Goldman Sachs BDC, Inc. (GSBD) Earnings Call Transcript & Summary

Good morning, and thank you for joining us. My name is Haley Neeven, Head of the Investor Relations team for Goldman Sachs BDC, Inc., and I would like to welcome everyone to the Goldman Sachs BDC, Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Before we begin today's call, I would like to remind our listeners that today's remarks may include forward-looking statements. These statements represent the company's beliefs regarding future events that, that by their nature, are uncertain and outside of the company's control. The company's actual results and financial condition may differ possibly materially from what is indicated in those forward-looking statements as a result of a number of factors, including those described from time to time in the company's SEC filings. This audiocast is copyrighted material of Goldman Sachs BDC, Inc. and may not be duplicated, reproduced or rebroadcast without our consent. Yesterday, after the market closed, the company issued an earnings press release and posted a supplemental earnings presentation, both of which can be found on the homepage of our website at www.goldmansachsbdc.com under the Investor Resources section and which includes reconciliations of non-GAAP measures to the most directly comparable GAAP measures. These documents should be reviewed in conjunction with the company's quarterly report on Form 10-Q filed yesterday with the SEC. This conference call is being recorded today, Friday, August 7, 2026, for replay purposes. I'll now turn the call over to Vivek Bantwal, Co-Chief Executive Officer of Goldman Sachs BDC, Inc.

Thank you, Haley. Good morning, everyone, and thank you for joining us for our second quarter earnings conference call. Before we begin today, I have an announcement. My Co-CEO of GSBD and Head of America's Direct Lending platform, David Miller, has decided to step down as Co-CEO of GSBD effective December 31 of this year. At that point, I will become the sole CEO. David has worked at Goldman Sachs for 22 years and has 34 years in the private credit industry. Since co-founding the Specialty Lending Group in 2004, David has been an integral part of the private credit platform we have built at Goldman Sachs. David will remain in his current role as Co-CEO through the end of this year and then will be appointed an Advisory Director of Goldman Sachs. He will continue to serve as a member of the Private Credit Investment Committee, so we can continue to benefit from his years of experience. We want to thank David for his many years of leadership and contributions. In connection with this transition, Justin Betzen has stepped into the role of Co-President and Co-COO alongside Tucker Greene. Justin is currently a Vice President of GSBD and has held several positions within GSAM, and he is currently a Managing Director and Senior Underwriter in GSAM Private Credit in the Americas. Justin initially joined Goldman Sachs in 2006. The platform will also continue to be supported by a deep bench of experienced investment professionals with significant industry and firm tenure. Our Head of Underwriting and Portfolio Management, Greg Watts; and Head of Originations, Steven Buddig, will be elevated to Co-Heads of Americas Direct Lending, and David will become Chairman of the GSAM Private Credit Direct Lending Group in the Americas. Collectively, Greg and Steven have over 45 years' experience in the industry and 33 years at Goldman Sachs.

Thanks, Vivek. I'm incredibly proud of what we've accomplished together and what this broader platform has achieved over the years. Looking back, I've seen the industry navigate multiple credit cycles, the ups and the downs, and I've watched the resiliency of the Goldman Sachs platform prove itself time and again. I've had the privilege of working alongside an exceptionally talented group of people. I know this fund and this platform are in great hands, and I have full confidence in my colleagues' leadership and continued success. I also want to thank the Board of Directors for their partnership and support, our investors for their continued trust. And finally, my colleagues and team for their hard work and dedication in making this platform the best place to work throughout these years. It has been an honor to work with you all, and I'm excited to see your future success. I'll now turn the call back over to Vivek.

Now let's discuss GSBD's second quarter results. Along with David, I'm here today with Tucker Greene, our President and Chief Operating Officer; and Stan Matuszewski, our Chief Financial Officer. We'll start by offering our perspective on the current market environment. Then I will discuss our portfolio positioning and how the scale of Goldman Sachs' private credit ecosystem continues to translate into a competitive advantage for our shareholders. David and Tucker will walk you through portfolio activity and credit quality, and Stan will cover the financial results. We will then open the line for some Q&A. In the second quarter, GSBD generated net investment income of $0.38 per share, representing an annualized yield on book value of approximately 12.6%. This increase reflects both higher total investment income and lower total expenses, which benefited from our shareholder-aligned incentive fee structure. Stan will discuss this in more detail later on. We ended the quarter with net asset value of $12.06 per share, down modestly just under 1% from $12.17 in the first quarter. Given these results, the Board has declared a third quarter 2026 base dividend of $0.32 per share payable to shareholders of record as of September 30, 2026, as well as a second quarter 2026 supplemental dividend of $0.03 to shareholders of record as of August 31, 2026. This brings our trailing 12-month total dividends to $1.54 per share and the annualized yield on our quarterly base dividend to approximately 14.1% based on yesterday's closing price of $9.09. Our Board continues to evaluate the dividend each quarter based on the earnings power of the portfolio, the rate environment and our overall financial position. Taking a step back to contextualize these results, let me start with the M&A environment. Deal activity has remained subdued during the second quarter of 2026, with overall private equity deal volumes down 38% quarter-over-quarter and sponsored loan issuance down 33%. For our business, that means the pace of new deployment opportunities has been slower. But what matters most is the quality of the deals coming to market and the terms available to lenders. As available capital in the direct lending market has contracted, driven in part by BDC redemptions and tighter fundraising conditions, borrowers and sponsors are accepting wider spreads, lower leverage and stronger documentation. That dynamic is directly benefiting the economics on every new investment we underwrite. Simultaneously, AI disruption concerns and geopolitical uncertainty have added complexity to the backdrop. We continue to monitor how these dynamics are affecting business models across our portfolio. Tucker will discuss how our borrowers are navigating this when he covers credit quality. I'd also point out that uncertainty means lenders are being compensated more for providing capital, and we are capitalizing on that. Post quarter-end, we have also seen a pickup in M&A activity and deal flow, which positions us well to deploy into this attractive spread environment as we move through the second half of this year. Across our borrower base, performance is differentiated. The majority of our portfolio continues to perform as anticipated. Companies with pricing power, mission-critical products and manageable leverage are executing well. Where we see stress is in a small number of companies carrying elevated leverage or facing sector-specific headwinds. These are the complex situations where our workout capabilities become most important. Tucker and David will walk you through a few recent outcomes that demonstrate what our platform and our process are designed to produce. David, let me turn it over to you for some perspective on what this means for our business.

Thanks, Vivek. This evolving landscape you just described is creating the kind of environment where our advantages are most pronounced. To put this in context, our platform manages over $150 billion in private credit, supported by more than 250 dedicated investment professionals and the relationships of over 3,000 Goldman Sachs investment bankers across our Global M&A and Capital Markets franchise. Goldman Sachs has been investing in private credit for over 30 years. That depth of experience across multiple credit cycles informs every underwriting decision we make. We're focused on deploying capital selectively into the best risk-adjusted opportunities available. When deal flow is abundant and capital is plentiful, every lender looks similar. When deal flow slows and capital becomes scarcer, the differentiation becomes clear and the competitive landscape shifts. Borrowers need lenders who can provide certainty of execution, underwrite complex situations quickly and have the scale to deliver full capital structure solutions. That's where our platform stands out. In June, our Private Credit platform closed a $455 million senior secured first lien term loan to Burgess Pigment Company, a leading specialty minerals processor. Goldman Sachs served as both agent and sole lender on this transaction. Given its scale, the borrower required a financing partner capable of underwriting the full commitment without the need for syndication. GSBD participated alongside other vehicles in our private credit ecosystem, and that multi-vehicle capacity is exactly what allowed us to win this on a bilateral basis. It is a clear illustration of how the breadth of our platform translates into differentiated deal flow for GSBD shareholders. Transactions like Burgess reflect the type of selective deployment we are prioritizing, and the spread environment today means the economics on these opportunities are more attractive than what was available in prior quarters. But we remain patient and disciplined, investing only into the highest conviction opportunities while we focus on bringing leverage towards the lower end of our target range.

Thanks, David. Private credit has drawn significant attention in the first half of this year, and we are not immune to the headlines. But this is the environment where the actions managers take create the largest differentiation in outcomes. How you underwrite, how you manage workouts, the stability of your capital base and the discipline of your deployment are what will ultimately separate outcomes as this cycle plays out. The steps we've taken are designed to put GSBD on the right side of that divide. With that, Tucker, could you walk us through our deployment activity, the opportunities we're seeing in the market and how these dynamics are reflected in our portfolio composition?

Yes, sure. So our deployment approach this quarter was intentionally selective, not because of a lack of opportunity, but because we are prioritizing balance sheet management and credit selection. As our leverage comes down and we create additional capacity, we expect to deploy more actively into this attractive spread environment. To elaborate on Vivek's comments regarding new deployment opportunities, we are seeing a meaningful shift in sectors where deal activity is concentrated. Software originations have showed across the industry, while we've seen increased activity in healthcare, business services and industrials. All of our new commitments this quarter were outside of software, not because we are avoiding the sector, but because the most compelling risk-adjusted opportunities this quarter were elsewhere. We continue to actively evaluate software deals and remain confident in our ability to underwrite the sector. When the right opportunity presents itself under the right terms, we will invest. GSBD's portfolio companies span across 39 industries and 173 borrowers, giving us the breadth to invest across the full opportunity set rather than depending on any single sector. During the second quarter, we made new commitments of approximately $12.9 million across 9 portfolio companies, 2 of which are new borrowers. We also funded approximately $114 million of previously unfunded commitments. While the commitment level in the second quarter was modest, the quality and economics of what we deployed were improved. The weighted average spread on our second quarter originations was 511 basis points, wider than what we were originating 6 months ago. The weighted average loan-to-value on new deals was 37.4%, reflecting conservative entry points in the current valuation environment. On the repayment and sales side, we received $146 million in total proceeds during the quarter. Net repayments exceeded new deployments, allowing us to use excess proceeds to reduce leverage. Our net debt-to-equity ratio is 1.35x at quarter end, but is now currently below our target of 1.25x, primarily due to repayment and sales activity since quarter-end. This is a meaningful shift that creates capacity for new deployment and positions us to reactivate our stock repurchase program. At the end of the quarter, total investments in our portfolio were $3.2 billion at fair value, comprised of 98.6% in senior secured loans with a residual asset mix in the form of preferred and common stock as well as unsecured debt. The weighted average yield of our total debt and income-producing investments at amortized cost decreased to 9.5% compared to the first quarter. Weighted average net leverage and interest coverage remained slightly or rose slightly to 6.2x from 6x last quarter and interest coverage increased to 2x from 1.9x, respectively. Turning to credit quality, an area of significant focus for the team. We ended the second quarter with nonaccruals of approximately 2.9% at fair value compared to 3.2% in the prior quarter. The number of companies on nonaccrual decreased from 11 to 10 during the quarter as 1 portfolio company was restored to accrual status. As mentioned on previous calls, we believe these nonaccrual names are idiosyncratic situations. They don't share a single cause, and they are not indicative of a broader portfolio trend. The large majority of our portfolio companies continue to perform well with continued revenue and EBITDA growth quarter-over-quarter and year-over-year across our borrower base. What we believe differentiates managers in this environment is the ability to identify problems early and manage through them effectively. Within our Direct Lending Americas platform, workout and restructuring efforts are supported by a dedicated team that is embedded within a broader investment group. This includes select investment professionals supported by several senior professionals with extensive workout experience who are actively involved in managing complex situations. Critically, when faced with portfolio company distress, original deal captains remain closely engaged throughout the restructuring process, leveraging the long-standing knowledge of the borrower and the investment thesis from origination. They work in coordination with the dedicated restructuring team to ensure continuity, alignment and accountability. These team members are engaged proactively and frequently with sponsors and co-lenders to help maximize recoveries. David, let me hand it to you on a couple of situations that played out this quarter.

Let me share two examples that demonstrate our workout team's capabilities in action. First is Thrasio, an Amazon e-commerce aggregator, which I'm sure is a name many of you recognize. Following its emergence from bankruptcy in 2024, our workout team has remained highly engaged through engagement with the Board, working closely with co-lenders, engaging deeply with management and leveraging the broader Goldman Sachs platform, we have focused on maximizing recovery value. Specifically, the team capitalized on the value of Thrasio's individual brands through a series of successful divestments. This proactive approach resulted in a full paydown of our senior loan and over 75% paydown of a second-out position at par in this quarter, with full repayment expected in the second half of 2026. Another example is Senneca Holdings, a specialty industrial door manufacturer, we have held in our portfolio since 2018. Performance has continued to improve following a restructuring in 2020. And in advance of upcoming maturities, our team engaged with the sponsor on a maturity extension to provide runway to further ramp performance and enhance our recoveries. Through this process, we successfully negotiated a 2.5-year maturity extension from the first lien lenders and elevated Goldman's subordinated notes within the cap stack, gaining higher seniority and increased cash pay component. Today, Senneca is in a much more stable footing with a rightsized capital structure positioned to support its ongoing operations and future growth. To further this point, the first-out term loan we hold was moved to accrual status within this quarter. Both examples demonstrate our ability to maximize recovery through proactive engagement, working collaboratively with sponsors, co-lenders and management and drawing on the broader Goldman Sachs platform when it creates value. With that, Stan walk us through the financial results.

For the second quarter, GAAP and adjusted after-tax net investment income were $42.2 million and $41.5 million, respectively, which is a material increase from $24.8 million and $24.7 million in the prior quarter. On a per share basis, GAAP net investment income was $0.38, equating to an annualized net investment income yield on book value of 12.6%. As Vivek noted, total investment income rose to $83.7 million this quarter from $78.8 million last quarter, primarily as a result of restoring certain investments to accrual status and repayment activity. As we've previously discussed, there can be variability in our incentive fee due to the 3-year total return look back, which ties our advisers' compensation directly to the cumulative economic value delivered to shareholders, including both income and the impact of gains and losses rather than income alone. The look back in combination with the current period total return resulted in an incentive fee that was outsized last quarter, but no fee earned in the current quarter. Collectively, the higher top line and lack of incentive fee expense contributed to higher NII. Net investment income covered our dividend this quarter, and we hold approximately $100.3 million or $0.89 per share of undistributed taxable income at quarter end. Turning to our balance sheet. We believe the strength of our liability structure is a deliberate competitive advantage, particularly in volatile markets. When certain lenders face pressure on their own financing, having committed long-dated facilities with established banking partners provides meaningful stability and reliability. Our revolving credit facility is committed across 12 bank lenders with no mark-to-market provisions. As of quarter end, we had approximately $796 million of borrowing capacity remaining under the facility and approximately $1.9 billion in outstanding debt across our entire financing package. Additionally, approximately 64% of our total principal amount of debt outstanding was in unsecured debt, which excludes the netting of unamortized debt issuance, costs and cumulative hedging adjustments for those borrowings that are designated in a fair value hedging relationship. Our net debt-to-equity ratio was 1.35x as of June 30, 2026. While this leverage level is within our operating range, it is at the upper end of it. As Tucker noted, our pro forma leverage now stands below the 1.25x target, which provides us flexibility to repurchase stock under our 10b5-1 program. As announced on our last earnings call, the Board approved and authorized a new 10b5-1 stock repurchase program to allow the fund to repurchase up to 75 million of shares of common stock, subject to certain limitations, including leverage. Taken together, these developments support a clear path toward lower leverage and the ability to make new investments and return capital to shareholders. We will continue to update investors on our progress each quarter.

Thanks, Stan. In closing, although the private credit market continues to face headwinds, the fundamentals of our platform are strong. We remain focused on reducing leverage, making new investments at attractive economics and returning capital to shareholders. Thank you all for joining us today. Let's open the line for questions.

[Operator Instructions] We'll take our first question from Arren Cyganovich with Truist Securities.

First, I guess I'd like to say congrats to those that are changing roles. And David, I enjoyed working with you. So good luck in your future. And hopefully, we'll cross paths again.

Absolutely. Well, I'll be here until year-end and then on Investment Committee thereafter. So I'll be around for a while yet, but thank you.

Sounds good. From an investing environment standpoint, M&A picking up post-quarter, how are you thinking about that in terms of this vehicle? And are you seeing enough activity where it may create enough turnover in the vehicle that you can start to see some pickup in activity for GSBD?

Yes, it's a good question. Thanks for asking that. And then as you sort of alluded to, there's a couple of things going on here. So first is, as you point out, the activity that we -- remember, there's always a lag between when we sign up deals and when we fund deals. And so when you think about this most recent quarter for GSBD, the flow of new origination was on the slower side in part because the kind of lag effect of the M&A environment earlier in the year was quiet, coupled with the fact that, as you know, post last quarter, our leverage was running higher than our target. And so the combination of those two things led to a quieter period on a relative basis, from an origination perspective. When you think about where we are, I think two things are different. One is, as you point out, the M&A environment is picking up again in this part of the market. So sponsor activity has picked up, and we are actively involved in and have actually been signing up recently kind of deals sort of in different parts of the platform. And then the second piece of it is, as we noted, our leverage is kind of back down, particularly post-quarter-end to sort of where our target is. And so we do expect that we'll have more to do on the origination side going forward. And then I think the third piece embedded in your question is really around kind of turnover of some of the legacy portfolio. And as we've talked about in the past, that will continue to kind of move along at its own pace. But now that our leverage is kind of where we want it to be and sort of deal volume is picking up, we'll still be able to kind of add some of the newer originations that reflect the new kind of integrated go-forward platform. And over time, that will continue to dilute the legacy names.

In the investments that you highlighted that's kind of shifting industries a bit and what I found interesting was that you said you're not ignoring the software sector. I would imagine that your bar is probably a bit higher now. Are you seeing any activity on the software side that would be kind of, I don't know, if you want to call it, green shoots for an industry that used to do a lot of activity, but maybe some positive aspects that might unlock some activity in that sector going forward?

Yes. So I'd say a few things. There have been a couple of transactions, both in the U.S. and in Europe in the broadly syndicated market that I think are useful data points to just think about where public credit is kind of willing to price these software names. And so I think that, that is just kind of constructive in terms of price discovery and knowing that, that option is out there for borrowers. From a private credit perspective, we've been pretty quiet. There has not been, as you can imagine, a lot of new software activity. I think that's less about lending and more about kind of just bid-ask because I think that one of the unresolved questions in and around AI is really around terminal value. And so even if your loan is well covered, it's 30x -- if a company used to be worth 30x and now it's worth 20x or 18x that might not impact how you think about your loan that's levered at 6x, but that's a pretty big bid-ask from an equity valuation perspective. And so I think new deal activity continues to be on the quiet side. We have seen some smaller add-ons. And I think that there is starting to emerge a market for kind of smaller sort of tuck-in add-ons that sponsors are starting to do, point one. And then point two is, I think that in terms of how software is actually performing, I think when you think about our AI framework that we've talked about that we've had in place now, elements of it really going back to 2023, I think what we're seeing has kind of been consistent with that platform, which is for incumbent software providers that are verticalized in their industry, that own their customers with high switching costs, and own their data, so proprietary data angle. Those companies are actually performing quite well. And in fact, those companies are actually kind of performing better than sort of the book as a whole. And so I think that -- and you see this in kind of public market pricing, both in equity and credit, which is now versus February, I think there's a much more -- much better appreciation around the fact that not all software is created equally. And I think the market has kind of had some more time to dig into kind of pricing different software providers based on kind of their characteristics, which I think is also a good step forward.

All right. That's helpful. And then lastly, just a kind of quick one on the quarter. The interest income rebounded nicely. And I think I saw in the release that there was partly attributed to the -- putting one of your nonaccruals back on to accrual status after it had better performance. Is there a sort of like a catch-up amount of interest income that was booked in the quarter that was related to that?