Golub Capital BDC: Record Earnings, Lower Fees, 11% Yield (NASDAQ:GBDC)

Rising interest rates have been a boon to Business Development Companies, known as BDC’s, over the past 1 year-plus. Several of them have reported record earnings, including Golub Capital BDC (NASDAQ:GBDC), which saw 55% growth in Investment Income and 49% growth in Net Investment Income, NII in its fiscal year ending 9/30/23. 99% of its debt investments are at floating rates.

Company Profile:

Golub Capital BDC is an externally managed, closed-end, non-diversified management investment company that has elected to be treated as a business development company under the Investment Company Act of 1940 and as a regulated investment company, or RIC, under the Federal tax code. It utilizes the established loan origination channels developed by Golub Capital, a leading lender to middle-market companies with over $65 billion of capital under management as of January 1, 2024. (GBDC site)

Holdings:

8% of GBDC’s $5.4B portfolio is in 1st Lien Senior Loans, with 86% in 1st Lien One Stop Loans, which are secured by a collateral interest. It also holds 5% in Equity, and 1% in Junior Debt.

GBDC’s average borrower earns $73M in EBITDA/year. 16% of its originations are with borrowers with under $20M in annual EBITDA, while 76% of the originations are to borrowers with under $100M in annual EBITDA.

GBDC has long-term relationships with its sponsors, i.e., the companies who invest the lion’s share of funds in the underlying companies. Repeat sponsorship has been 90% or above from 2020 on:

Portfolio Company Ratings:

Like other BDCs, management re-rates its holding quarterly. They use a 5-tier system, with 5 being the top tier, and 1 the lowest.

In the quarter ending 12/31/23, top tier 5 holdings increased by ~$89M, to 2.6% of the portfolio; wile tier 2 increased by ~$7M, representing just 0.4%.

Non-Accruals decreased by 10 basis points sequentially, to 1.1% of total debt investments at fair value in the quarter ending 12/31/23. There were no new defaults. Portfolio company investments on non-accrual status remained at 9 as of December 31, 2023.

GBDC had a 0.00% Payment Default Rate during the COVID-19 dislocation; and has a very low 0.01% Average annual loss rate from Payment Defaults since 2004.

Earnings:

GBDC’s fiscal year ends on 9/30. Its positive results kept going in the latest quarter, which ended 12/31/23, with 20% top line growth, 31.6% NII growth, and 36% NII/Share growth. Adjusted net investment income per share was $0.50, tied with fiscal Q4 2023, (period ending 9/30/23), for the company’s highest-ever adjusted NII per share.

Unrealized gains improved to -$8.8M, while Realized Gains fell to $1.1M. As seen with most other companies, Interest Expense rose for GBDC in the quarter, up 21%. NAV/Share rose from $14.89 to $15.02.

Fiscal 2023 had 55.5% revenue growth, and 49% NII growth, with NII/Share rising ~48%.

New Developments:

-GBDC entered into a definitive merger agreement with Golub Capital BDC 3 Inc., with GBDC as the surviving company subject to certain stockholder approvals and customary closing conditions.

-GBDC’s investment advisor agreed to reduce GBDC’s income incentive fee and capital gain incentive fee from 20% to 15% in connection with and in support of the proposed merger. The reduction in incentive fees was made effective as of January 1, 2024.

Dividends:

GBDC’s Board increased the company’s regular quarterly distribution from $0.37 to $0.39 per share, in conjunction with the proposed merger announcement and corresponding reduction and incentive fee.

At $16.61, GBDC’s base yield is 9.39%, and its most recent $.07 supplemental payout added 1.69%, for a total yield of 11.08%. It has a modest 5-year dividend growth rate of 2.27%, due to dividend reductions during COVID-challenged 2020-2021.

Dividend coverage has been strong over the past 4 quarters, hitting 1.26X in the quarter ending 12/31/23, and averaging 1.25X.

GBDC also paid 3 straight supplemental distributions in the most recent 3 quarters – its total distribution coverage averaged 1.11X:

Taxes:

Distributions for fiscal year ending 9/30/23 were deemed ~99.8% non-qualified.

Profitability & Leverage:

ROA and ROE both improved markedly over the 4 quarter period ending 12/31/23, with both above BDC industry averages. Debt/NAV was roughly flat, while Interest coverage was somewhat lower, but still in line with industry averages.

Debt & Liquidity:

As of 12/31/23, GBDC had $1.3B of liquidity from unrestricted cash, undrawn commitments on its corporate revolver, and the unused unsecured revolver provided by its advisor.

It has $500M of unsecured notes maturing in 2024.

On February 1, 2024, GBDC issued $600M of 2029 Unsecured Notes, which bear a fixed interest rate of 6.000%, and mature on July 15, 2029. In connection with the 2029 Notes, they entered into an interest rate swap agreement on the full principal amount of the 2029 Notes where GBDC receives a fixed interest rate of 6.248%, and pays a floating interest rate of one-month SOFR plus 2.444%.

GBDC’s debt is rated investment grade by Fitch, Moody’s, and S&P Global:

Performance:

GBDC has outperformed the BDC industry, the broad Financial sector, and the S&P 500 on a total return basis over the past year. It has also outperformed the BDC industry and the S&P on a price basis so far in 2024:

Analysts’ Price Targets:

GBDC received an upgrade from B of A Securities on 3/25/24, from Neutral to Buy.

At $16.61, GBDC is roughly even with street analysts’ $16.70 average price target, and 5% below their $17.50 highest target.

Valuations:

At $16.61, GBDC is getting a 10.6% premium price to NAV per share from the market, much higher than the BDC industry’s 1% discount to NAV. It’s also higher on a P/Sales basis.

GBDC’s earnings multiples are also higher than industry averages, on a trailing and forward basis, as is its EV/EBIT. Its base dividend yield is lower than average.

Parting Thoughts:

Golub Capital BDC is trading ~1% below its 52-week high. Clearly, Mr. Market is pleased with the merger, and the incentive fee reductions, as well as record earnings. We intend to wait for Mr. Market’s next irrational hissy fit, and then try to scoop up shares of Golub Capital BDC at lower valuations.

All tables furnished by Hidden Dividend Stocks Plus, unless otherwise note