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Edited Transcript of GBDC earnings conference call or presentation 26-Nov-19 7:30pm GMT

Q4 2019 Golub Capital BDC Inc Earnings Call

CHICAGO Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Golub Capital BDC Inc earnings conference call or presentation Tuesday, November 26, 2019 at 7:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* David B. Golub

Golub Capital BDC, Inc. - CEO & Director

* Gregory A. Robbins

Golub Capital LLC - MD & Co-Head of the Investor Partners Group

* Jonathan D. Simmons

Golub Capital BDC, Inc. - MD & Co-Head of Corporate Development

* Ross A. Teune

Golub Capital BDC, Inc. - CFO & Treasurer

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Conference Call Participants

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* Finian Patrick O'Shea

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Robert James Dodd

Raymond James & Associates, Inc., Research Division - Research Analyst

* Ryan Patrick Lynch

Keefe, Bruyette, & Woods, Inc., Research Division - MD

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Presentation

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Operator [1]

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Welcome to Golub Capital BDC, Inc.'s September 30, 2019, 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 facts made during this call may constitute forward-looking statements that 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 BDC Inc.'s filings with Securities and Exchange Commission.

For materials the company intends to refer to on today's earnings conference call, please visit the Investor Resources tab on the home page of the company's website, www.golubcapitalbdc.com, and click on the Events/Presentations link. Golub Capital BDC's earnings release is also available on the company's website in the Investor Relations -- Resources section.

As a reminder, this call is being recorded for replay purposes.

I would now turn the call over to David Golub, Chief Executive Officer of Golub Capital BDC. Please go ahead.

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David B. Golub, Golub Capital BDC, Inc. - CEO & Director [2]

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Thanks, everyone. Thanks, operator, and hello, everyone. Thanks for joining us today. I'm joined by Ross Teune, our Chief Financial Officer; Gregory Robbins and Jon Simmons, both Managing Directors here at Golub Capital. Let me wish everyone a really happy Thanksgiving.

Yesterday afternoon, we issued our earnings press release for the quarter and fiscal year ended September 30, and we posted an earnings presentation on our website. We'll be referring to the presentation throughout the call today.

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.

Let me start today by talking about the quarter and fiscal year ended September 30, and both the quarter and the fiscal year were landmarks in the history of GBDC. On September 16, 2019, GBDC completed its merger with Golub Capital Investment Corporation, or GCIC. I'll start today's call by talking about the impact of the merger on GBDC, both the benefits of the merger and the accounting implications for GBDC's financial statements going forward. Ross is then going to review GBDC's results for the quarter and fiscal year, and then Gregory is going to close with our outlook and plan for fiscal 2020.

Let's turn to Slide 3. We said last year when we first announced the merger with GCIC that they've had 3 key benefits for GBDC and its stockholders. First, we said the transaction will be meaningfully accretive to GBDC's net asset value per share. Second, we said it would increase the size and scale of GBDC without materially changing the risk or composition of its diversified, high-quality investment portfolio. And third, we said it would give GBDC greater earnings power going forward to support an increased dividend. Let me elaborate on how we're doing on each of these points.

Slide 4 shows that the GCIC acquisition drove meaningful NAV per share accretion, as GBDC's September 30 NAV per share increased by $0.81 or 5.1% to $16.76. This was meaningfully higher than our original expectation of a 3.6% increase in NAV per share that we announced at the time of the merger -- I'm sorry, that we announced when we announced the merger. To give you a sense of scale, the 5.1% NAV accretion is as if GBDC earned overnight more than 2.5 quarters' worth of historic regular distributions per share.

As you can see on Slide 5, GBDC achieved this substantial amount of accretion without materially changing its investment portfolio or its credit risk exposure. This slide shows that the premerger GBDC portfolio and the postmerger GBDC portfolio are substantially similar in terms of their diversification, both by asset type and by obligor. You'll recall that over 98% of GBDC's investments at fair value overlap with those of GCIC at the time of the merger. This is why we described the merger as, in some ways, GBDC buying more of itself at discount. Postmerger GBDC's investment portfolio was $4.3 billion at fair value at September 30, making the company the fifth largest externally managed publicly traded BDC by assets.

One important implication of the increased size and scale of the postmerger GBDC is that it increases the company's earnings power going forward. As a result of its increased earnings powers, the GBDC Board of Directors declared an increased quarterly distribution of $0.33 per share from $0.32 per share payable on December 30 to stockholders of record as of December 12, 2019.

Next, I'm going to go into GBDC's results for the quarter and fiscal year. But before I do so, I think it's important to spend some time on Slide 6 walking through the accounting treatment of the GCIC merger. Starting from left to right, this slide provides an illustration of how the purchase premium, the portion of the purchase price in excess of GCIC's NAV, how that purchase premium is treated for accounting purposes. Because the merger was accounted for as an asset acquisition under GAAP, the purchase premium was allocated pro rata to the former GCIC assets.

As a result, GBDC's initial cost basis in the former GCIC assets equaled their fair value at the time of the acquisition plus the purchase premium. But GBDC uses fair value accounting. So immediately after the closing of the merger, GBDC recognized a onetime unrealized loss equal to that same purchase premium. Effectively, GBDC wrote up the former GCIC assets to fair value plus purchase premium and then wrote down the former GCIC assets to their fair value. This onetime loss, a paper loss in accordance with GAAP, is a noncash item that doesn't reflect any economic loss experienced at GBDC.

Slide 7 provides an illustration of how we expect the purchase premium will flow through the income statement on a go-forward basis. In short, GBDC will amortize the purchase premium over the life of the purchased loans through interest income as a reduction to net investment income or NII. Having said this, the purchase premium amortization won't result in any reduction to net income as any decrease to NII will be offset by a corresponding reversal of the unrealized loss, as shown in the middle graph.

In order to make GBDC's postmerger financial results easier to compare to premerger results, we'll be referencing some supplemental financial measurements, in addition to GAAP measurements, each of which seeks to strip out the impact of the purchase premium write-off. Let me briefly describe them. We'll talk about adjusted net investment income and adjusted net investment income per share. These will exclude the amortization of the purchase premium and the accrual for the capital gain incentive fee required under GAAP. We'll also talk about adjusted net realized and unrealized gain/loss and adjusted net realized and unrealized gain/loss per share. These will exclude both the onetime unrealized loss resulting from the purchase premium write-down and the corresponding reversal of the unrealized loss from the amortization of the purchase premium. And finally, we'll talk about adjusted net income and adjusted earnings per share. These will calculate net income and earnings per share based on adjusted net investment income and adjusted net realized and unrealized gain/loss.

As depicted on this slide, after the onetime unrealized loss on the purchase premium write-down, adjusted net income is expected to equal GAAP net income, as any purchase premium amortization is anticipated to be offset by a corresponding reversal of the unrealized loss on the GCIC loans acquired.

So with that by way of context, let's turn to Slide 8 and look at the results for the quarter. Net investment income per share, or as we call it income before credit losses, for the quarter ended September 30 was $0.37 per share as compared to $0.32 per share for the quarter ended June 30, excluding $0.02 per share in purchase premium amortization from the GCIC acquisition and a $0.06 per share reversal in the accrual for the capital gain incentive fee. Adjusted net investment income per share for the quarter ended September 30 was $0.33 per share. This compares to adjusted net income per share of $0.32 per share for the quarter ended June 30.

Net realized and unrealized loss per share for the quarter ended September 30 was a loss of $1.39 per share, and that was comprised of $0.02 per share of net realized and unrealized gain on investments in foreign currency, $1.43 loss per share of net unrealized depreciation resulting from the onetime write-down of the GCIC acquisition purchase premium and a negative $0.02 reversal of unrealized loss resulting from the amortization of the purchase premium. Adjusted net realized and unrealized gain per share was $0.02 per share when excluding the $1.43 loss per share of net unrealized depreciation resulting from the write-down of the GCIC acquisition purchase premium and negative $0.02 reversal of unrealized loss resulting from the amortization of the purchase premium. So this compares to net realized and unrealized loss per share of less than $0.01 per share during the quarter ended June 30.

Earnings per share for the quarter ended September 30 was a loss of $1.02 per share as compared to earnings per share of $0.32 for the quarter ended June 30. Again, this loss per share does not represent an economic loss since it was the result of a onetime charge to net income from the write-down to fair value of the GCIC purchase premium. Adjusted earnings per share for the quarter ended was $0.35 per share, which is calculated as the sum of adjusted net investment income per share, which is designated with the A in this slide, and adjusted net realized/unrealized gain per share, which is designated by the B in the slide. Once again, you can see the increase in our NAV per share to $16.76 as of September 30 in the highlighted row.

Finally, as I mentioned earlier, on November 22, our Board declared a quarterly distribution of $0.33 per share, an increase resulting from the incremental earnings power from the acquisition of GCIC. It also approved a special distribution of $0.13 per share. Both of these are payable on December 30 to stockholders of record as of December 12. The special distribution is due to taxable income exceeding distributions over the prior year. I'd point out this is the fourth consecutive year we will be paying a special distribution.

The quarter and fiscal year ended September 30 were very strong for GBDC. We're particularly proud of GBDC's 12.8% return on NAV for the year. We calculate this using the change in NAV per share for the year plus distributions paid divided by NAV per share at the beginning of the year. We think this is a very important measure of our work as managers. The strong results were driven by consistent investment income, good credit results and an accretive merger.

I'll now hand the call over to Ross to go through those in more detail.

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Ross A. Teune, Golub Capital BDC, Inc. - CFO & Treasurer [3]

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Thanks, David.

I'll begin on Slide 9. This slide highlights our total originations of $130.4 million and total exits and sales of investments of $43.7 million during the quarter. As shown in the bottom table, the weighted average rate of 7.4% on new investments this quarter was down from 8.1% in the previous quarter primarily due to a declining LIBOR rate. The rate on loans that paid off decreased to 7.8% from 8.8% in the prior quarter. As a reminder, the weighted average interest rate on new investments is based on the contractual interest rate at the time of funding. For variable rate loans, the contractual rate will be calculated using current LIBOR, the spread over LIBOR and the impact of any LIBOR floor.

Turning to Slide 10. This slide shows that our overall portfolio mix by investment type has remained consistent quarter-over-quarter and consistent postacquisition, with one stop loans continuing to represent our largest investment category at 81%. Due to the GCIC acquisition, GBDC's average investment size increased to $17.3 million at September 30. Important to note here is that despite the growth, GBDC's investment diversification by portfolio company remained below 0.5%, as GCIC's portfolio was also highly diversified.

Turning to Slide 11. Our debt investment portfolio remains predominantly invested in floating rate loans and defensively positioned in resilient industries.

Turning to Slide 12. This graph summarizes portfolio yields and net investment 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, excluding the amortization of upfront origination fees and purchase price premium. The income yield decreased by 20 basis points to 8.4% for the quarter ended September 30 primarily due to a corresponding decrease in LIBOR during the quarter. The investment income yield, or the dark-blue line, which includes amortization of fees and discounts, decreased to 8.8% during the quarter due to the decrease in LIBOR and also due to a decline in OID amortization and prepayment fee income.

The weighted average cost of debt, the aqua-blue line, decreased by 20 basis points to 4% due to the corresponding decrease in LIBOR. As a result, our net investment spread, or the green line, which is the difference between the investment income yield and the weighted average cost of debt, declined by 20 basis points to 4.8% but has remained relatively steady or stable over the past few quarters.

Looking to the next 2 slides. Fundamental credit quality remains strong as nonaccrual investments as a percentage of total debt investments at cost and fair value declined from 0.7% and 0.4%, respectively, at June 30 to 0.5% and 0.3%, respectively, as of September 30. In addition, as shown on Slide 14, over 90% of the investments in our portfolio have an internal performance rating of 4 or higher as of the end of the quarter. As a reminder, independent valuation firms value approximately 25% of our investments each quarter.

Reviewing the balance sheet and income statement on Slides 15 and 16. We ended the quarter with total investments at fair value of $4.3 billion, total cash and restricted cash at $84.2 million, and total assets of $4.4 billion. Total debt was $2.1 billion, which includes $1.1 billion in floating rate debt issued through our securitization vehicles, $287 million of fixed rate debentures and $761.8 million of debt outstanding in our revolving credit facilities. Total net asset value per share increased by 5.1% to $16.76, as previously highlighted by David. And our GAAP debt-to-equity ratio was 0.96x, while our regulatory debt-to-equity ratio was 0.83x.

Moving to the statement of operations. Total investment income for the quarter ended September 30 was $49 million, an increase of $6.9 million from the prior quarter primarily due to the acquisition of the GCIC investments on September 16. On the expense side, total expenses were $22.2 million, a decline of $0.5 million. Our operating expenses were essentially flat quarter-over-quarter, as higher interest expense from the assumption of GCIC debt facilities was offset by a full reversal of our accrued capital gains incentive fee caused by the write-down of the purchase price premium.

Excluding the impacts of the purchase price premium write-down and incentive fee reversal, adjusted net investment income per share was $0.33, and adjusted earnings per share was $0.35.

Turning to Slide 17. This graph illustrates our long history of steady growth in net asset value per share since our IPO. For historical purposes, we have presented NAV per share both including and excluding special distributions.

Turning to Slide 18. The graph at the top summarizes our annualized return on average equity over the past 5 years, which has averaged 8.6%. The graph on the bottom summarizes our regular quarterly distributions, which have remained stable at $0.32 per share, which has generally been consistent with our pre-GCIC acquisition net investment income per share when excluding the GAAP accrual for the capital gains incentive fee.

Turning to Slide 19. This slide provides some financial highlights for our investments in our 2 senior loan funds. The annualized quarterly returns for GBDC SLF and GCIC SLF were 14.3% and 8.1%, respectively. Total investments at fair value for GBDC SLF and GCIC SLF as of September 30 were $152.3 million and $111.6 million, respectively, a decrease of 1% or $1.5 million and 1.2% or $1.4 million from June 30.

The next slide summarizes our liquidity and investment capacity at the end of the quarter in the form of restricted and unrestricted cash, availability on our revolving credit facilities and debentures available through our SBIC subsidiaries.

Slide 21 summarizes the debt -- summarizes the terms of our debt facilities as of September 30. And at the bottom of the slide, this illustrates our continued focus on optimizing GBDC's funding with diversified, long-term and stable sources of debt capital. Subsequent to quarter end, on October 11, we amended our revolving credit facility with Morgan Stanley and increased the borrowing capacity from $300 million to $500 million. In addition, on October 28, we increased the commitment on our unsecured line of credit with GC Advisors to $100 million.

Lastly, on Slide 21 (sic) [Slide 22], our Board declared a regular distribution of $0.33 a share and a special distribution of $0.13 a share, both payable on December 30 to shareholders of record as of December 12.

And with that, I'll turn it over to Gregory with some closing remarks.

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Gregory A. Robbins, Golub Capital LLC - MD & Co-Head of the Investor Partners Group [4]

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Thank you, Ross. Before we go to Q&A, I want to discuss 2 strategic themes for fiscal 2020: delivering benefits from the Golub Capital platform and delivering benefits from the merger.

Let me first talk about the platform. You've heard us talk in previous quarters about our strategy of leaning on our competitive advantages as one of the largest players in sponsor finance, advantages like sponsor relationships, incumbencies, reliability, industry expertise and breadth of financing solutions.

I want to highlight a new one today, our capacity to lead large one stops. Prior to 2019, one stops in excess of $500 million in size were unusual. There were a few. [Collecting] 2016 comes to mind. But so far in 2019, we are aware of 21 one stop deals in excess of $500 million. This is an enormous market shift. Large one stops have emerged as a viable option for many larger deals, and Golub Capital is the clear market leader in this emerging niche. We've led 12 of those 21 deals. No other lender comes close to our market share. We anticipate that the trend toward larger one stops will continue in fiscal 2020 and may even accelerate if the syndicated market gets choppier. We think these loans represent very attractive risk/reward in today's market.

Let me move on and discuss the second strategic theme. We plan to take advantage of our enlarged scale now that the merger is complete. Two projects we have underway now illustrate this. We continue to study ways to further diversify and strengthen our liability structure, and we are studying potentially ending our senior loan fund joint ventures. There's a strong argument that these funds introduce unnecessary and costly complexity postmerger.

With that, let me thank you for your time today and for your partnership. And Jennifer, if you could open up the line for questions.

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Questions and Answers

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Operator [1]

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[Operators Instructions) Our first question comes from the line of Fin O'Shea with Wells Fargo Securities.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [2]

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Congratulations as well on the completion of the merger and the better-than-expected results on the net asset value side at least. Can -- my first question, can you expand a bit on studying the ending of the SLF programs? We've seen some BDCs do this. And yes, it's less complex, but it's typically -- the immediate impact is more economics to the manager. So can you kind of give us your view of the major negative that would maybe more than offset that?

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David B. Golub, Golub Capital BDC, Inc. - CEO & Director [3]

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So let me go back in time. When we created the SLFs, we did it in an environment where traditional senior debt was much more attractive from a risk-return standpoint and where GBDC was constrained by the 1x regulatory leverage limitation. Clearly, all those facts on the ground have now changed. As Gregory mentioned, we're now looking at exploring with our partners whether it makes sense to wind down these programs and bring the assets on balance sheet. If you look at the information in our supplementary reporting, you'll note that the leverage level in the SLFs today are comparable to the leverage levels in GBDC balance sheet. And Fin, as you know, based on where we stand in terms of our fee structure, the difference in fees associated with -- moving forward with full consolidation of the SLFs, it's not -- there's no material difference because any increase in management fees would result in a decrease in incentive fees under our catch-up. So this is purely about making our financial statements easier to understand. We've gotten a lot of questions over the last couple of years about the SLFs, and it's clear that there's a price to be paid for the complexity. And we don't think that price is worth it.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [4]

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And another one just on the market and the new or expanded opportunity in large one stops. I want to ask about a specific deal that was closed quarter, Parts Town, and it was reported that the funds and the syndication business within Golub clogged up to provide execution. So I guess, one, is that correct, of course, would be my first question. And then if so, how does that solution come about? So what's the sort of -- how you do that together and the why in terms of a good solution for both parts of your business?

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David B. Golub, Golub Capital BDC, Inc. - CEO & Director [5]

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Sure. So by way of context, Berkshire Partners bought Parts Town in mid-November. We worked with Berkshire to provide a compelling financial solution for Berkshire in the context of that acquisition. It's a bit less than a $900 million facility. It's a one stop. It's of a size where it's large -- it's too large even for Golub Capital to hold all of. So we worked with Berkshire to develop a list of partners to bring into the transaction. And as you put it, Fin, our cap markets team worked with their counterparts at Berkshire to build a plug to enable Berkshire -- to be able to take advantage of a financing structure, which they deemed far more advantageous to the company than a traditional broadly syndicated solution.

From a GBDC standpoint, this was, in my judgment, a very attractive transaction because GBDC got the opportunity to participate in the portion that the Golub platform held in the deal. And from a Berkshire standpoint, it illustrated a lot of the strengths, the competitive strengths of the Golub platform. As Gregory mentioned, there've been 21 of these $500 million-plus one stops, and we, at Golub Capital, have led more than half of them. No other [range] was close. So this is a great example. When we talk about being a strategically important partner to our sponsor clients, this is what -- this is an example of what we mean. We were able to deliver a solution that very few others, if any others, would have had the capacity to be able to do.

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Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [6]

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And one more, if I may, for now. Can you -- Greg, you said that these -- your platform, you're finding these larger deals attractive that have been -- that have taken place in 2019 and continue on, let's say, the plus $500 million size in private deals. Can you give us some, I guess, recent historical context as to how understanding today's -- it's hard to find good paper. But more historically, how attractive is this paper in terms of the execution you're providing? If there was a spectrum of private credit execution and broadly syndicated execution, is this paper halfway in between? Or is it more toward one side or the other?

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David B. Golub, Golub Capital BDC, Inc. - CEO & Director [7]

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So I'm not completely sure I understand the question, Fin. But let me give it a go, and please come back to me if I haven't answered exactly what you're looking for. When we work with a private equity firm and talk about providing a unitranche solution, they're obviously very smart and talented and have their own internal groups that are focused on developing the right financing structure for the deal they're doing. And they evaluate what they're going to choose by comparing all those different alternatives. So they'll look, in this case, at a one stop solution, and they'll compare that to a first lien, second lien, broadly syndicated solution. They may compare it to a high-yield issuance. They have a variety of different approaches that they're exploring. So it's never the case that we win a mandate to do a one stop, where it's not the -- perceived to be the best answer. What are the decision criteria that a sponsor uses in evaluating what I mean by best? Well, one of the criteria would be rates, would be spreads. A second would be quantum of debt, and a third would be documentation terms and covenants. A fourth would be ease of getting it closed, certainty, reliability, capacity to scale it up over time without having to refinance and pay all of the origination fees over again, the nature of the partnership that they have with the lender, whether it's a relationship arrangement or whether it's more transactional. All of these characteristics feed into the private equity firm's decision about which kind of financing to choose.

I think when you look at these large one stops, what you find is that the sponsors who choose these large one stops are choosing them because of the pluses, which would include confidentiality, reliability, speed, reasonable costs, some likely to be that the one stop is sort of the cheapest option, but they're also not meaningfully more expensive and dramatically improve flexibility in a relationship orientation. So every time a sponsor looks at a financing decision, they're going to need to make a judgment about which financing strategy makes the most sense. It's never going to be one size fits all. We're never going to be in a world where there's always the one best answer for all deals. Every deal is going to need to be looked at individually.

What I think has changed, and this is the point Gregory was making, is that until very recently, the large one stop wasn't one of the options on the table. Now it's one of the options, and we think that it's growing in popularity and will continue to grow in popularity. And we think that's good for us at Golub Capital because we're in the catbird seat and market leadership in this emerging niche, and we think it's good for GBDC because we think the paper that we're creating through these large one stops has very attractive risk-reward characteristics.

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Operator [8]

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

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [9]

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You've given us a lot of color about how the combination with GCIC benefits investing, et cetera, et cetera. What about if you can add any color on the liability side? I mean, obviously, you've got a very diversified liability structure right now. But also, some of that's resulting from the combination of the 2 entities. I mean, is there any thought to either rationalizing or restructuring that liability structure in some way? And is there a prospect of any -- a spread phasing on the liability cost side given your newfound scale?

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David B. Golub, Golub Capital BDC, Inc. - CEO & Director [10]

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So I think the word I'd use rather than rationalize or restructuring would be optimizing. I think there are some opportunities for us to optimize the liability structure. One thing you'll probably always see in looking at the right side of GBDC's balance sheet is a real focus on risk mitigation on our liability side. And what I mean by that specifically is we don't ever want to be too reliant on any one counterparty. We don't want to have too many dollars in a single facility or with reinvestment end-period dates all at the same time. So we think having a significant number of different facilities with different counterparties with different reinvestment periods with different characteristics in terms of what kind of loans fit best into that. Those are likely to be characteristics you're going to continue to see in looking at the right-hand side of our balance sheet.

Having said that, we are looking at additional securitizations. We're always going to continue to evaluate whether bond issuance makes any sense. There are a lot of options that we have that we think it's appropriate to explore now all with the goal of optimizing the liability structure.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [11]

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On that product-related -- obviously, there's a lot of overlap between the GCIC and GBDC portfolios, as you said, 98%. So presumptively, from that, some of those overlaps occur in different locations on the balance sheet, if you will, i.e. -- so on the GBDC side, you can have an asset and an SBIC SPV. And then on the GCIC side, obviously, it didn't have any SBIC. So presumptively, you've got some assets now that exist in different -- for the lack of a better term, different legally structured SPV vehicles that consolidate onto your balance sheet. Does that create any incremental difficulties either as pledging them to your bank facilities, securitizations, et cetera, and/or any potential cost savings there over time if those structures -- those borrowers kind of merge into a single location on your balance sheet?

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David B. Golub, Golub Capital BDC, Inc. - CEO & Director [12]

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Not -- neither, I would say, Robert. I mean, we've operated even within GBDC and GCIC over time with loans that we've targeted to pieces where one might be in one bank facility and another piece might be in a securitization or even in multiple securitizations. So this is how we've always done it, and the combination doesn't really change anything in respect of how we organize assets.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [13]

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Okay. Got it. Appreciate that. And then one more, if I can. On the kind of overhead expansion and put it in context, obviously, as you said, with the structure of how your management fees are right now, it really doesn't matter much to shareholders in terms of generating the return because it just moves the location where expenses show up. But long run for this -- for the newly enlarged business, what do you think the kind of overhead expense OpEx ratio to assets, however you want to put it, could normalize out to? Because obviously, right now, it doesn't matter. But hypothetically, if sometime in the distant, distant future, rates do actually go up high enough that you come out of a catch-up, then it can potentially start to matter. So any color on that front?

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Jonathan D. Simmons, Golub Capital BDC, Inc. - MD & Co-Head of Corporate Development [14]

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Yes. Robert, it's Jon. We -- and I believe the number we had disclosed previously when talking about the merger was expense synergies of about $1 million on a combined basis. And now working through things, I don't think we have seen anything for us to materially revise that forecast. These expenses were associated with, for example, 1 audit instead of 2 audits and 1 set of directors instead of 2 sets of directors, things of that sort. I agree, Jon.

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Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [15]

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Got it. I appreciate that and thank you. And congrats on closing the deal.

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Jonathan D. Simmons, Golub Capital BDC, Inc. - MD & Co-Head of Corporate Development [16]

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Thank you.

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Operator [17]

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[Operators Instructions) Our next question comes from the line of Ryan Lynch with KBW.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [18]

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Congratulations on officially closing the merger. First question I had was on your comment about potentially ending your SLF funds. You mentioned, as when you originally formed those funds, that you saw them as an attractive opportunity given that the senior debt was more attractive asset class at that time as well as you guys had leverage constraints of 1:1 leverage. And now that asset class isn't as attractive, and you guys don't have the leverage constraints. So I'm wondering if you -- or if you actually wind down the SLFs that would actually reduce some off-balance sheet leverage and reduce actually the effective leverage within GBDC, so is there any plan on increasing the balance sheet leverage to offset that? Or do you plan on running at the same target leverage range even if those SLFs are -- will eventually wound down?

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David B. Golub, Golub Capital BDC, Inc. - CEO & Director [19]

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So we're entering into hypothetical land. So let me start with the caution that we're entering in the hypothetical land. But let me tell you how I think we think about this. Right now, if you look at the 2 SLFs, they are, on average, operating at approximately the same debt-to-equity ratio as GBDC. So if we were to consolidate those today by, for example, purchasing the stake held by our partner, the impact on the leverage ratio of GBDC would be very small. We -- if we -- whether we go forward with that kind of plan or don't, I would anticipate that we will continue to deemphasize investing in traditional middle-market, first lien debt and continue to emphasize one stops, as we have been for many years now. And you can see that in the chart in the earnings deck that shows the composition of the portfolio by loan type.

The second part of your question is what is our thinking on leverage ratio within GBDC, and I would actually say that's a separate question from the question about the SLFs. We're always looking at the question of what's the optimal leverage ratio for GBDC. And when we got approval for being able to increase leverage, what we said then and remains true today is -- and we're going to keep relooking at that with an eye toward figuring out what's the best level of leverage from a shareholder standpoint. And I anticipate, Ryan, that we'll continue to revisit that question over time.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [20]

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Okay. That's helpful, and understood. I wanted to revisit your guys' commentary around the 12 unitranche deals this year that were over $500 million. Could you give a ballpark of -- out of those 12 deals and the amount that you guys actually held across the Golub platform, what percentage were those 12 unitranche deals as a percentage of the total capital you deployed? Because what I'm trying to get a sense of is I don't know the ultimate size of those deals or the leverage on those deals, but just using simple math of a $500 million deal, which should be on the lower end, because you said it was at $500 million or above with 6x leverage, that would imply maybe an average EBITDA of $83 million. So those seemed to be kind of more on the upper middle market-sized deals. And so I'm just wondering as a percentage of deal flow, what percentage of the deal flow are these larger deals from the deal flow you guys did in 2019? And how are you guys thinking about lending to potentially some more of these upper middle-market companies versus kind of the core middle-market, which I think you guys have really focused on historically?

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David B. Golub, Golub Capital BDC, Inc. - CEO & Director [21]

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Let me be clear: we're not changing our focus away from what we've done historically. This is an additional niche, not a change in strategy. We've historically been financing companies in -- with our sweet spot being in the EBITDA range between $10 million and about $75 million. That is -- that has not changed. That will not change. What our capabilities have enabled us to do is to become involved in somewhat larger transactions than we have been able to lead before. And it's not just us. There is -- we've developed a market for these larger one stops. And so when they are larger than we can hold across the Golub platform, we have a group of like-minded investors who we can bring in to make the solution work for sponsors.

I'm going to come back to you with the exact answer to your question because it's calculable. We have publicly disclosed the amounts that GBDC has invested in these 12 deals, and we can divide that by the total originations that GBDC's had over the course of the year. So I always rather use real data than speculation. My guesstimate is that it's not a huge proportion of overall originations. My guess is it's in the 20% range. But let us come back to you with exact numbers.

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Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [22]

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Okay. That would be helpful. And that would definitely give me a frame of reference of kind of how it's gotten more kind of one-offs or just to add a tool in the tool box versus a strategy shift, which it sounds like you guys aren't really doing. So those are all my questions. I appreciate the time today.

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Operator [23]

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[Operators Instructions) And we're showing no further questions on the audio lines at this time. I'll turn the conference back over to you.

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David B. Golub, Golub Capital BDC, Inc. - CEO & Director [24]

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Thanks, operator. And just thank you all for your time today. And on behalf of everybody at Golub Capital, we want to wish you all a very Happy Thanksgiving.

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Operator [25]

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That does conclude today's conference call. We thank you for your participation and ask that you kindly disconnect your lines. Have a good day, everyone.