U.S. Markets open in 4 hrs 26 mins

Edited Transcript of GBDC earnings conference call or presentation 29-Nov-18 6:00pm GMT

Q4 2018 Golub Capital BDC Inc Earnings Call

CHICAGO Jan 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Golub Capital BDC Inc earnings conference call or presentation Thursday, November 29, 2018 at 6:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* David B. Golub

Golub Capital BDC, Inc. - President & CEO

* Gregory A. Robbins

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

* Ross A. Teune

Golub Capital BDC, Inc. - Treasurer & CFO

================================================================================

Conference Call Participants

================================================================================

* Christopher Robert Testa

National Securities Corporation, Research Division - Equity Research Analyst

* Finian Patrick O'Shea

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Greg Mason

* Robert James Dodd

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

* Ryan Patrick Lynch

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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to the Golub Capital BDC, Inc.'s September 30, 2018 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 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 BDC, Inc.'s filings with the 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 homepage of the company's website, www.golubcapitalbdc.com, then click on the Events/Presentations link. Golub Capital BDC's earnings release 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 will now turn the conference over to David Golub, Chief Executive Officer of Golub Capital BDC. Please go ahead, sir.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thank you, Jennifer. Hello, everybody, and thanks for joining us today. I'm joined by Ross Teune, our Chief Financial Officer; Greg Robbins, Managing Director; and Jon Simmons, Director here at Golub Capital.

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. Yesterday, we issued 2 press releases. An earnings press release for the quarter and fiscal year ended September 30, and an announcement that GBDC had entered into a merger agreement with Golub Capital Investment Corporation, or GCIC. We also posted an earnings presentation and a presentation about the merger on our website. We're going to refer to both of those presentations throughout the call today.

I'm going to start today's discussion with the merger announcement and then we're going to shift and Gregory Robbins is going to review the results for the quarter and the fiscal year, and we'll end with Q&A on both topics.

You've heard me say many times that at Golub Capital, we strive to be boring, but today is an exception. I'm excited about and pleased to share details with you about GBDC's agreement, subject to stockholder approval, to merge with GCIC. I'm going to refer in the next few moments to the overview of proposed merger with Golub Capital Investment Corporation that's posted on the website.

Before I start, please note that additional information regarding the proposed merger and the participants in the solicitation of proxies in connection with matters requiring stockholder approval will be available in the joint proxy statement that GBDC and GCIC intent to file with the SEC alongside the prospectus of GBDC. Stockholders are urged to read the joint proxy statement-prospectus when it's available as well as other documents filed with the SEC. These filings will be available free of charge at the SEC's website, sec.gov and filings by GBDC will also be available at GBDC's website, golubcapitalbdc.com.

Let me start in talking about the merger with some context. Our philosophy about issuing new GBDC shares has been consistent since the company's IPO in April of 2010. We'll issue new shares if it's good for existing stockholders, good for new stockholders and good for the company. We applied this framework throughout our process of evaluating a potential merger with GCIC. GBDC's board, along with its financial adviser and legal counsel went through a careful methodical process and concluded that a merger with GCIC meets this test.

Let me briefly describe the transaction, and I'd refer you to Page 3 of the presentation. The transaction is a stock-for-stock merger with each GCIC stockholder receiving a fixed 0.865 shares of GBDC per share of GCIC. The combined company will continue to trade under the ticker GBDC. Post the merger, GBDC will operate a lot like pre-merger GBDC. Its Investment strategy, its financing strategy, its management fees, income incentive fees, income incentive fee hurdle rates all that stays the same. A couple of notable items about the merger. First, it's the board's present intention to increase the dividend per quarter to $0.33 per share after the closing of the merger, thus provided that the board reserves the right to revisit this intention if market conditions or GBDC's prospects meaningfully change. And second, that Golub Capital entity intends to purchase at least $40 million of GBDC's shares after the merger closes.

As for next steps, GBDC and GCIC expect to file the joint proxy I referred to a moment ago, in December. And the transaction is anticipated to close in the first half of 2019 subject to stockholder approvals, amendment of the investment advisory agreement and other customary closing conditions.

We believe the merger with GCIC is compelling for 6 primary reasons. I'm going to summarize these now, and I'm going to go into more detail on each. First, the merger is accretive to GBDC's net asset value per share based on September 30, 2018, GBDC NAV and GCIC NAV. We estimate the degree of accretion to be about 3.6%. Second, because GBDC is traded at a 15% premium to NAV on average over the past 3 years, we believe the accretion to GBDC's NAV per share could drive appreciation of GBDC's share price. Third, we expect the scale of the combined GBDC, GCIC to deliver improved trading liquidity and broader research coverage. Fourth, we expect the portfolio of the combined company to look a lot like stand-alone GBDCs with no meaningful change in diversification, asset type or credit characteristics. In fact, over 96% of GBDC's investments at fair value as of September 30, 2018 overlap with those of GCIC. Fifth, we expect the combined company to have better access to the securitization market than either company on its own, and we think that's particularly important in the context of our recently having received no-action relief permitting both GBDC and GCIC once again to issue new securitizations. Sixth and finally, we expect some operational synergies from eliminating redundant expenses.

Before I discuss each of these elements in more detail, I want to provide some background information on GCIC, if you'll flip to Page 5 of the presentation. GCIC is a nontraded, externally managed BDC and has the same investment adviser as GBDC. It commenced operations in December of 2014, and it raised -- through a series of closings on its private placement, it raised $1.3 billion of investor commitments. GCIC was designed for long-term institutional investors and accounts among its shareholders, marquee pension funds, insurance companies, endowments and foundations. As of September 30, GCIC has an investment portfolio of over $1.6 billion, about the same as GBDC's. And GCIC has performed very well for its stockholders. The company has delivered 15 consecutive profitable quarters, and its average return on equity, since inception, has been 8.6%.

As with GBDC, we believe GCIC's strong performance reflects the excellent credit quality of its underlying portfolio. GCIC's had net realized and unrealized gains on its investments for 12 out of 15 quarters since inception. And today, over 90% of its investments are rated in one of the top 2 categories on GC adviser's internal performance rating scale.

So with that context, let's drill down on the 6 advantages of the merger that I outlined. On the following page, you can see the merger would be accretive to GBDC's NAV per share. Let me explain how and how much. So GBDC's issuing share is valued at a 15% premium to its NAV as of September 30 to buy GCIC at a 7.05% premium to GCIC's NAV. Based on these premia and based on September 30 numbers, GBDC's NAV per share will increase as a consequence of the transaction by about 3.6% or $0.59 a share, going up from $16.10 per share to $16.69 per share.

To refresh your recollection, this data is on the following page on Page 7. GBDC currently trades at about a 15% premium to NAV. And if you look at the last 3 months, 6 months, 1 year, 3 years, 5 years or since IPO, it's been in that 15% range. So assuming GBDC continues to trade at a 15% premium to NAV, the accretion to GBDC's NAV per share should drive appreciation of GBDC's share price in a like amount. In addition to increasing GBDC's NAV per share, the transaction will add $1.7 billion of assets to GBDC's portfolio based on fair value as of September 30.

And you can see on Page 8, this should make the combined company the fourth largest externally managed, publicly traded BDC in the market by assets. Why is that valuable? It's valuable because our analysis suggests larger BDCs generally had improved trading liquidity. You can see this on Page 9. Greater liquidity gives existing stockholders more flexibility to manage their investments and should attract new investors who want a more liquid vehicle than stand-alone GBDC. Our analysis also suggests that larger BDCs generally have broader coverage by research analysts and greater institutional ownership. You can see this on Page 10. As a consequence, this means post-merger, GBDC may have a larger -- may have a higher trading value and may have greater flexibility to raise opportunistic capital on attractive terms.

Although GBDC will be larger post-merger, we expect very little change about its investment portfolio. On page 11, you can see that over 96% of GBDC's investments at fair value overlapped with GCIC's. You can also see that if you look at diversification by Obligor, changes very little, going to a level of diversification that's a little bit better. Top 10 investments are 19% for the combined company versus 20% for GBDC standalone. If you look at the following page, you can see the mix by security type, by performance rating and by industry, all of them changed meaningfully.

While we expect fundamental change to the asset side of GBDC's balance sheet, we believe the combined company will be well positioned to improve its liability profile. We highlight this on Page 13. The key change is that we expect the increased scale of the combined company to make it easier to increase the portion of funded debt in the form of securitizations. Why does that matter? Well, now that we can perceive the no-action letter from the SEC, we've cleared a path to use securitizations again. And as many of you know, I've talked about it before, we believe securitizations can offer a lot of advantages over traditional bank facilities, including lower costs, longer reinvestment periods, longer duration, greater flexibility. So better access to the securitization market should allow the combined company to reduce its funding costs to further diversify its funding sources and to create an even more resilient and flexible balance sheet.

Finally, we expect the combined company to realize operating synergies from elimination of some redundant professional services and other corporate expenses. We're estimating about $900,000 of annual cost savings, that's about 9% of combined company G&A.

So to sum up, we believe the proposed merger with GCIC is very attractive for GBDC shareholders. We believe the combined company maintains all the elements that have made GBDC successful to date. Same strategy, it's a strategy that GBDC has proven. It can sustain consistent dividends and NAV per share growth. By implementing, the combined company would be the fourth largest externally managed publicly traded BDC by assets. The increased scale of the combined company could lead to greater trading liquidity, stronger institutional ownership, broader research coverage, better access to securitization markets and cost synergies.

We'll come back at the end and take questions about the merger. Let's now shift to earnings for the quarter and fiscal year ended September 30. And for that, I'm handing the microphone to my colleague, Gregory Robbins.

--------------------------------------------------------------------------------

Gregory A. Robbins, Golub Capital LLC - MD & Co-Head of the Investor Partners Group [3]

--------------------------------------------------------------------------------

Thank you, David. For the discussion on GBDC's earnings, I will refer to our separately posted quarterly earnings presentation from our website.

The headline is that GBDC had another very solid year in fiscal 2018, despite a challenging, borrower-friendly environment. Let me point out a few highlights on the year. First of all, we generated stable and consistent earnings in excess of our dividend. Growing NAV per share over the course of the fiscal year by $0.02 to $16.10 and paying out an $0.08 per share special distribution. Our return on average equity averaged 8.5% for the fourth quarter ended September 30. In aggregate, we had net realized and unrealized gains on investments. In other words, we had negative credit losses for the fiscal year. And lastly, portfolio risk ratings have remained stable and nonaccrual investments represented only 0.3% of total investments at fair value at 9/30.

Let's now focus on the fourth fiscal quarter of 2018. I'll start with an overview, Ross will provide some more detail, and David will come back at the end for closing remarks and Q&A.

For the quarter ended September 30, 2018, net increase in net assets resulting from operations, or net income, was $15.9 million or $0.26 per share. That's compared to $21.7 million or $0.36 per share for the quarter ended June 30.

Net investment income, or as we call it income before credit losses, was $20.3 million for the quarter ended September 30 or $0.34 per share as compared to $18.7 million or $0.31 per share for the quarter ended June 30. Excluding the $800,000 reversal in the accrual for the capital gains incentive fee, net investment income was $19.5 million or $0.32 per share as compared to $19.4 million or $0.33 per share for the quarter ended June 30. Consistent with previous quarters, we have provided net investment income per share excluding the capital gains incentive fee accrual, as we think this adjusted NII is a more meaningful measure.

Unlike the last 7 consecutive quarters, we do not have net realized or unrealized gains on investments this quarter. However, we continue to see solid investment income from the portfolio and solid overall portfolio credit quality. Net realized and unrealized loss on investments in foreign currency was $4.4 million or $0.08 per share for the quarter ended September 30. This compares to a net realized and unrealized gain on investments of $3 million or $0.05 per share for the prior quarter.

New middle-market investment commitments totaled $182.3 million for the quarter ended September 30. Approximately 14% of new investment commitments were senior secured loans, 85% were one-stop loans and 1% were investments in equity securities. Overall, total investments in portfolio companies at fair value decreased by approximately 0.9% or $15.7 million during the quarter ended September 30, primarily due to net return of capital distributions of $20.1 million from our investments in Senior Loan Fund.

On November 27, 2018, our board declared a quarterly distribution of $0.32 per share and a special distribution of $0.12 per share, both payable on December 28, 2018, to holders of record as of December 12, 2018. The special distribution is due to taxable income exceeding distributions over the prior year. This is the third consecutive calendar year we will have paid a special distribution.

Turning to Slide 4. You can see on the table the $0.26 per share we earned from a net income perspective, the $0.32 per share we earned from a net investment income perspective before accrual for the capital gain incentive fee, and our net asset value per share $16.10 at September 30, 2018. As shown on the bottom of the page, the portfolio remains well diversified with investments in 199 different portfolio companies at an average size of $8.6 million per investment.

With that, I'll now turn it over to Ross, who'll provide some additional portfolio highlights and discuss the financial results in more detail. Ross?

--------------------------------------------------------------------------------

Ross A. Teune, Golub Capital BDC, Inc. - Treasurer & CFO [4]

--------------------------------------------------------------------------------

Great. Thanks, Gregory. Turning to Slide 5. This slide highlights our total originations of $182.3 million and total exits and sales of investments of $168.3 million.

Turning to Slide 6. This slide shows that our overall portfolio mix by investment type has remained consistent quarter-over-quarter, with one-stop loans continuing to represent our largest investment category at 80%.

Turning to Slide 7. This slide illustrates that the portfolio remains 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 classification percentages over the past year.

Turning to Slide 8. The weighted average rate of 8.2% on new investments this quarter was up from 7.8% in the previous quarter due to an increase in the weighted average rates over LIBOR and new investments. The 40 basis point increase in the weighted average rate on new investments was due to a few larger deals with high relative spreads and not a general market move towards higher rates. Due to a few larger payoffs on existing loans with high relative rates, the weighted average rate on new investments that paid off increased to 9.2%. 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 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. Looking first at the light blue line, this line represents the income yield or the amount earned on the investments, including interest and fee income, but excluding the amortization of discounts and upfront origination fees. Due to increases in LIBOR, over the past few quarters, the income yield increased to 8.8% for the quarter ended September 30, as the vast majority of our interest -- as the vast majority of our investments bear interests at a rate that is determined by reference to LIBOR. And rates on variable rate investments have increased as LIBOR contracts have reset. LIBOR contract resets are also the primary cause for the increase in the investment income yields, or the dark blue line, which includes amortization of fees and discounts and the weighted average cost of debt, the aqua blue line.

Moving into the next 2 slides. The number of nonaccrual investments remain flat at 3 investments, as one portfolio company investment was reclassified to accrual status and one additional portfolio company investment was classified as nonaccrual during the quarter. As of September 30, nonaccrual investments as a percentage of total investments at cost and fair value were 0.7% and 0.3%, respectively. These are both down from the prior quarter.

Fundamental credit quality as of September 30 remained strong with approximately 88% of the investments in our portfolio having an internal performance rating of 4 or higher as of September 30 as shown on Slide 10. As a reminder, independent valuation firms value approximately 25% of our investments each quarter.

Reviewing the balance sheet and income statement on Slides 11 and 12. We ended the quarter with total investments at fair value of $1.8 billion, total cash and restricted cash of $45.7 million and total assets of $1.84 billion. Total debt was $845.7 million, which includes $197.5 million in floating-rate debt issued through our securitization vehicles, $277.5 million of fixed-rate debentures and $370.7 million of debt outstanding in our revolving credit facilities.

The total net asset value per share at September 30 was $16.10. Regulatory GAAP debt-to-equity ratio was 0.59x, while our GAAP debt-to-equity ratio was 0.88x, which is below our current target of about 1x GAAP leverage.

Moving to the statement of operations. Total investment income for the quarter ended September 30 was $40.4 million. This is an increase of $2 million from the prior quarter, primarily due to an increase in LIBOR and continued growth in the portfolio. On the expense side, total expenses were $20.2 million, an increase of $0.5 million, which was primarily attributable to higher interest and other debt financing costs associated with the rising LIBOR, and we also had higher incentive fee expense.

Turning to the following slide. The tables on the top provide a summary of our quarterly distributions and return on average equity over the past 5 quarters. Our regular quarterly distributions have remained stable at $0.32 per share, which is consistent with our net investment income per share when excluding the GAAP accrual for the capital gains incentive fee. The annualized quarterly return based on net income has averaged 8.7% for the past 5 quarters. At the bottom of the page, this illustrates our long history of consistently increasing NAV per share over time. For historical comparison purposes, we have presented NAV per share both including and excluding special distributions.

Turning to Slide 14. This slide provides some financial highlights for our investment in Senior Loan Fund, which continues to be impacted by unrealized losses, below target leverage and a shortage of attractive new investment opportunities. Total investments at fair value at September 30 declined by 20.7% to 400 -- to $46.9 million due to a combination of a high level of prepayment activity and a continued shortage of appropriate assets to put into the Senior Loan Fund. Due to the lack of attractive traditional senior secured deals, the Senior Loan Fund did not renew the reinvestment period on its revolving credit facility, but instead, reduced the commitment to advances outstanding and reduced the interest rate by 10 basis points to LIBOR plus 2.05%.

The next slide summarizes our liquidity investment capacity as of September 30 in the form of restricted and unrestricted cash, availability on our revolving credit facilities and debentures available through our SBIC subsidiaries.

Turning to Slide 16. We're very happy to report that on September 16, 2018, we received a no-action relief letter from the SEC that allows us to once again issue term debt securitization. We sought this relief to ensure that we could engage in term debt securitizations under the regulatory framework of the 1940 Act and the risk retention rules mandated by Dodd-Frank. Subsequent to the no-action letter on November 16, we issued $408.2 million in Class A, Class B and Class C-1 notes due to securitization. The Class A notes bear an interest rate equal to 3-month LIBOR plus 1.48%, the Class B notes bear an interest rate equal to 3-month LIBOR plus 2.1% and the Class C-1 notes bear an interest rate equal to 3-month LIBOR plus 2.8% during the reinvestment period. In connection with the debt securitization, we used a portion of the proceeds to repay all outstandings on the revolving credit facility with Morgan Stanley in full, and those agreements governing the facility were terminated.

Turning to Slide 17. At the -- at our board meeting on November 27, our board recommended that we seek stockholder approval at our annual meeting -- our Annual Meeting of Stockholders on February 5, 2019, to increase the company's leverage limitation under the 1940 Act by reducing its required asset coverage ratio from 200% to 150%. The benefits of the increased leverage limitation include increased cushion to the regulatory leverage limit and greater flexibility to pursue cost-effective long-term securitization debt financing.

We currently expect to maintain our 1x GAAP debt-to-equity ratio and do not anticipate making any changes on our investment strategy, credit selection or asset mix.

I'll now turn the call back to David who'll provide some closing remarks.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Ross. So to sum up, GBDC had another solid year in 2018, giving the company strong momentum for the next stage of its evolution, the proposed merger with GCIC. We believe the combined company sustains the characteristics that has made GBDC successful and gives us a number of additional advantages, including accretion to GBDC's NAV per share, greater flexibility to optimize GBDC's liability profile, now that we have no action relief and further advantages of scale.

As for our market outlook, we're hoping that recent volatility in the equity market will translate into more favorable conditions in the credit market. Volatility is usually our friend, but we're not counting on it. We're planning on a continuation of borrower-friendly conditions that have been persisting for the last 2.5 years. I'm aware our strategy remains to focus on investments that leverage what we believe to be the advantages of the Golub Capital platform, sponsor relationships, incumbencies, reliability, market-leading scale, industry expertise and breadth of financing solutions.

With that, we've covered a lot today. I thank you for your patience, and I thank you for your time and your partnership. Jennifer, if you can open the line for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Ryan Lynch with KBW.

--------------------------------------------------------------------------------

Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [2]

--------------------------------------------------------------------------------

And congratulations on the announced merger. I can definitely see it as a lot of nice benefits for GBDC shareholders. But I did want to talk about one concern and get your commentary on it. And that concern is that the merger with GCIC is going to basically unlock that shareholder base of GCIC shareholders who have not had liquidity for many years, and they're now going to receive liquidity via GBDC shares. And there is some fear out there that that could create some selling pressure on GBDC. So can you maybe speak to who composes the shareholder base of GCIC? Is it more institutions or retail? And how do you plan on minimizing that potential negative impact on GBDC's stock price with potential selling pressure post-merger?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sure. Thanks, Ryan for your question. It's a great question. So let me talk a little bit about the first element of your question, which is what are the characteristics of the GCIC investor base. It is not a retail fund. We raised this fund by marketing it to institutional investors. The institutions who're involved are pension funds, endowments, foundations, insurance companies. And in general, they're institutional investors with a very long-term perspective. So my expectation is that many of the GCIC investors will become long-term stockholders of GBDC. Some may consider selling some of their holdings over time. But we also expect that because the transaction is going to approximately double the market capital of GBDC and enhance its liquidity, so we may get some new stockholders who have historically not been interested in investing in GBDC because of its limited liquidity. In addition to that, I said earlier in the call that part of the transaction involves a Golub Capital entity that's going to purchase at least $40 million of GBDC shares after the merger. So while I look at the combination of who we've got in the GCIC investor base and the purchasing of shares that Golub Capital manager affiliate is going to be doing post the merger, I feel -- this is not an area of major concern for me.

--------------------------------------------------------------------------------

Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [4]

--------------------------------------------------------------------------------

Okay. That's helpful color. And then, I guess, also congratulations on the SEC no-action relief. On that point, I take it that you're of the opinion that securitizations are the best form of debt capital going forward given the lower cost and increased flexibility. So as we kind of look at your capital structure, maybe a couple of years down the road, should we expect a vast majority of that to be in securitization debt and maybe leaving the bank facilities is more temporary financing? Or what sort of role do you see the bank facilities playing in the future as you start to build out securitizations?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

So great -- another great question. Let me go back a little bit in context. So just to refresh everybody's recollection, GBDC has been a long-time user of securitizations as one of the forms of financing in the right-hand side of its balance sheet. When risk retention rules were put into effect, GBDC was temporarily precluded from amending or issuing new securitizations because of an odd interplay between '40 Act rules and risk retention rules. We applied for no-action relief from the SEC and it took us 2.5 years to get it. Interestingly, some parties while we were seeking it, said, "Oh, you don't need it." In the no-action relief that we received the -- there is actually an interesting sentence which answers that and which the staff of the SEC acknowledged that they agree with our interpretation that we needed it. Good news is, now we have it, and we plan to go back to our strategy of relying heavily on securitizations, not exclusively, but heavily. If you look at GBDC's funded debt mix today, as of September 30, it was about 23% securitizations, about 32% SBIC debentures and about 44% bank facilities. If I were to describe, target or perfect, it would still include all 3 those categories, but the securitization piece would be meaningfully larger and the bank facility piece would be, call it, 20%, 25%. And there'll be times when it's less than that, and there'll be times when it's a little more than that. But I'd say, as a generalization that one might look at a structure where bank facility is at 20%, 25% or approximately target. Now interestingly, after quarter-end, we completed the first post-no-action letter securitization or GBDC of $408 million securitization that Ross commented on. With that securitization, we will have shifted GBDC's funded debt mix to be very substantially securitization led.

--------------------------------------------------------------------------------

Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [6]

--------------------------------------------------------------------------------

Okay. That's helpful commentary. And then I have kind of a two-part question, both related to the Senior Loan Fund. I see that GCIC has its own Senior Loan Fund. Is it the expectation to collapse those into one fund? Or keep operating them independently and then separately, but likely related? Is it fair to assume that in the current environment that we're in today, given the current deal flow that you're seeing for the Senior Loan Fund, is it reasonable to expect that really that those Senior Loan Funds could just keep winding down and really eventually wind off, especially given you guys' action to not extend the reinvestment period on GBDC's Senior Loan Fund?

--------------------------------------------------------------------------------

Gregory A. Robbins, Golub Capital LLC - MD & Co-Head of the Investor Partners Group [7]

--------------------------------------------------------------------------------

So as I said before, we think that the market opportunity, the risk-reward opportunity for traditional senior debt is the sort that we historically have put in the Senior Loan Fund but it's not that attractive right now. And consequently, we've been allowing these SLF asset both GBDC and GCIC to shrink. I do think there is value in retaining them because market conditions change. And in a different set of market conditions having the ability to expand our SLF might be attractive. We've not made a decision about whether to combine or not combine the 2 SLFs post the merger, but I see a lot of advantages to combining them. It would ease administration and operating costs and financing-related costs. So I think that's something we would look hard at post-merger.

--------------------------------------------------------------------------------

Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [8]

--------------------------------------------------------------------------------

Okay. Maybe, can I just have one follow-up on that? I mean, just a thought process of what to do as far as retaining those Senior Loan Funds in case the market ever changes. Does that change at all if shareholders do approve the 2:1 leverage on your balance sheet? Now you can actually put higher leverage versus putting higher leverage in the Senior Loan Funds off the balance sheet?

--------------------------------------------------------------------------------

Gregory A. Robbins, Golub Capital LLC - MD & Co-Head of the Investor Partners Group [9]

--------------------------------------------------------------------------------

I guess, definitely a consideration. I don't want to get ahead of ourselves. We don't have a merger, and we don't have shareholder approval on the leverage test. But I think your question is a valid question. Certainly, one of the advantages of a Senior Loan Fund is the capacity to use higher degrees of leverage without it having a meaningful impact on your regulatory debt-to-equity. And that whole issue becomes less meaningful in the context of having the ability to utilize a higher degree of leverage. But I want to focus on a different element of this. I mean, when we talked about the possibility of seeking shareholder approval for using higher leverage, Ross said something really important. I want to make sure everybody heard it loud and clear. While we are seeking shareholder approval, we are not planning to use it. We have a target today of 1x GAAP debt-to-equity, and our intention with or without shareholder approval on the test is to continue to have a 1x GAAP debt-to-equity target.

--------------------------------------------------------------------------------

Ryan Patrick Lynch, Keefe, Bruyette, & Woods, Inc., Research Division - MD [10]

--------------------------------------------------------------------------------

Yes, understood. That's an important clarification, important point with the increased leverage.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [12]

--------------------------------------------------------------------------------

I just want 1 quick follow-up to the SLF. Obviously, I mean, you make it sound, David, like you haven't decided yet on whether to combine them. Obviously, they've both got fundamentally the same partner, RGA directly or RGA through Aurora. So I presume you've had some discussions already, and in fact, with view of the merger -- the acquisition of GCIC and the partnership there. So I mean, can you add any more color than that? Or it hasn't been decided? But the same partner has been involved in both of these for a while. So it seems more like you have been...

--------------------------------------------------------------------------------

David B. Golub, Golub Capital BDC, Inc. - President & CEO [13]

--------------------------------------------------------------------------------

You're 100% right, Robert. That it's the same partner, and if we decided that it makes sense to combine the 2 SLFs, I don't think RGA would have any objections to our doing so. But to be very candid, we've had no discussions at this time with RGA about this. Telling RGA about the merger would have been sharing material nonpublic information, and we did not. So this is all separate. We're planning to work through in the coming days.

--------------------------------------------------------------------------------

Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [14]

--------------------------------------------------------------------------------

Okay, got it. On the special dividend, obviously, it's been a pattern for the asset we used to pay out the full amount or roughly the full amount of taxable income. I mean, is that going to continue to be your policy, basically, avoiding excise tax going forward? And if you have any thoughts of that in the context of the GCIC acquisition?

--------------------------------------------------------------------------------

David B. Golub, Golub Capital BDC, Inc. - President & CEO [15]

--------------------------------------------------------------------------------

That will continue to be our policy. That's our intention. We don't understand why it isn't everyone's policy. You have your choices of BDC manager to pay an excise tax or not to pay an excise tax, and you can avoid paying the excise tax by making sure that you have paid out distributions equal to or almost equal to your taxable income. This is not a hard calculus. So it's good for shareholders to avoid paying the excise tax. I anticipate we will continue with that same policy.

--------------------------------------------------------------------------------

Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [16]

--------------------------------------------------------------------------------

Got it. And one more if I can? On the combination, presuming -- I expect you to get shareholder approval, so presuming it goes through, can you give us a little color on the accounting? Obviously, you're buying assets depending where the premium is, et cetera, it's close, but call it 107%, so above principle par. So would the accounting be to take kind of a lower effective yield on those assets? And then if they were held to maturity, you just have a lower effective yield for the life of the asset or if they prepaid early, you'd have kind of an inversed accelerated amortization of a onetime reduction at the top line. Can you give us any color on how that's going to work?

--------------------------------------------------------------------------------

David B. Golub, Golub Capital BDC, Inc. - President & CEO [17]

--------------------------------------------------------------------------------

Sure. It's not intuitive. So for accounting purposes, the merger will be accounted for as an acquisition. So the GBDC will be deemed to be acquiring GCIC and will use purchase accounting. So per purchase accounting, the purchase price of 107% of GCIC's NAV will be allocated to GCIC's assets. We anticipate that the premium will largely be attributed to GCIC's loan assets. So you'll see a nanosecond when GCIC's loans will be written up, but a nanosecond later because GBDC uses fair value accounting, those loan assets will be written down to fair value. Consequently, at the time of the merger, there will be an accounting related onetime purchase accounting charge, essentially equal to the premium that GBDC is paying. After that, GBDC's accounting won't be much impacted by the merger. GBDC's EPS won't be impacted on a go-forward basis by these -- this merger-related purchase accounting charge, but it's going to make the first period after the merger look funny.

--------------------------------------------------------------------------------

Robert James Dodd, Raymond James & Associates, Inc., Research Division - Research Analyst [18]

--------------------------------------------------------------------------------

Does your assessment of NAV acquisition take that charge into account?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [20]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of Finian O'Shea with Wells Fargo Securities.

--------------------------------------------------------------------------------

Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [21]

--------------------------------------------------------------------------------

Just noticing -- shifting to normal stuff. You seem to have a bit of negative originations which was against the trend of many of your peers this quarter. Is this sort of a one-off aberrative type time period? And for more context, do you expect this to come back given potentially more attractive market deal flow today?

--------------------------------------------------------------------------------

David B. Golub, Golub Capital BDC, Inc. - President & CEO [22]

--------------------------------------------------------------------------------

So a couple of things on the quarter and origination in the quarter. I would say that from a gross origination standpoint, it was a reasonably normal quarter. It was unusual in that we had a higher degree of payoffs than usual. And from the standpoint of GBDC, it saw particularly high degree of shrinkage of the SLF. So I'm not anticipating that the pattern that you see this quarter is going to continue. And in fact, my expectation is that the portfolio will grow in coming quarters.

--------------------------------------------------------------------------------

Finian Patrick O'Shea, Wells Fargo Securities, LLC, Research Division - Associate Analyst [23]

--------------------------------------------------------------------------------

Okay. Very well. And then back to the -- just another small question on CLO usage for GBDC, as you said, it wouldn't expand. Do you anticipate that Golub with a larger CLO will still be mainly using the AAA financing?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Yes. I mean, we're not planning, as I mentioned earlier, although we're seeking shareholder approval, to lift the leverage limit. We're not planning on utilizing a higher degree of leverage. So there is -- there'll be very limited reason for GBDC to issue junior securitization liabilities.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

Our next question comes from the line of Christopher Testa with National Securities Corporation.

--------------------------------------------------------------------------------

Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [26]

--------------------------------------------------------------------------------

Many have already been asked and answered. Just touching on the SLFs that are on your balance sheet as well as GCIC. To the extent that whether you end up merging them or not, will you also seek to convert the sub-notes of the LLC equity interest in GCIC much like you did with GBDC when the merger is complete?

--------------------------------------------------------------------------------

David B. Golub, Golub Capital BDC, Inc. - President & CEO [27]

--------------------------------------------------------------------------------

So your question is, will the capital structure of the SLFs be aligned with each other, is that what you mean?

--------------------------------------------------------------------------------

Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [28]

--------------------------------------------------------------------------------

Yes. Correct, yes.

--------------------------------------------------------------------------------

David B. Golub, Golub Capital BDC, Inc. - President & CEO [29]

--------------------------------------------------------------------------------

That'd be my expectation. So again we haven't -- had these discussions yet with RGA and with our board. But my expectation would be that it'll make sense to combine the 2 SLFs, reduce the debt facilities to one from 2 and to align their capital structures.

--------------------------------------------------------------------------------

Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [30]

--------------------------------------------------------------------------------

Got it. Okay. And sticking with that theme, and I know you alluded to this earlier, David, it's one of the earlier questions, but as we started to see hung deals on the market and kind of some backups in spreads, there seems to be -- the outflows in a lot of loan funds. Is it safe to say that there might be at least going forward if these trends persist, greater and greater opportunities that might lead to some net growth in the SLF and maybe even extending the period of reinvestment for the SLFs?

--------------------------------------------------------------------------------

David B. Golub, Golub Capital BDC, Inc. - President & CEO [31]

--------------------------------------------------------------------------------

So you're getting to a great point. So the point you're making is market conditions change and maybe they're changing even now as we speak because there has been -- in recent weeks with the equity market volatility, there has been a pullback in broadly syndicated loan pricing and that in turn is creating some change in terms that are being offered to the market on new broadly syndicated loans being brought to market. The traditional pattern for us middle market lenders is, we watch the broadly syndicated market carefully, not because we are going to the [HIP] with the broadly syndicated market, but because the middle market tends to follow with a lag the patterns that we see in the broadly syndicated market. So if we see a continuation of the choppiness and spread widening that we're seeing in the broadly syndicated market, and we see the typical pattern, which is that those same phenomena shift to be present in the middle market in the coming months, then I can absolutely see a scenario in which it becomes attractive for us to look to ramp back up the SLFs. Now I think there are a lot of ifs in that statement, but your point is exactly the reason why I think it may make sense to the keep the SLFs around.

--------------------------------------------------------------------------------

Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [32]

--------------------------------------------------------------------------------

Got it. Okay. And sticking with the last part of what you've said, if we assume that the broadly syndicated market continues to weaken in terms of pricing or getting more favorable yields, is there any potential to drop down any syndicated loan growth in the SLF?

--------------------------------------------------------------------------------

David B. Golub, Golub Capital BDC, Inc. - President & CEO [33]

--------------------------------------------------------------------------------

It's always possible for us to purchase some more broadly syndicated or upper middle-market loans into the SLF. I think we do want to be mindful as we have in the past of not introducing too much price volatility into GBDC's earnings through a large concentration of broadly syndicated loans that are leveraged significantly. That's not a strategy that we'd be interested in pursuing.

--------------------------------------------------------------------------------

Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [34]

--------------------------------------------------------------------------------

Right. Okay, that's fair. And again, I know you answered the question on -- about targeting 20%, 25% of the revolvers with the remaining being in securitization. As you move towards a substantially larger public fund with enhanced liquidity in the public stock, is your thought process also potentially maybe looking at doing cheap fixed-rate financing, maybe through means of a convertible note or something where it seems that you guys would be able to price that extraordinarily cheap relative to a lot of your peers?

--------------------------------------------------------------------------------

David B. Golub, Golub Capital BDC, Inc. - President & CEO [35]

--------------------------------------------------------------------------------

I think you -- we will definitely look at all available options in respect of debt financing. And that includes convertible notes, it includes unsecured notes, it includes bank facilities. If the SBA rules change and we can expand our participation in the SBA program, that would be on the table as well. To date, as we've looked at convertible notes and unsecured notes, the cost of those kinds of liabilities has been meaningfully higher than the cost of securitization liabilities given our asset mix. And I think that's not true for some other BDCs whose asset mixes don't so easily lend themselves to securitizations.

--------------------------------------------------------------------------------

Christopher Robert Testa, National Securities Corporation, Research Division - Equity Research Analyst [36]

--------------------------------------------------------------------------------

Got it. Okay, that makes sense. And last one from me. Just -- I know you had mentioned that you still want to stay at 1x debt-to-equity on a regulatory basis. Is that a hard stop? Or if we see severe dislocation in the market, would you be comfortable going above it, not substantially above, so 1.5 or maybe 1.1, 1.2 if the market is favorable enough in those conditions?

--------------------------------------------------------------------------------

David B. Golub, Golub Capital BDC, Inc. - President & CEO [37]

--------------------------------------------------------------------------------

So Chris, just to clarify one thing, what I said was and what Ross said is that our target today is a 1:1 GAAP debt-to-equity ratio. So we've been running less than that on a regulatory basis because the SBIC debentures don't count in the context of a regulatory test. I anticipate, I mean, is it a cap -- look, everything has got to be revisited in the context of changes in market conditions that are significant. But I'd characterize our view on this target as -- things would have to change quite meaningfully for us to want to revisit that target.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

(Operator Instructions) Our next question comes from the line of Greg Mason with Ares.

--------------------------------------------------------------------------------

Greg Mason, [39]

--------------------------------------------------------------------------------

Congratulations on the merger. We've been waiting for this. So congratulations. Just wanted to talk quickly on the tax impact on the purchase premium and then write down. Does that create a tax loss carry-forward that you can use to offset potential excise taxes going forward?

--------------------------------------------------------------------------------

David B. Golub, Golub Capital BDC, Inc. - President & CEO [40]

--------------------------------------------------------------------------------

Well, that would make too much sense, Greg. For tax purposes, this is a tax-free transaction and carryover basis applies in this case. The premium write-off and write-down is all GAAP and has nothing to do with tax.

--------------------------------------------------------------------------------

Greg Mason, [41]

--------------------------------------------------------------------------------

Okay, great. And then on the new securitization, if I look at the new securitization versus the 2014 securitizations, spreads on the A Class are up about 50 basis points, spreads on the C Class are up about 100 basis points. And just curious, kind of why you saw that spread increase? It feels like over the past 4 years, CLO spreads have been declining. Anything unusual for that spread to increase? And kind of what's your expectations as you issue more securitizations around that spread on the classes?

--------------------------------------------------------------------------------

David B. Golub, Golub Capital BDC, Inc. - President & CEO [42]

--------------------------------------------------------------------------------

So the spread differential that you're alluding to is a bit apples and oranges because the new issue securitization that we just did has a normal reinvestment period. I think about 4-year reinvestment period, has standard typical new issue securitization. The one that has the very low interest rate on it, we were able to negotiate that very low interest rate because there essentially was no reinvestment period. It was called a static deal where if you get repayments, they go immediately toward repaying the debt securities that are issued. So in any static securitization, the expected life of the securitization is much shorter, and as a consequence, you can typically negotiate cheaper financing. So I'd characterize the financing that we got on the transaction that we just did is very attractive. It's about 40, 50 basis points inside of the all-in costs of financing through bank facilities and has other characteristics that in my judgment they get better.

--------------------------------------------------------------------------------

Greg Mason, [43]

--------------------------------------------------------------------------------

Got it, that makes sense. And then my last question, I was just kind of struck by the fact on the senior loan that you really aren't viewing those assets as attractive, kind of true first-lien assets. Seems to fly in the face of kind of what everybody has been saying over the last 6 to 12 months that you've got to move up the capital stake, first-lien is where the best risk-adjusted returns are, and it sounds like you don't quite see it that way. So just curious if you can give us some more color on why you don't think that top of the stack first-liens are the best risk returns in the current environment?

--------------------------------------------------------------------------------

David B. Golub, Golub Capital BDC, Inc. - President & CEO [44]

--------------------------------------------------------------------------------

Well, I think we've been -- you can see our views in what we've done. We think that the most attractive risk-reward is in one stops. And we think one of the main reasons that that's the case is that our competitive advantages are strongest in the one-stop arena. It's very a challengingly competitive market right now. We've been for 2.5 years in a borrower-friendly, in some respects a progressively more borrower-friendly environment. And in the traditional lower leverage first-lien securities -- first-lien loans, the competition is particularly intense. So we've been focusing on areas that we think are more attractive from a risk-reward standpoint. Those have tended to be areas where our competitive advantages are particularly strong. That's meant repeat obligors, repeat sponsors, one stops, industries where we have particular domain expertise, it's been a pretty consistent theme that I've been talking about for the last couple of years.

--------------------------------------------------------------------------------

Operator [45]

--------------------------------------------------------------------------------

And we are showing no further questions on the audio lines.

--------------------------------------------------------------------------------

David B. Golub, Golub Capital BDC, Inc. - President & CEO [46]

--------------------------------------------------------------------------------

I wanted to take this opportunity to, again, thank everybody. It was an unusually long call, about an hour for us. Very much appreciate your patience. And I know a lot has dropped on you in the last 24 hours. So should you have further questions about the quarter or about the merger, please feel free to reach out to Gregory Robbins or to Ross or to myself. Look forward to talking to you next quarter.

--------------------------------------------------------------------------------

Operator [47]

--------------------------------------------------------------------------------

Ladies and gentlemen, this does conclude today's conference call. We thank you for your participation, and ask that you kindly disconnect your lines.