Golub Capital BDC, Inc. (GBDC) has announced its financial results for the fiscal quarter ended June 30, 2024, revealing a combination of positive developments and challenges. The company completed its second affiliate merger early in June, which was accretive to net asset value (NAV) and led to a reduction in the incentive fee rate. Despite an increase in origination volume and new investment commitments, GBDC faced significant write-downs due to negative outcomes in two credits.
The adjusted net investment income (NII) per share stood at $0.48, with adjusted earnings per share at $0.31. NAV per share increased to $15.32, and the company declared regular and special distributions, boasting an annualized dividend yield of 11.5% based on NAV per share.
Key Takeaways
- GBDC closed its second affiliate merger, enhancing NAV and lowering the incentive fee rate from 20% to 15%.
- New investment commitments totaled $435 million, indicating robust origination volume.
- Two credits experienced negative outcomes, leading to meaningful write-downs.
- Adjusted NII per share was $0.48, and adjusted earnings per share reached $0.31.
- NAV per share rose to $15.32, with a total annualized dividend yield of 11.5%.
- The Board approved additional special distributions to be paid in three installments.
Company Outlook
- The company anticipates a cautious outlook for origination, spreads, and credit.
- Despite some credit losses, GBDC maintains a positive view due to a resilient portfolio and strong earnings potential.
- The portfolio remains highly diversified, with one-stop loans making up about 85%.
- The company is prepared to navigate expected headwinds in the market.
Bearish Highlights
- Negative outcomes for two credits, Imperial Optical and Pluralsight (NASDAQ:PS), resulted in significant write-downs.
- The investment income yield decreased, and the cost of debt increased.
- The weighted average net investment spread decreased to 5.8%.
Bullish Highlights
- The merger with GBDC 3 is expected to be offset by the amortization of the purchase premium over time.
- The company's liquidity position is strong, with approximately $1.6 billion of liquidity at quarter's end.
- The portfolio remains cash flow positive after interest expenses, indicating overall good performance.
Misses
- Non-recurring items such as interest income reversals and non-cash interest expenses impacted the P&L.
- A one-time unrealized loss was recorded due to the merger accounting treatment.
Q&A Highlights
- David Golub stated that the majority of the portfolio companies are performing well and generating positive cash flow.
- The company is not experiencing a dramatic increase in deal activity and is selective about new loan opportunities.
- GBDC aims to maintain a debt-to-equity ratio of 1.15x but is not rushing to reach this level without attractive loan opportunities.
- Fee waivers in the quarter were voluntary, driven by one-time financial noise.
In conclusion, GBDC's quarter was marked by strategic moves that yielded both gains and setbacks. The company's leadership remains cautiously optimistic, emphasizing a disciplined approach to growth and a commitment to shareholder value despite some credit losses and market challenges.
InvestingPro Insights
Golub Capital BDC, Inc. (GBDC) recently shared its fiscal quarter results, highlighting both its achievements and obstacles. To add further context to these results, InvestingPro provides additional insights into the company's financial health and market performance.
InvestingPro Data shows that GBDC's market capitalization stands at approximately $3.87 billion, with a P/E ratio of 9.19, signaling a potentially attractive valuation for investors looking for income-generating stocks. The company's revenue for the last twelve months as of Q3 2024 reached $664.81 million, exhibiting a robust growth of 19.1%. This growth is reflected in the company's gross profit margin, which impressively stands at 100% for the same period.
An InvestingPro Tip highlights that analysts have revised their earnings upwards for the upcoming period, which may indicate a positive outlook for GBDC's future performance. Furthermore, the company has maintained dividend payments for 15 consecutive years, demonstrating a strong commitment to returning value to shareholders. This consistency is particularly noteworthy given the company's significant dividend yield of 12.59%, as of the latest data.
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In conclusion, the data and tips from InvestingPro suggest that GBDC is not only a company with a solid track record of dividend payments but also one that is experiencing positive revenue growth and analyst confidence. These factors, combined with the company's strategic initiatives and market positioning, may present a compelling case for investors.
Full transcript - Golub Capital BDC Inc (GBDC) Q3 2024:
Operator: Hello everyone, and welcome to GBDC's Earnings Call for the Fiscal Quarter ended June 30, 2024. Before we begin, I'd like to take a moment to remind our listeners, that remarks made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Statements other than statements of historical facts made during this call may constitute forward-looking statements and are not guarantees of future performance or results, and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors, including those described from time to time in GBDC's SEC filings. For materials we intend to refer to on today's earnings call, please visit the Investor Resources tab on the homepage of our website, which is www.golubcapitalbdc.com and click on the events presentations link. Our earnings release is also available on our website in the Investor Resources section. As a reminder, this call is being recorded. With that, I'm pleased to turn the call over to David Golub, Chief Executive Officer of GBDC.
David Golub: Hello, everybody, and thanks for joining us today. I'm joined by Chris Ericson, our Chief Financial Officer; and Matt Benton, our Chief Operating Officer. For those of you who are new to GBDC, our investment strategies focused on providing first lien senior secured loans to healthy, resilient middle market companies, companies that are backed by strong, partnership oriented private equity sponsors. This is the same strategy we've had since our IPO 14 years ago. Yesterday we issued our earnings press release for the quarter ended June 30, and we posted an earnings presentation on our website. We'll be referring to that presentation during the call today. I'm going to start as usual with headlines and with a summary of performance for the quarter. Then Matt and Chris are going to go through our financial results for the quarter in more detail. And finally, I'll wrap up with our outlook for the coming period and then we'll take questions. So let me start with headlines. The headline is that GBDC's quarter ended June 30 was great in part and disappointing in part. And we're going to talk about all of it in detail in today's call. Let me start with a brief summary. I'll start with the great part. First, we closed our second win-win-win affiliate merger in early June. We believe the merger was good for GBDC shareholders, good for GBDC 3 shareholders, and good for GBDC as a business. The completion of the merger was accretive to NAV. We ended the quarter with NAV per share of $15.32. That's up 1.3% from March 31. It also made permanent the reduction in GBDC's incentive fee rate from 20% to 15%, giving GBDC what we believe to be an industry leading fee structure and increasing GBDC's go forward earnings power. GBDC also declared and began paying a series of special distributions. Second, origination volume picked up. It built on the recovery in middle market M&A that began in the quarter ended December 31, 2023. New investment commitments for the June 30 quarter totaled $435 million, up $111 million from the same quarter the prior year. Originations were concentrated as expected in areas of Golub Capital's competitive advantages, lots of repeat sponsors, repeat borrowers and industry sectors we know well. Third, most of GBDC's borrowers performed well. The Golub Capital middle market report showed median borrower revenue and EBITDA up strongly for the seventh consecutive quarter, and performance ratings across the portfolio also improved. So what was the disappointing part? GBDC had negative outcomes in two credits. Imperial Optical and Pluralsight, and this led to meaningful write downs on both of them. Now we're very proud of our long track record of low defaults and low credit losses, but we're not perfect. And this quarter GBDC saw $0.17 per share of net realized and unrealized losses, adjusted for the merger, primarily from these two credits. In both cases, the losses were not reflective of patterns or themes we're seeing across the portfolio. In the case of Imperial Optical, an advanced sale process fell apart and we decided to pivot to a restructuring. In Pluralsight, a leading sponsor with over $4 billion of equity invested in a company with about $1.7 billion in debt, decided not to continue to support it. Both developments were surprising and frustrating. So where did we end up in the June 30 quarter? Adjusted net investment income for the quarter was $0.48 per share. Adjusted earnings per share was $0.31 per share, a return on equity of about 8% annualized. For the first three quarters of the fiscal year, GBDC has delivered a return on equity of 11.4% annualized. Included in this quarter's results were some onetime merger related items. And continuing our tradition of being shareholder friendly, Golub Capital decided to proactively waive on a one-time basis the incentive fee this quarter to support returns to our shareholders. Matt and Chris are going to describe the quarter and fiscal year-to-date in more detail, including a variety of one time impacts to the P&L, and how we think about how GBDC would have performed from a profitability perspective for the quarter adjusted for these one-time items. I'll come back at the end and offer some thoughts on GBDC's outlook. Matt?
Matt Benton: Thanks, David. I'm going to start on Slide 4. As David just previewed, adjusted NII per share was $0.48, corresponding to an adjusted NII ROE of 12.7%. Compared to fiscal Q3 of 2023, GBDC's adjusted NII per share increased by $0.04 year-over-year or about 9%. Adjusted earnings per share was $0.31, corresponding to an adjusted net income ROE of 8.1%. Taking a step back, GBDC's earnings were driven by multiple key factors. First, credit performance was solid generally with the exceptions of markdowns on Imperial Optical and Pluralsight that drove the majority of the $0.17 per share net realized and unrealized loss. I'll go into more detail in a moment. Second, we continue to experience high base rates consistent with recent quarters. Third, GBDC's leading investment advisory fee structure drives sustainably lower expenses. This includes the reduction in the incentive fee rate from 20% to 15%, which became permanent with the closing of the GBDC 3 merger on June 3, 2024. And finally, Golub Capital, GBDCs Investment manager elected to voluntarily waive the manager's incentive fee this quarter. This equated to approximately $0.07 per share benefit to net investment income and earnings. This fee waiver continues the long tradition of Golub Capital taking shareholder friendly actions. Let me summarize portfolio activity and credit quality in the quarter. Net funds increased by $2.5 billion sequentially, primarily the result of the closing of the GBDC 3 merger, bringing the size of the total portfolio at fair value to $7.9 billion. The overall credit performance of GBDC's investment portfolio remains strong with internal performance ratings improving from the prior quarter. Investments in rating categories four and five increased to 89.2% from 87.2% in the prior quarter and investments in rating categories one and two represented just 70 basis points of the total portfolio at fair value. As a percentage of total debt investments at fair value, non-accruals increased slightly to 1% at June 30, 2024 from 90 basis points at March 31, 2024 and continue to be well below the BDC sector average. In the quarter the number of non-accrual investments increased to 10 as the return to accrual status of one portfolio company was offset by the addition of two portfolio companies. We continue to believe the overall portfolio is well positioned from a credit perspective. The weighted average loan-to-value of the portfolio was 45%, which we believe provides very nice downside protection. Despite these generally positive credit trends, we did have the two negative surprises in the quarter that David highlighted in his opening remarks. We don't think they are representative of the broader health of the portfolio and it's probably worth a moment to really discuss Imperial Optical in more detail given its relative size and impact on this quarter's results. Imperial Optical is a full-service vision care platform that offers optometric patient care and retail eyewear products through 280 locations across the U.S. Our exposure to Imperial Optical at March 31, 2024 consisted of $96.9 million face amount of senior secured debt at pre-merger GBDC and $41.7 million face amount at pre-merger GBDC 3. The company's been underperforming our and the sponsor's expectations for some time. With the support of the sponsor, last year we undertook a two-pronged strategy. First, the company implemented an operating turnaround plan, including a new CEO. Second, it explored strategic alternatives. As of 03/31/2024, we believe there was a high probability of a strategic exit. However, over the course of the quarter ended 6/30, it became clear this was not going to happen. Accordingly, we shifted to a singular focus on the operating turnaround. We rightsized its capital structure and took control of the equity and Board. We worked closely with existing management and other key stakeholders to ensure alignment. This restructuring drove the majority of GBDC's net realized and unrealized loss in the quarter. Continuing on Slide 4, let me briefly summarize certain balance sheet changes in the quarter. NAV per share increased by $0.20 on a sequential basis to $15.32. NAV per share is now $0.49 higher than the prior year, even as GBDC delivered higher distributions to shareholders during this period. As David described earlier, one of the benefits of the recently closed merger with GBDC 3 is that shares issued in the merger, approximately $92 million, were issued at a price in excess of the current NAV, resulting in material NAV accretion for existing GBDC shareholders. Leverage decreased materially quarter-over-quarter to 1.05x on a debt-to-equity basis net of available cash. And to 1.00x net of available cash and cash trapped at debt securitizations for the purposes of paying down principal on outstanding notes. We described last quarter that we expected a level of deleveraging in connection with the merger, and we got it. Let's turn to distributions now. The Board approved $0.44 per share of distributions comprised of a regular quarterly distribution of $0.39 share and a fiscal Q3 supplemental distribution of $0.05 per share. Taken together, these distributions correspond to an annualized dividend yield of 11.5% based on GBDC's NAV per share as of June 30, 2024. Adjusted NII per share continues to significantly exceed the company's regular quarterly distribution, resulting in regular distribution coverage of 123%. In addition, our Board declared additional special distributions to be paid in three equal installments of $0.05 per share, which began in June 2024 following the merger close on June 3. The remaining two special distributions of $0.05 per share will be paid on September 13, 2024 for stockholders of record as of August 16, 2024 and December 13, 2024 for stockholders of record as of November 29, 2024. You can find more information about the record dates and payment dates for fiscal Q3 distributions on Slide 25 of the earnings presentation and about the variable supplemental distribution framework on Slide 26. Lastly, and before I turn it over to Chris to walk through the financial results in more detail, we've outlined on Slide 6, which is a new slide, the key nonrecurring items that impacted the P&L in the June 30 quarter. The intent of this analysis is to better show what we believe is a more normalized GBDC core earnings profile before the impacts of modestly re-leveraging the balance sheet. First, the reversal of interest income recognized in prior quarters on investments restructured or placed on non-accrual status this quarter reduced adjusted NII per share by $0.01. Second, in the quarter, GBDC recognized an additional $0.03 per share of non-cash interest expense associated with marking to market interest rate swaps. Again, these are noncash charges that should sum to zero over time. And lastly, the incentive fee waiver contributed to a $0.07 per share increase in adjusted NII. The net results of these adjustments for non-recurring items is an adjusted NII per share of $0.45 or an 11.7% adjusted NII ROE. Further, as I mentioned earlier, we expect that re-leveraging GBDC's balance sheet to target levels in response to the deleveraging impact of the GBDC 3 merger would be an NII tailwind. I'm going to turn it to Chris now to provide more detail on our results.
Chris Ericson: Thanks, Matt. Slide 8 shows a bridge to GBDC's new net asset value per share increased to $15.32, up $0.20 per share from the prior quarter. Next, I think it's important to turn to Slide 9 to spend some time walking through the accounting treatment of the GBDC 3 merger. Because the merger was accounted for as an asset acquisition under GAAP, the purchase premium was allocated pro rata to the former GBDC 3 assets. As a result, GBDC's initial cost basis and the former GBDC 3 assets equaled their fair value at the time of the acquisition plus the purchase premium. Because GBDC uses fair value accounting, 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 GBDC 3 assets to fair value for the purchase premium and then wrote down the former GBDC 3 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. Turning to Slide 10. This 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. Now 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. And consistent with our approach since the GCIC merger and in order to make GBDC's post-merger financial results easier to compare to pre-merger results, we'll continue to use some supplemental financial measurements in addition to GAAP measurements to strip out the impact of the purchase premium write-down. We'll continue to talk about adjusted net investment income and adjusted net investment income per share, which will exclude the amortization of the purchase premium. We'll also talk about adjusted net realized and unrealized gain or loss and adjusted net realized and unrealized gain or 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, which will calculate net income and earnings per share based on adjusted net investment income and adjusted net realized and unrealized gain or 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 GBDC 3 investments acquired. Let's now go through the details of GBDC's financial results for the quarter ended June 30, 2024. We'll start on Slide 13, which summarizes our origination activity for the quarter. Net funds growth quarter-over-quarter increased by $2.5 billion, primarily driven by the acquisition of GBDC 3's $2.6 billion portfolio upon closing of the GBDC 3 merger. Beyond the merger, new investment commitments and delayed draw term loan fundings were outpaced by the net impact of the exits, sales of investments and fair value changes of existing investments. Market-wide deal activity and origination across the Golub Capital platform both improved in the June 30 quarter. We expect it to continue to improve over the remainder of the year. Golub Capital has remained highly selective, closing approximately 2% of deals reviewed during the first half of calendar year 2024. That's on the lower end of our typical 2% to 4% selectivity rate and reflects our focus on quality over quantity. The asset mix of new investments shown in the middle of the slide remains predominantly one-stop loans. Looking at the bottom of the slide, the weighted average rate on new investments decreased modestly quarter-over-quarter to 10.7%. We continue to be highly selective as the average loan-to-value on Golub Capital's middle market originations during the quarter was below 35% with a disproportionate amount of these originations to repeat borrowers. Slide 14 shows GBDC's overall portfolio mix following the closing of the GBDC 3 merger. As you can see, the portfolio breakdown by investment type remained consistent quarter-over-quarter with one-stop loans continuing to represent around 85% of the portfolio at fair value. And Slide 15 shows that GBDC's portfolio remains highly diversified by portfolio company with an average investment size of approximately 30 basis points. Additionally, our largest single borrower represents just 1.7% of the portfolio, and our top 10 largest borrowers represent just 14% of the portfolio. We are big believers in modulating credit risk through position size, which we believe has served GBDC well in previous credit cycles and will continue to be important in the context of future credit cycles As of June 30, 2024, 93% of our investment portfolio consisted of first-lien senior secured floating rate loans to borrowers across a diversified range of what we believe to be resilient industries. The economic analysis on Slide 16 showed some changes quarter-over-quarter. Let's walk through those in detail. We'll start with the dark blue line, which is our investment income yield. As a reminder, the investment income yield includes the amortization of fees and discounts. Consistent with base interest rates, GBDC's investment income yield has levelled out in recent quarters and decreased to 12.3% for the quarter ended June 30 as the combination of spread compression and certain nonrecurring items during the quarter, notably the impact of reversing previously recognized interest income on investments restructured or placed on non-accrual status this quarter, as well as reduced interest income earned on cash as compared to the quarter ended March 31, contributed to a decrease on a sequential basis of 50 basis points. Our cost of debt, the teal line, increased primarily as a consequence of the maturity of the April 2024 unsecured notes, a full quarter of the 2029 unsecured notes outstanding and assumption of the funding facilities from GBDC 3. Following merger close, we began executing on a plan to reduce GBDC's post-merger funding costs by increasing utilization of our low-cost JPMorgan (NYSE:JPM) credit facility. We also believe there is room for cost of funding improvement within certain of our other funding structures over the balance of this year. Additionally, we recognized an increase in interest expense during the quarter associated with marking to fair value our existing interest rate swaps on the 2028 and 2029 notes. As a reminder, we elected to swap our recent fixed rate unsecured note issuances, the floating rate, to term SOFR to match fund the company's assets, which are primarily floating rate. Hedge accounting requires us to fair value the interest rate swaps and recognize any changes in fair value through interest expense. But it's important to note, this is a noncash expense and will net to zero over the lives of the swaps. So for the quarter ended June 30, 2024 we saw a $0.03 per share non-cash reduction in net investment income from increased interest expense as a result of marking down the fair value of our interest rate swaps. We recognized the opposite impact in the quarter ended March 31, 2024, as the change in fair value on our interest rate swaps contributed to a reduction in non-cash interest expense and a corresponding increase to net investment income of $0.01 per share during that quarter. We have excluded the net change in fair value related to our interest rate swap hedges from the calculation of our weighted average cost of debt since these are non-cash amounts that will net to zero over the life of the swaps. We believe with nearly 80% of GBDC's total debt funding represented by floating rate exposure, GBDC is well positioned for declining interest rates. The collective results of these factors was for GBDC's weighted average net investment spread, the gold line, to decrease sequentially to 5.8%. I'm going to turn the floor back over to Matt now. Matt?
Matt Benton: Thanks, Chris. I'll wrap up this section by reviewing GBDC's liquidity and investment capacity on Slides 23 and 24. Let's focus on the key takeaways on Slide 24. Our weighted average cost of debt this quarter was 6.5%. 46% of our debt funding is in the form of unsecured notes. The fixed-rate notes coming due in 2026 and 2027 were issued with a weighted average coupon of 2.3%. And as you've heard us say on multiple occasions, we didn't swap them out for floating rate exposure. The issuance of the July 2029 and December 2028 unsecured notes improve upon GBDC's debt maturity ladder while addressing refinancing risk with respect to the $500 million of notes that matured and were subsequently repaid in April 2024. Overall, our liquidity position remains strong and greatly enhanced by the recent unsecured notes issuances. We ended the quarter with approximately $1.6 billion of liquidity from unrestricted cash, undrawn commitments on our meaningfully over collateralized corporate revolver and the unused unsecured revolver provided by our adviser. The diversification, flexibility and low cost of GBDC's funding structure is an important element that underpins our three investment grade ratings from Fitch, Moody's (NYSE:MCO) and S&P. GBDC has stronger ratings from Moody's and Fitch, than the majority of the rated BDC sector providing for deeper and more cost-effective access to the debt markets. Now I'll hand it back over to David for closing remarks and Q&A. David?
David Golub: Thanks, Matt. So to sum up, GBDC's June 30 quarter had some great elements and some disappointing elements. We've talked about the two disappointing credit losses in the quarter. We've also talked about the great elements, including strong income generation, stable credit trends on the whole and completion of the win-win-win merger with GBDC 3. Let me wrap up with our outlook before we open the line for questions. We talked last quarter about a few headwinds we anticipated the market and GBDC would face with respect to origination, spreads and credit. Our view today is largely unchanged. Let me touch briefly on each of these three areas. Let me start with origination. The good news is that we saw a pickup in M&A activity in the quarter. Our sense is that many market participants are expecting a further recovery in M&A activity later this year. That's a possibility, but our outlook's more cautious. We think deal activities is likely to stay modulated in the second half. We think sellers in many cases are going to choose to hold off on sales processes in hopes of falling interest rates and less economic and political uncertainty. We think it probably takes until 2025 to see volumes getting back to normal levels. Let's shift now the second headwind, spreads. The broadly syndicated loan market saw striking spread compression in the first half of 2024, and this translated in the second calendar quarter into a combination of many repricings of existing deals and lower spreads on new transactions. The dynamic was much more pronounced in the large market segment, where direct lenders compete with broadly syndicated market executions. Overall, spread compression in the large market segment since the beginning of the year has been in the range of 50 to 100 basis points. The traditional middle market, our focus has seen less spread compression and fewer repricings than in the large market. But our strategy hasn't been immune to the spread tightening and borrower friendly refinancing activities. In recent weeks, the market seems to be stabilizing and this week's market volatility may add to that stabilization. Finally, let's talk about our outlook for credit. For the last two years, we've talked about how we've been expecting to see more credit stress in both the broadly syndicated market and the private credit market. Well, the higher credit stress is visible. You can see it in higher default rates in both the broadly syndicated market and in parts of private credit. Now, credit stress never shows up evenly. We've been seeing, and I expect this trend will continue, we've been seeing more issues in certain sectors and in respect of certain managers. We expect this dispersion in results to continue. So, to sum up, we continue to expect to see some headwinds in the coming period, and we continue to believe GBDC is very well positioned to be on the favorable end of the manager dispersion spectrum that we expect to see. We believe post-merger GBDC is poised to deliver strong earnings thanks to its resilient portfolio, its best-in-class fees structure, its very low non-accruals, and its durable and diversified liability structure. We appreciate the overwhelming support for the merger that we received from GBDC shareholders, and we look forward to delivering the expected benefits of the merger going forward. With that, please open the line for questions.
Operator: [Operator Instructions] Our first question comes from Robert Dodd from Raymond James. Your line is now open.
Robert Dodd: Hi, guys, and congrats on getting everything done. I mean first question, David, about the market volatility. You said the near-term volatility might enable spreads to stabilize. At what point - how long would such volatility need to go on you think before BSL and private market spreads would actually start to widen again?
David Golub: So great question, Robert. Market conditions right now are very hard to make generalizations about because we're all in real time trying to assess the underlying causes of the swoonthat started on Friday continued on Monday, reversed some today. My own view is that this market volatility reflects the recent weakness in some economic data that came out, Jobs Report, some increased sense from an emotional standpoint that valuations have gotten too high in the public markets, particularly in the tech sector. But I'd be lying if I told you that I had a good beat on where the market volatility, where market prices are going to head in the near term, I don't have a good beat on that. Here's what we know. We know that over the course of the last few days, the broadly syndicated loan market has seen, decreases in loan prices of about one point. We've seen changes in securitization liabilities markets. I'd say for a typical broadly syndicated CLO, average cost of funds on a marked basis would be about 25 basis points. Will those changes flow through to private credit or even sustain over the course of the next few days or weeks? I think that's difficult to know right now. My own take is that the weakness is causing some rethinking in private credit land of some of the desirability of the spread compression that we've seen in the last few months and may take some of the steam out of some of the parties that have been most receptive to reducing spreads in the private market. But this is all very real time, Robert, and it's difficult to gauge.
Robert Dodd: Yes. Understood. Thank you for that color, it's very real time. On credit, I mean, Pluralsight is probably one of the most widely flagged problem assets over the last quarter that we've ever seen in the BDC space. We all knew it was coming, so it's no surprise. Broadly, though, what proportion of your portfolio has loan structures, documentation structures, however, you want to think about it that are similar to the kind of structure in Pluralsight that allowed, for example, some of these asset transfers, unrestricted subs, things like that. I mean how widespread is that kind of loan structure in the rest of the portfolio, less concerned about Pluralsight like because we all know about it at this point?
David Golub: So, I want to just give a perspective on Pluralsight before I answer the rest of your question. I do not view Pluralsight despite some of the press that it's gotten, I do not view it as a good example of a sponsor misbehaving or a sponsor misusing documentation. In fact, in this instance, what Vista - and I think very highly of Vista as a sponsor, we have very few problem credits that we've ever had with Vista; I think they're very good operators - what Vista did was they were in discussions and negotiations with lenders about how to pursue a longer-term solution and they ran out of time before needing to make a decision about paying an interest payment. And in order to make that payment and create more time, they arranged a loan provided by Vista for the purposes of paying interest to other lenders. This is not lender on lender violence. This is not a liability management transaction. This is much more boring than any of that. Many of the large market loans in private credit land provide baskets and documentation terms that permit a certain amount of pari-passu or subsidiary level borrowings, it's not uncommon. What makes the private credit market relatively insulated compared to the broadly syndicated market, relatively insulated from liability management transactions, are two key points: incentives and norms. What do I mean by each of these? Incentives. So, in private credit transactions, one tends to see a relatively small number of lenders. Most of the liability management transactions in the broadly syndicated market that have garnered a lot of press and garnered a lot of attention, they pit one group of lenders against another group of lenders. If you have a large group of lenders in the mix, it's much easier to create a cool kids club and pit that cool kids club against a non-cool kids club. In private credit land, where you have syndicates that are very small, it's much harder to affect that. The second key criteria is norms. There are norms of behavior in any market, including, in particular, I’m going to talk about one in the private credit market, sponsors and private credit lenders have strong relationships with each other. When the market is well functioning, they do. And both parties have a commitment to the success and fair dealing with the other. So again, as a consequence of norms, it would be an enormous violation of norms and it would be relationship destructive to have a sponsor use documentation terms in a manner that would be disadvantageous to one of the key private credit lenders in one of their companies and with whom they do a lot of business. So I don't think it's a documentation terms issue that underlies why we've seen so few examples of lender on lender violence in private credit. I think it has to do with incentives and norms.
Robert Dodd: Thank you.
Operator: Our next question comes from Finian O'Shea from Wells Fargo (NYSE:WFC). Your line is now open.
Finian O'Shea: Hey everyone. Good morning. I guess just sticking with Pluralsight for a moment there, piecing everything together, it sounded like the sponsor had been supporting the company. And then, of course, it seems like they stopped and here we are. But we're not looking for Pluralsight specifics, but for the rest of the book, where a lot of companies may be struggling from higher interest rates, how common is that set up where the sponsor is needing to put more money in to keep interest payments up?
David Golub: I'd say that's quite uncommon, Fin. Most companies in the portfolio are doing well. Of the portion that's not doing well, they're still cash flow positive after interest expense. So, it's a relatively small group where we would anticipate there being a need for continued sponsor support.
Finian O'Shea: Okay, thanks. That's helpful. And just a follow-up, there was some commentary on leverage. It sounds like that will be coming back up. So, with things sounding like they're getting busier out there, we're seeing if you have visibility on that and are able to provide color on sort of what leverage level and perhaps how soon? And a second part, qualitatively, how are you thinking about the benefit of releveraging into a very tight spread environment?
David Golub: So I think your question highlights exactly the issues that we're thinking about right now. Right now, we're thinking that a good target for GBDC from a leverage standpoint is about 1.15x debt-to-equity, which is a bit higher than where we're running now. But we're not going to be in a wild rush to get to that 1.15x unless we determine that there are attractive new loan opportunities out there that merit our committing to grow the balance sheet. So right now, as I mentioned in our prepared remarks, we're not seeing a dramatic surge in deal activity. We're seeing a continuity of trend from Q1 and Q2. So, we're going to be picky, and we're going to take our time, and we're going to aim to have leverage increase at GBDC over the course of the coming period not at the expense of quality.
Finian O'Shea: Great. Thanks so much.
Operator: [Operator Instructions] Our next question comes from Paul Johnson of KBW. Your line is now open.
Paul Johnson: Yes, thank you for taking my question. I was just wondering, just trying to get your idea of the fee waivers this quarter, was that entirely a voluntary action on your part? What was kind of the motivation behind that? Whether it was kind of some of the restructuring during the quarter of Imperial Optical or if this was more related to just kind of noise within the fissure?
David Golub: Sure. Thanks for your question. So, we have a long tradition at Golub Capital. It's very different from many other managers. We have a long tradition of periodically waving fees. So, this is not out of the ordinary. It was entirely voluntary. Our view of the quarter when we looked at it in its totality was there was a significant amount of onetime noise, and we thought it was appropriate in the context of the onetime noise to waive the incentive fee. I think that our view is that taking a long-term view as manager and making sure that our investors have a positive experience is good for everybody.
Paul Johnson: Got it. That's helpful. That's all for me.
Operator: Thank you so much. As of right now, we are still waiting for some questions to come in. [Operator Instructions] We don't have any pending questions as of the moment. I'd now like to hand back over to David Golub for final remarks.
David Golub: Great. Thank you all for joining us today. As always, if you have further questions, please feel free to reach out to us at any time. And we look forward to reporting back to all of you next quarter.
Operator: Thank you so much for attending today's call. You may now disconnect. Have a wonderful day.
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