Hello everyone and welcome to GBDC's December 31st 2022 Quarterly Earnings Call. Before we begin, I'd 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 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 GBDC's SEC filings. For materials we intend to refer to on today's earnings call, please visit the Investor Resources tab on the homepage of our website, which is www.golubcapitalbdc.com and click on the Events Presentations link. Our earnings release is also available on our website in the Investor Resources section. As a reminder this call is being recorded. With that, I'm pleased to turn the call over to David Golub, Chief Executive Officer of GBDC.

Hello everybody, and thanks for joining us today. I'm joined by Chris Ericson, our Chief Financial Officer; Matt Benton, our Chief Operating Officer; and Greg Cashman, who Heads Golub Capital's Direct Lending Group. For those of you who are new to GBDC, our investment strategy is and since inception, it has been, to focus on providing first lien senior secured loans to healthy, resilient middle-market companies that are backed by strong partnership-oriented private equity sponsors. Yesterday, we issued our earnings press release for the quarter ended December 31, 2022 and we posted an earnings presentation on our website. We'll be referring to this presentation during the call today. As with last quarter, we're going to follow a new agenda for these calls and that new agenda has me leading off with headlines and with an overview. Let me start with the headlines. GBDC's performance for the quarter was solid and it was consistent with our discussion last quarter. We saw strong growth in net investment income and generally stable credit trends. What has changed is our macro outlook. I've said for the last that we're in a period of unusually high uncertainty. I think that uncertainty is now easing and we're in, and I think we're likely to stay in, a period of muddling growth. I'm going to elaborate later on what I mean by this, how we're responding to it, and why we think muddling growth can be good for Golub Capital BDC. After that, Chris and Matt are going to go through the financial statements for the quarter in detail. And finally, I'll come back and make some closing remarks and take questions. Before we jump in, I also want to mention that we intend to file our quarterly equity investor presentation over the next few weeks. You'll…

Thanks David. I can summarize our approach in one sentence. There is no substitute for granular credit analysis. I mentioned on last quarter's earnings call that we enhanced our credit monitoring processes in response to the challenging environment. One of the key benefits of our scale is that when we hit a rough period like the one that we started over the summer, we can deploy some of our 170-plus investment professionals from offense to defense. We can and did pivot resources from underwriting new deals to scouring the portfolio for potential vulnerabilities. Then we assess each of the companies that we identify as vulnerable one by one. Specifically, starting last summer, we evaluated company-by-company Golub Capital's entire middle market loan portfolio. Our analysis focused on six key risk factors. First, we looked for a portfolio of companies who may have potential liquidity or cash flow issues from increased base rates. Second, we look for companies susceptible to contracting operating margins. This meant looking closely at cost drivers, as well as pricing power. Third, we looked at recession resistance. Some companies are more susceptible to recessions than others. We look for companies with material risk of falling revenues, deterioration in working capital, growth in accounts payable and similar vulnerabilities. Fourth, we look for companies with material vulnerability to a stronger US dollar or to customers or suppliers in areas of geopolitical tension or economic weakness, such as Europe and China. Fifth, we looked at credits with high levels of EBITDA adjustments that might not be realized in practice. And finally, we looked at issues specific to our investments in software companies. We look for businesses with material amounts of high-margin, transactional or other non-recurring revenues. We completed our initial screen around the end of the summer. From there, our work…

Thanks, Craig. I'm going to take the third key question that David mentioned earlier. Will we see more write-downs, or will we see reversals of some write-downs GBDC has already taken? Let me start by setting context. Over the last calendar year GBDC has performed well, despite a bumpy investment environment. Trailing 12-month ROE was 4.6%, which compares very favorably to traditional fixed income returns over the same time frame. The Bloomberg aggregate index was down 13%, high yield bonds were down 10.6% and the LSTA loan index was down 0.6%. Our returns were depressed by mark-to-market write-downs in calendar Q2, Q3 and Q4, which were largely a function of credit spreads widening on a market-wide basis and to a lesser extent a function of credit concerns. Net unrealized losses for this nine-month period added up to $0.79 per share, or about 5.1% of NAV as of 3/31/22. Importantly, over the same period GBDC had net realized gains amounting to 0.3% or 30 basis points of 3/31 NAV. So how should investors think about the $0.79 per share of net unrealized losses? One way to think about it is as an embedded loss reserve. Let's look at slide 8 of the earnings presentation. This slide breaks down the $0.79 per share of net unrealized depreciation on investments for the nine-month period ending 12/31/2022 based on our internal performance rating categories. You'll recall that the highest categories four and five represent loans that are performing as expected or better than expected at underwriting. The vast majority of our investments fall into categories four and five. They represented 89.3% of the portfolio as of 12/31/22. Critically, the box in gold on the chart shows that investments in categories four and five accounted for 75% of the cumulative unrealized losses incurred since 3/31,…

Thanks Matt. Turning to slide four, we see GBDC's adjusted NII per share increased by $0.04 quarter-over-quarter to $0.37 per share, which represents an adjusted NII return on equity of 10%. As David described earlier, the increase in adjusted NII per share was primarily driven by the impact of increasing interest base rates on GBDC's portfolio and GBDC's low cost of funding structure. In addition, accrued dividends on certain preferred equity investments generated approximately $0.02 per share during the quarter and will be included in adjusted NII moving forward. The favorable increase to adjusted NII was partially offset by an accrual for excise tax of approximately $0.01 per share as a result of calendar year 2022 taxable income in excess of distributions or spillover income that was driven by realized gains and short-term temporary book-to-tax income differences that we expect to reverse over time. GBDC had an adjusted net realized and unrealized loss per share of $0.22, primarily from unrealized depreciation due to a combination of spread widening and isolated credit factors on certain portfolio companies. This unrealized depreciation was partially offset by $0.02 per share of realized gains on the sale of equity investments. Adjusted EPS was $0.15 per share. We view this as a solid performance in the context of the market and economic volatility and uncertainty. Now I want to take a moment to quickly provide additional details around two components of adjusted NII. First, we made the decision to incur an excise tax of approximately $2.2 million or $0.01 per share. Historically, we've sought to minimize excise tax payments. Our decision this year was primarily driven by the fact that a meaningful portion of the spillover income was related to short-term taxable gains on foreign exchange hedges that we expect to reverse over the balance of…

Thanks, Chris. On slide 16, we've quantified the potential positive impact of higher base rates on GBDC's NII earnings power. The key takeaway is that GBDC's adjusted NII per share stands to continue to benefit from two key tailwinds in the coming period. The first tailwind is that there's a lag between when base rates change in the market and when loans in our portfolio reset the higher base rates, which happens once per quarter in those cases. Said another way, GBDC sees the full benefit of higher base rates about a quarter after those base rates actually increase. The chart on this slide is our attempt to help demystify this dynamic for you. As you can see on the chart, the average LIBOR or SOFR rate GBDC actually earned on its investments for the quarter ended 12/31 was meaningfully less than market rates at the end of the quarter. The second tailwind is that base rates will increase further from 12/31 levels based on the recent Fed decisions and the expectations embedded in the forward curve. The leftmost bar shows GBDC's actual adjusted NII of $0.37 per share for the quarter ended 12/31. On average for the quarter, the average LIBOR rate was approximately 375 basis points. The right bar looks at what GBDC's adjusted NII per share would have been in the 12/31 quarter if all of its floating-rate assets and liabilities had been based on a LIBOR rate of 477 basis points, the rate at quarter end. In this scenario, all else equal, we estimate adjusted NII would have increased 13% to $0.42 per share. Please note that today's three-month LIBOR is a bit above the level we assumed in this analysis. The bottom line is that we think GBDC's NII per share has a lot of…

Thanks, Matt. To sum up, GBDC's performance for the quarter ended December 31 was solid. Adjusted NII per share was strong and it was well in excess of our recently raised dividend. The portfolio is generally healthy and it's performing well from a credit perspective. Unrealized losses have been elevated for the last several quarters, but as we've said many times before, what really matters in the long run is avoiding realized losses. And in the most recent quarter and in the last nine months, we once again reported net realized gains. We've always believed that early detection of risks and early intervention to mitigate those risks are critical for limiting credit losses. It takes scale and experience to do this well. We've today taken you through how we last year undertook what we believe was a very thorough review of the portfolio against a range of key risk factors and how we honed in on a small subset of names that we plan to continue to monitor quite closely. Now Greg said it right. We're not going to be 100% right. That's not a realistic goal. Consistent with prior periods, our approach is to try to identify borrowers that are higher risk and then to have early discussions with sponsors and management teams about how to make them more resilient. This approach has worked before and I believe it's going to work again. What do I mean by work? I mean that once again we'll be able to keep realized credit losses low and we'll see a large portion of the unrealized losses that we've taken over the last nine months reverse. Finally, I promised I'd come back to the topic of the dividend in my closing remarks. We out-earned our dividend by $0.04 per share in fiscal Q1. And as we've said before, we think GBDC's earnings are going to be driven higher by higher base rates, higher spreads and GBDC's very low cost of funds. We're evaluating in this context whether and when it would be appropriate to increase the quarterly dividend further or make a supplemental dividend or both. For now, we think it's prudent to wait and see, but we'll keep you informed as our thinking progresses. With that, let's open the line for questions.

Thank you. [Operator Instructions] We'll take our first question from Finian O'Shea with Wells Fargo Securities. Your line is now open.

Hi. This is Jordan on for Fin today. Just a question on your loan documents. You spotted some PIK on – you spotted new or higher PIK on about 3% of loans this quarter. Is this -- if you could just like characterize this? Is this something that's normal course toggling? Maybe default interest or something else entirely?

Combination of all of the above, Jordan. So we are seeing, particularly in our Golub Growth portfolio, demand from sponsors for loans that have a PIK component or an optional PIK component. So that's part of what you're seeing. And there are a couple of cases where we have added a PIK component to existing loans as part of amendments, as part of efforts to bring loans that were under-priced up to levels that we were looking to get them at without creating more cash drag on the companies.

Okay. That's helpful. And then question for Chris. Did the BDC pay a full incentive fee back to the advisor this quarter? And if so what's kind of the -- what is the cushion before earnings fall back into the band?

Yes, hi. We did pay a full incentive fee this quarter and we're well-above the 8% hurdle rates. I'll have to get back to you with the exact number on that.

Okay. Thank you so much. That’s it from me.

Okay. Next we'll go to Robert Dodd with Raymond James. Your line is now open.

You gave about the portfolio vulnerability analysis, et cetera…

Robert, can you just start again? Yeah. Can you just start your question again?

Yeah, sorry. It's tied to the vulnerability analysis that you completed. The disclosure is very helpful, the information in the presentation. How much of that if any was, is normal per share with say your third-party valuation consultant each quarter into the fair value analysis that they assist with? Or was this all incremental over and above the kind of normal analysis that goes into evaluating what the appropriate fair values are for the loans each quarter?

So we do, just to set context for everyone on the line, each quarter Golub Capital has an internal group that does valuation work with respect to every position in the portfolio and approximately 30% of those valuations are also reviewed each quarter by third-party valuation experts like Duff & Phelps, Houlihan Lokey, or Kroll, Houlihan Lokey, et cetera. The information that we share with the valuation firms is a robust set of information. So there's nothing that we're looking to prepare, Robert, that we would not be sharing with the valuation firms. But the analysis, the resiliency analysis that we went through is a special analysis in the sense that we began in the late summer of last year to redeploy a significant portion of our underwriters to do an exercise that we've done before. We did it during COVID, we've done it during other periods of rapid change, where we go through and screen the portfolio again to look at vulnerability to changes that we've identified. So I think the answer to your question is, it is both consistent with information that's provided to the valuation firms and it's a new analysis that we do episodically as opposed to every quarter.

Got it. I appreciate that. And then if I can one more, on kind of on credit, setting the landscape again. I mean, your non-accrual rate is not high by industry historic standards. So I just want to say that. Historically it’s been well below industry historic standards as well. But it is now, if I look at your non-accrual at cost, for example, or you know, fair value, it's relatively elevated by your standards historically. About the only level higher than this in the last more than 10 years was the peak during COVID. So can you give us any more color about what's -- what -- it's not many assets and the rate is objectively not that high, but why is it so high compared to your normal low levels currently?

So you're focused on the percentage at cost. I don't focus on percentage at cost. I focused on percentage at fair value. I think that's the amount that we have at risk at a given point in time vis-à-vis the difference we've already taken that as a hit against earnings. And if we look at the non-accrual investments as a percentage of fair value, it's not out of line with our history. It's not -- it's low by the standards of our industry. We do have a couple of credits in this pool where our current carrying value is small. And I think the cost of those investments is elevated relative to fair value and that's kind of creating some distortions when we look at the percentage vis-à-vis cost. We're going to go back and do some more work on this and come back with some more analysis that I hope to be able to share with you.

Okay. Appreciate it. Thank you.

And next we'll go to Ryan Lynch with KBW. Your line is now open.

Hey. Good afternoon. First question I had -- well, let me just first say, I really do appreciate all the detail you guys put in and walk through kind of the resilient analysis and what you guys discovered as well as the couple of slides that went over kind of where the markdowns have come in your portfolio versus kind of potentially weaker credits versus kind of maybe mark-to-market declines that could recover. So it's a really great analysis, really appreciate that. On the resilient analysis when you talked about the seven investments that you guys identified that consist of in GBDC's portfolio. I'm just curious I think you said that generally those investments are performing fine today, but there's additional heightened potential for weakness down the road. Have you already started having conversations with the sponsors of those positions yet? And also, from just a higher level, you mentioned having this robust detection process helps early detection and early mitigants to risk. Can you just walk through, when you guys have identified a risky investment and it does start to struggle, what are the things that early detection and risk mitigant, what are some of the strings you can pull to help increase the recovery potential of an investment that's struggling?

Sure. Thanks, Ryan, and I appreciate your positive feedback on the new approach to our earnings presentations and the new information. Thank you. Look one of the characteristics of Golub Capital that's unusual is we are almost always the lead lender in our loans. We -- I think it's over 90% and it's been over 90% for many years in a row. In a typical deal we’re, if not the sole lender, we're in a small bank group that we're the lead lender of. So that puts us in the position to be able to do things that are very challenging to do in the broadly syndicated market or even in the private market in situations where you're a participant in a larger club. It puts us in a position to have conversations with the borrower and with the sponsor where they know and we know that we're the decision-maker. And they know and we know that there's an opportunity to be creative and thoughtful about solutions. And in most cases this is with a sponsor we've done multiple deals with. So they know and we know, we're both interested in sustaining a strong and positive relationship on an ongoing basis so that we can continue to do business together. So with that by way of context, we're in constant touch with our borrowers and our sponsors. It's not just on poorly performing companies; it's on all of our companies. When we have a company that we're growing concerned about, we have more discussions with the borrower and with the sponsor. And we'll talk about concerns that we have. We'll talk about their plans and ways in which they can potentially take steps that might increase a margin for error. That might mean slowing down an expansion plan or decreasing CapEx or selling a division or a couple of small pieces of the business, or it might involve the sponsor putting in more capital, or in some cases it may involve putting the business up for sale. These are all discussions that we regularly have with sponsors and with management teams. And those discussions are informed by the credit monitoring work that we do. I think this goes in sharp contrast to say the broadly syndicated market where you have a very large collection of lenders, no one of which is a decision maker, and where the borrower doesn't really even have a reasonable expectation of being able to get that group to agree to make meaningful changes because they're so frequently a group of lenders or a single lender that won't agree. So it's a very different dynamic Ryan. It's purposefully a setup where we have more power and more control. And I think it works to the benefit of everybody involved.

Okay, that's helpful background and color on kind of a little bit of insight into those processes and conversations. The other question I had and it kind of came up when you were talking about the weighted average interest coverage and how valuable that is. You all publish the Golub Capital Altman Index and I think it's very helpful to kind of give an insight on how general trends in the portfolio are moving on a quarterly basis. But when I think about your comments on kind of the weighted average interest covered not being a good metric because the average borrower is not going to really struggle, it's going to be kind of those marginal credits. Could you take that same sort of approach when you look at the Golub Capital Altman Index and say maybe the results that you look at that on a quarterly basis aren't as helpful because it's just showing the average and it really may not be indicative of the true credit performance of those individual underlying borrowers in your portfolio? I'd just love to hear your comments on this. I find the index really helpful. But in context when you said about the weighted average EBITDA, I'm just wondering -- I'd be curious to hear your thoughts on that.

So it depends what you're using it for. I think your point is well taken. If you're thinking about using the index to create an indicator as a metric of how the portfolio is doing as a whole, I think it's very useful. If you're looking at the index as an indicator for how the tail is doing, I don't think it's very useful. I think the best source of information about the tail is our portfolio ratings. And one of the things that I like to emphasize in discussions with investors is are we seeing significant migration toward categories one and two, those are the two risk performance rating categories where -- which contain investments that are significantly underperforming. Are we seeing more and more of the portfolio in those two categories? What you would expect in a pre-recessionary or recessionary environment is that kind of credit migration. You'd see quarter-over-quarter increases repeatedly over a series of quarters and you'd expect to see levels of category one and two credits that are high by historical standards. And I think -- what we can say is on a portfolio-wide basis, the middle market index numbers are encouraging. And in respect of the tail, the portfolio performance ratings are encouraging in that they do not show the kind of migration that I was alluding to.

Okay. That’s helpful and I think makes a lot of sense. That’s all for me today I appreciate the time.

[Operator Instructions] I'm showing no further questions. I'll turn the call back over to David Golub for any additional or closing remarks.

Thank you. I just want to thank everybody for their time today. I know this was a particularly long presentation so thanks for your patience. We did want to present to you all some very detailed information about the portfolio and our approach to credit monitoring. So I appreciate your patience on that. As always also appreciate your partnership. Should you have any questions, always feel free to reach out and look forward to talking again next quarter.

This concludes today's conference call. You may now disconnect.