be on better terms than those projected.

Okay. That’s helpful color. That’s my only question today. Thank you.

Our final question comes from the line of Ray Cheesman from Anfield Capital. Please proceed with your question.

Thank you for taking the question. I was wondering if you are seeing anything in the house or senate tax bills which, one, impact the operations of a BDC potentially, interest caps or something like that? And then secondly, how do you think that – if it passes, let’s – who knows, right? Our government hasn’t exactly been spitting out laws left and right. But if something like this comes along, do you think that the business environment in 2018 may be more active, including the M&A market, which could be a good thing for you guys?

So I’m going to answer the second part of your question first. It would be a great thing for our business if tax uncertainty was removed from the system. So putting aside what might get passed or might not get passed, the uncertainty that we are all living with right now is depressing middle-market M&A. Because buyers and sellers don’t necessarily agree on what’s going to happen, and consequently, they have different discounting factors. And consequently, there’s an incentive for sellers to wait. So I think part of the explanation for the tepid middle-market M&A environment we’re seeing right now is tax uncertainty. Now let me go back to the first part of your question. Do we see anything in the tax bill that would be particularly good or particularly bad for us or for BDCs generally? The answer is, there is some of both on balance. I think the House Bill would be a net positive. And I’m going to speak to the House Bill because I’m more familiar with it, not because the Senate bill is different, but just because I’ve studied in its 400 single-spaced pages more carefully. The House bill has a couple of elements that I think would be particularly good for us. First and most obvious is the reduction in corporate income tax rates. Most of our borrowers are corporations, and most of them pay tax. So lower tax rates mean lower tax payments, means more cash that’s available to service debt and to pay down debt. That’s a good thing. Second element is a variety of different provisions related to accelerated depreciation. Again, here, if our businesses can depreciate assets more quickly and reduce their taxes because of that accelerated depreciation, that’s credit enhancing. The main negative in the House bill is a cap on interest deductibility for some companies at about a 30% of EBITDA level. And we do have some borrowers who have – who would be subject to this limitation. In the work we’ve done, we think that the benefit of lower tax rates, lower corporate tax rates and faster amortization availability, that, that would meaningfully outweigh the disadvantage of the cap on interest deductibility. So net-net, we think it would likely be a positive. I want to reiterate something you said though, which is I don’t think anybody knows where this is going to end up. There is a Senate bill that needs to get debated and passed. It’s going to look very different from the House bill, then we’re going to go through a reconciliation process. We’re a long way from done right now.

Great. And just one follow-up, if I may. When we listen to the presentations of the regionals, and some of them, the mega banks, they seem to be indicating that the middle-market is more attractive, and since they’ve got this incredibly cheap low-beta funding of basically free money, that they are reaching farther than they have over these courses of the last eight years of recovery. And I’m wondering, do you see a change in behavior of people getting – I understand that spreads are down and paperwork is getting worse. But just plain number of guys trying to be in the waiting room, to be in the deal at all, and sometimes, maybe guys you thought had left the business coming back. I mean, what are you seeing?

We’re seeing some changes at the margin, but I’d describe it as changes in the margin. So if you look at some of the banks who pulled back on their activity in the context of leveraged lending guidance, we’re seeing some of those banks become more active in pitching for mandates to do larger syndications. And I want to make sure everybody understands what I just said, because it’s – the details are important here. We’re not seeing a big change in activity in traditional middle-market-sponsored finance. That business is dominated by non-banks. It’s been dominated by non-banks since the early 2000s, and I don’t think it’s going to change. Where we’re seeing more involvement by regulated entities is in the upper middle-market and broadly-syndicated spheres where what they really want to do is not hold the loans but underwrite and syndicate the loans and earn fees. And that’s a business that today is dominated by Jefferies and [indiscernible] and if we’re looking at the upper middle-market, if we shift and talk about the lower broadly syndicated market, you might want to add Credit Suisse, JPMorgan, Deutsche Bank, Goldman, a number of others. It’s the folks in that last category who we’re seeing becoming a little bit more aggressive, pushing some of the – what used to be perceived as regulatory boundaries on leverage lending guidance. And I’m not sure where that’s going to go because leverage lending guidance isn’t crystal clear, right? I mean, it’s guidance. And what has happened over the years is that the bank regulators have come in after the fact, and looked at the transactions the banks have been involved with and either said it’s okay or expressed upset. And we’re – we haven’t – not enough time has gone by yet to see whether the attitude of the regulators is meaningfully changing, or whether it’s a wished for changes on the part of the banks.

Yes. Weird times we live in. You actually mentioned something in your answer that clicked one last question. I’ve been watching the – first of all, congratulations that you had a great quarter. I’m invested in your company because you have the same attitude of carefulness about other people’s money as I run my business. And I’ve been watching Oaktree taking over Fifth Street. I’ve been watching Ares take over American Capital. Do you think that the M&A environment in your business will get more exciting in 2018?

No.

Okay.

I mean, honestly, I don’t really understand these acquisitions. At the end of the day, if we have the opportunity to buy something, we’re buying a set of assets and those assets, if they’re good assets, we’ll turn over in a couple of years. So after that, it’s up to us to originate good, new assets to redeploy the capital. We’ve been pretty well served by focusing on organic growth in our own careful origination and not taking over other people’s problems.

Thank you very much. That’s a terrific answer.

Well, once again, I want to thank everyone for joining us today. And I just want to wish everyone a happy Thanksgiving. Please enjoy the holiday season, and we’ll look forward to talking again after the December 31 quarter.

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